State Revenue Systems and State Revenue Systems and Principles of Tax Policy Principles of Tax Policy Blue Ribbon Tax Structure Commission Vermont General Assembly Bert Waisanen National Conference of State Legislatures September 1, 2009
State Revenue Systems State Revenue Systems � First, What is a Revenue System? � The entire means of government funding � Variety of revenue sources, diversification � Apply criteria to systems, not sources
State Revenue Systems State Revenue Systems � Where State Revenue Comes From � Total income and total sales taxes represent more than 80 percent of revenues � Property taxes are 2 percent of state revenues nationally, Vermont is an exception.
Components of Federal Tax Components of Federal Tax Collections Collections Selective Sales/Excise Other 3% 4% Individual Income Social Insurance 43% and Retirement Receipts Corporate 35% Income 15%
Components of State Tax Components of State Tax Collections Collections Other Individual Property 10% Income 2% 34% Selective Sales/Excise 15% Corporate General Sales Income 32% 7%
Components of Local Tax Components of Local Tax Collections Collections Corporate Income Individual General Sales 1% Income 11% Other 5% Selective 6% Sales/Excise 5% Property 72%
State Revenue Systems and State Revenue Systems and the Personal Income Tax the Personal Income Tax � 41 states have an income tax, 7 have flat rates, others graduated rates. � 27 states use adjusted gross income as starting point; 10 states use federal taxable income. � Deductions, exemptions reduce the base but may boost progressivity. � Conformity with the federal tax system eases compliance and simplifies administration.
State Sales Tax Systems State Sales Tax Systems � 45 states have them. 34 states allow local sales taxes. � The average state rate is 5.75%, the average state-local rate is 6.5%. � Few rate increases the past few years, until 2009, except to pay for property tax relief. � Few expansions to services.
Consumption of Goods and Consumption of Goods and Services, 1960- -2007 2007 Services, 1960 0.65 0.6 0.55 Consumption of Goods 0.5 Consumption of Services 0.45 0.4 0.35 2006 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Sales Taxes on Services Sales Taxes on Services Rhode Island Delaware More than 100 Services 50 to 90 Services 20 to 40 Services 10 to 20 Services 0 or 1 Service
Business Taxes Business Taxes � Corporate income is taxed in 46 states. Not a large or growing source of overall state revenues. � Why? Erosion risk due to exclusions from (incentives) the base, business tax planning, or tax cuts. � Some states are experimenting with alternative tax systems to broaden the tax base.
Sustainability is the New Key Sustainability is the New Key Driver for State Tax Policy Driver for State Tax Policy � Prices set the retail sales tax calculation so potential tax base growth will be in services. � Future developments - consumer behavior, higher inflation or federal fiscal changes - have implications for state tax systems. � Revenue source and base diversification reduces volatility, spreads tax burden, and helps match a tax system to a state's economic activity.
Origin of Tax Policy Principles Origin of Tax Policy Principles � From The Wealth of Nations to NCSL � Adam Smith spoke of equity, explicitness, simplicity and economy of administration. � NCSL convened legislators and policy experts; its 1992 principles also consider evolution in federalism and economies.
Tax Policy General Principles: Tax Policy General Principles: Ability- -to to- -Pay Pay Ability � Regressive, proportionate or progressive impacts � Earned income credit, circuit-breakers and grocery exemptions are examples � Rules of thumb (progressive income tax, regressive sales tax) are affected by duration or design.
Tax Policy General Principles: Tax Policy General Principles: The Benefit Principle The Benefit Principle � Assumes a market relationship between citizen and government: a price is assigned to public services. � Assumes taxpayers should pay for what they receive, and tax policy should not redistribute income.
Tax Policy General Principles: Tax Policy General Principles: Equity and Simplicity Equity and Simplicity � Horizontal Equity � Similar income, similar tax obligation � Vertical Equity � Income variance, tax burden variance � Associated rules of thumb � Broad Base, Low Rates � Simplicity
NCSL Principles of High- -Quality Quality NCSL Principles of High Revenue Systems Revenue Systems 1. A high-quality revenue system comprises elements that are complementary, including the finances of both state and local governments.
NCSL Principles of High- -Quality Quality NCSL Principles of High Revenue Systems Revenue Systems 2. It produces revenue in a reliable manner. Reliability involves stability, certainty and sufficiency.
NCSL Principles of High- -Quality Quality NCSL Principles of High Revenue Systems Revenue Systems 3. A high-quality revenue system relies on a balanced variety of revenue sources.
NCSL Principles of High- -Quality Quality NCSL Principles of High Revenue Systems Revenue Systems 4. It treats individuals equitably. At a minimum, it imposes similar tax burdens on people in similar circumstances, minimizes regressivity, and minimizes taxes on low- income persons.
NCSL Principles of High- -Quality Quality NCSL Principles of High Revenue Systems Revenue Systems 5. A high-quality revenue system facilitates taxpayer compliance. It is easy to understand and minimizes compliance costs.
NCSL Principles of High- -Quality Quality NCSL Principles of High Revenue Systems Revenue Systems 6. It promotes fair, efficient and effective administration. It is as simple as possible to administer, raises revenue efficiently, is administered professionally, and is applied uniformly.
NCSL Principles of High- -Quality Quality NCSL Principles of High Revenue Systems Revenue Systems 7. A high-quality revenue system is responsive to interstate and international economic competition.
NCSL Principles of High- -Quality Quality NCSL Principles of High Revenue Systems Revenue Systems 8. It minimizes its involvement in spending decisions and makes any such involvement explicit.
NCSL Principles of High- -Quality Quality NCSL Principles of High Revenue Systems Revenue Systems 9. A high-quality revenue system is accountable to taxpayers.
NCSL Tax Policy NCSL Tax Policy Principles Summary Principles Summary � Distribute burdens equitably � Provide timely and appropriate revenues (adequacy) � Promote economic efficiency and growth (neutrality) � Achieve workable compliance and administration � Have accountability and transparency
Current Fiscal Situation and Current Fiscal Situation and Other State Reform Actions Other State Reform Actions
Overview Overview � The state fiscal situation is growing increasingly dire. � The current revenue situation is nearly unprecedented, at least in recent decades. � To date, states have reported a total estimated budget gap of $348.3 billion (FY 2008 through FY 2012). � States are bracing for prolonged fiscal problems.
U.S. Business Cycle Downturns U.S. Business Cycle Downturns 1929- -2009: Duration in Months 2009: Duration in Months 1929 45 43 40 35 30 25 20 19 16 16 15 13 11 11 10 10 10 8 8 8 8 6 5 0 1929- 1937- 1945 1948- 1953- 1957- 1960- 1969- 1973- 1980- 1981- 1990- 2001 2007-? 1933 1938 1949 1954 1958 1961 1970 1975 1980 1982 1991 Source: National Bureau of Economic Research
Economic Analysis and the National Bureau of Economic Research, 2009. Sources: NCSL calculations based on data from the Bureau of the Census, Bureau of 1989 2nd Quarte 1990 2nd Quarte r 1991 2nd Quarte Annual Change by Quarter, 1989- State Tax Collections and GDP: Annual Change by Quarter, 1989 State Tax Collections and GDP: r 1992 2nd Quarte r 1993 2nd Quarte r 1994 2nd Quarte r 1995 2nd Quarte GDP State Tax Collections Recession r 1996 2nd Quarte r 1997 2nd Quarte r 1998 2nd Quarte r 1999 2nd Quarte r 2000 2nd Quarte r 2001 2nd Quarte r 2002 2nd Quarte r 2003 2nd Quarte r 2004 2nd Quarte r 2005 2nd Quarte r 2006 2nd Quarte r 2007 2nd Quarte r 2008 2nd Quarte r 2009 2nd Quarte r -2009 r 2009 -15% -5% 5% 15%
FY 2010 Revenue Outlook FY 2010 Revenue Outlook Rhode Island Delaware Puerto Rico Pessimistic n = 21 Concerned n = 28 Stable n = 1 Optimistic n = 0 No response n = 1 Source: NCSL survey of state legislative fiscal offices, April 2009.
Year- -Over Over- -Year Percent Real Year Percent Real Year Change in Major Taxes Four- - Change in Major Taxes Four Quarter Average of Percent Change Quarter Average of Percent Change Source: The Nelson A. Rockefeller Institute of Government. State Revenue Report, July 2009 .
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