Book Review: "State Tax Policy"

Tchaikovsky Sounds Funny

Looking for a frightening thriller to read on the beach this month? One where you can worry how the hero must pay a two billion dollar bill when his pocket is empty? Where you turn each page wondering how the characters will find the money their children require for school and their parents need for health care, not to mention their own desires for roads, romance, and public utilities, all while dodging enemy space aliens? Well, "State Tax Policy" by David Brunori covers most of these topics; just don’t look too hard for the romance and space aliens.

What you will find is a book that takes the complex topic of state government taxation and makes it understandable. The book then goes further and explores what the limitations of these mechanisms and what this means in present and future economies. Readers learn, in sum, that tax systems designed in the 19th century may not respond to 21st century challenges. They are tax systems based upon a manufacturing economy that is disappearing. Along with the devolution of federal programs to the states over the past two decades, states need to find secure revenue bases to keep state government services operational.

The shifting of public services responsibility to states has awakened the corporate world. 1981 marked the first year that corporations paid more in state taxes than in federal taxes. Thus, corporations have increased lobbying pressures on state governments. Numerous tax breaks have been afforded to businesses by states.

States find themselves pitted against each other in near-death spirals of competing against each other in offered tax breaks to attract businesses away from other states. Unfortunately, the differences in state taxes have been found to matter little in business location decisions. The book warns that tax incentives create problems.

State governments have become dependant more upon personal income taxes. 1998 marked the first year since the 1930s that revenues from personal sales taxes were greater than revenues from sales taxes. This reflects our changing world, as tax-exempt services are an increasing part of our economy.

Readers learn that personal income taxes account for just over one third, the sales and use taxes account for almost one third, and corporate income taxes account for 6% of all state tax revenues. The growth in the personal income tax share of state tax revenues has been dramatic: it was 9% in 1950 and 19% in 1970 before reaching 34% in 1998. All these tax collections account for about 40% of what states need for their budgets. The rest is gained through federal funds, lotteries, litigation (including the tobacco settlement), license fees, and selling unclaimed properties.

This book discusses the principles of good state taxation, as developed with assistance from the National Conference of State Legislatures. Even when principles are violated, as most states do when offered tax incentives for business location, the book offers recommendations on how to minimize negative effects, such as requiring greater accountability and requiring repayment if job creation promises are not met.

The book observes that state governments have been responsive to the more organized advocacy groups on behalf of wealthier citizens as the state tax burden has become more regressive. Even Pennsylvania is faulted for its regressive flat income tax, although we do offer forgiveness for filers below the poverty line.

So, what are state government leaders to do (besides assigning key staff to read this book?) The book concludes that states should examine what taxes work within their states, that they consistently reevaluate their taxing policies, and that public leaders be aware where tax burdens fall. These are things that are seldom considered. The goal is to create a stable tax system than needs only rare changes. .