Policy Recommendations for State Policy Makers

1. Policy Recommendations for State Policy Makers Gruber Chapter 10

2. introduction • The economy is no longer centered on manufacturing and agriculture. Products are no longer consume near where they were made or grown. The globalization of markets and the advent of electronic commerce have revolutionized how people entertain, communicate, shop, and conduct business. • Globalization of the marketplace will also continue to test state tax systems. Increasingly, the ability of companies to move capital easily and to sell products and services around the world will make the compliance and administration of taxes tied to specific state both difficult and expensive. • Addressing the problems associated with state taxation in the new economy is a daunting task. • Solving these problems will call for unprecedented cooperation among states and require wholesale reform of some state revenue systems.

3. Problems of the New High-tech Global Economy • The threat of declining state revenue. • Loss of state autonomy

4. Know What Works • It is imperative that state policy leaders know what types of taxes and revenue structures are working and what types are not. • Traditionally, state governments have not systematically evaluated their revenue systems. • To allow for more incremental improvements, , legislatures or revenue department should periodically review state tax systems to determine if they are raising revenue efficiently.

5. Evaluation • Every three years, a nonpartisan, independent study should examine each tax and evaluate it on three criteria: • Whether it raises enough revenue to justifies its administrative and compliance costs. • Whether it hinders economic development. • Whether it is capable of raising revenue in the immediate future.

6. Know Where the Burdens Fall • It tax system must be fair, according to the principles of sound tax policy. • Few states conduct incidence analysis to determine who bears the burdens retains the benefits of proposed tax policies. • This lack of information has no doubt played a role in , creating decidedly regressive tax systems. • The proliferation of targeted tax incentives, extensive taxation of the incomes in the states of the working poor, and widespread use of consumption taxes are part of this legacy of ignorance.

7. Consider the Experts’ Opinions • Tax policies are often formulated in a way that is inconsistent with the advice or recommendations of those most knowledgeable about the subject. • Legislatures, of course, cannot abdicate their policymaking responsibilities. But many tax laws are proposing supported for short-term political purposes alone. • Experienced economists in public finance experts can position proposed legislation in a longer-term perspective.

8. Work Together • A certain amount of competition between the states encourages innovation and efficiency. • Interstate competition should not, however, preclude interstate cooperation. • By acting alone, the states risk harmful tax competition, and ever-shrinking tax base, and possible fret federal preemption. • Thus far, the most effective cooperative effort has been in multistate business activities. The adoption of the Multistate Tax Compact and the efforts of the Multistate Tax Commission have created uniform tax laws and procedures that reduce compliance burdens and minimize the possibility of double taxation.

9. Strive for Sound Tax Policy • The ultimate goal of these recommendations is to create sound tax policy. • To arrive at that goal, policy makers and political leaders should demand the tax system with stability, where the rules of the game rarely change. • Leader should demand diverse Revenue sources and undue reliance on any one particular tax. • They should demand a broad tax base – one with minimal , exemptions, deductions, credits, and other loopholes. • Broadening the tax base will allow a state to maintain lower rates for everyone.