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“Tax Swaps, Single Sales, Pot Taxes and More”

Thomson Reuters Tax & Accounting Blog David Brunori

States should be cautious about property tax swaps

Pennsylvania is once again considering a bill that will essentially eliminate the property as a source of revenue for its schools. The bill, H.B. 76, would replace the school district property tax with higher state income and sales taxes. Under the proposal, the state individual personal income tax would increase from 3.07 percent to 4.95 percent. And the sales tax rate would go from six to seven percent. Those are significant increases. They have to be; the school portion of the property tax raises somewhere around $13 billion a year.

I have been studying the property tax for decades. I get it. People hate the tax. Political leaders know people hate the tax. Unfortunately, there is chasm between what public finance experts believe (the property tax is a good tax) and what everyone believes. I am in the former category. I think the property tax is a good tax for funding local governments. I particularly like the tax because it allows localities to have a measure of autonomy. When the state is paying the bills, the state is calling the shots. The trend has been to shift financing of education from the local to state levels of government. That trend, not coincidently, has led to an alliance of education reformers and those who really don’t like the property tax. But from a policy perspective, political leaders should consider this. The shift away from the property tax is always paid for by higher personal income and/or sales taxes. In the Pennsylvania it is both.

Significantly higher personal income taxes will make the commonwealth less attractive to business investment. Because the Pennsylvania income tax is flat, the almost 2 percent increase in the rate will be a shock to many – including low and moderate income earners. They may not like the property tax, but I am not sure they will like the new income taxes any better. And speaking of low income folks, increasing the sales tax by one percentage point will make the system more regressive. That is a fact. The increased sales tax will not be welcomed by the business either. No one likes the property tax. But replacing the tax with higher personal income and sales taxes might very well result in slower economic growth. And I cannot fathom how that could ever be a good thing.

Virginia and the Single Sales Factor

A Virginia lawmaker would like Virginia to join the trend of states adopting single sales factor apportionment formulas. Del. Glenn Davis (R) proposed H.B. 1499 which would phase in single factor beginning in 2020. It would also adopt market based sourcing (which makes eminent sense if you adopt single sales factor apportionment).

From a tax policy perspective, single sales factor is most interesting. Traditionally, the states used property, payroll, and sales to determine corporate tax liability. The assumption was that these three factors contributed to the income of the corporation. But the trend for decade has been to go only with the sales factor. This is an economic development decision. You are not penalized for increasing your investment in plant, equipment, or people in the state. From a policy perspective, it belies the argument that the corporate income tax is a benefits tax. Under single sales factor it clearly is not. The bottom line is that single sales is terrific for in state companies exporting their products. It is not so great for out of state companies selling into the state. That is not a hard choice politically.

Davis is also proposing (in different legislation) to conform to the Streamlined Sales and Use Tax Agreement and to become an associate member of the MTC. Both of these ideas are excellent.

Good for Asa

We should applaud Arkansas Governor Asa Hutchinson (R). The governor is calling for significant tax cuts on low and middle income citizens. And he is calling for a commission to study the state’s tax system. He would like to eliminate the income tax on everyone earning less than $21,000 a year (a fair and just proposal). As far as a tax reform commission, I would suggest that all reformers start with reading the Tax Foundation’s report on Arkansas that was published last fall and is available on its website. Not surprisingly, it contains excellent reform suggestions.

A point of caution for the governor: He reportedly wants to exempt all military retirement income from tax. That is a good political move, but not particularly good tax policy. A better approach is to make broad changes to the income tax (including exclusions and exemptions for low income residents) that make the state attractive to all retirees. Singling out military retiree – as worthy as they are—will lead to eventual requests by police officers, fire fighters, teachers for similar treatment.

Kudos to the NCSL

The National Conference of State Legislatures has released a report on best practices for tax expenditure budgets and reports. Whatever you think of tax expenditures (and however you define them), citizens should know how much money the state is spending through the tax laws. There is nothing nefarious nor particularly radical about open government. If the state decides to carve out preferences in the tax law, we should know what they are and how much they cost. You would have to be pretty cynical to disagree with that assertion.

In any event, the NCSL put together a brief best practices paper. Basically, states should produce reports and make those reports as understandable and accessible as possible. Hats off to the executive committee of the Task Force on State and Local Taxation for keeping this important issue in the spotlight. And hats off to Max Behlke for keeping good tax policy ideas before the task force.

Pot taxes for Kids

I have written and orated on this topic a lot. I am pretty much opposed to excise taxes on both philosophical and policy grounds. Excise taxes should be used to pay for externalities – the costs to society of using a product that are not born by the market. They should never be used for anything else. So I sighed when I say that Nevada Governor Brian Sandoval (R) proposed raising the excise tax on recreational marijuana to increase funding for education.

I will ask this often: Aren’t schools important enough to pay for with real, broad based taxes? Or are they just important enough to pay by people sitting on their couch contemplating their navels? And if you are going to use pot taxes to help Johnny learn to read, why not go all out and impose an excise tax on Cheetos? Unless things have changed since I was young, people still like munchies after getting high. It is not good policy to use excise taxes to pay for education.

Late to this Party

The South Carolina legislature will likely pass an affiliate nexus law (introduced as s. 214). The proposed bill will require retailers to collect sales tax if it enters into an agreement with a resident under which the resident refers business to the retailer. For collection to commence, the resident must refer at least $10,000 of sales in the state.

If my counting is right, 19 states have already enacted affiliate nexus laws of some kinds. Back in the day, we used to call these Amazon Laws. But since Amazon is collecting tax just about everywhere now we don’t feel the need to single the company out. In any event, all the rage of late has been economic nexus laws and regulations. The six states that have adopted economic nexus do not want to engage you in a debate over whether a contractual relationship gives rise to physical presence. The economic nexus states want to overturn Quill.

Don’t Shoot the Messenger

I have had a lot of folks ask me about the Iowa Department of Revenue declaratory order regarding Amazon Prime. Basically, the department ruled that sales of Amazon Prime were subject to Iowa sales tax. Services are not generally subject to sales tax in Iowa and many folks wondered about this result.

Simply, Iowa law says that pay television is subject to sales tax. The Iowa regulations say pay television is basically any television programming. Under Iowa law, bundled services are subject to sales tax if the transaction consists of two or more products sold for one non-itemized price – and one of the items would be taxable.

Given the law, the Iowa decision is correct. Amazon Prime allows you to subscribe to all kinds of television programming. It is difficult to argue that Amazon is not offering television programming when you can watch unlimited HBO, Showtime, Starz, Cinemax, etc. Once you determine that Amazon Prime is offering television programming and the programming is part of a bundled package, it is logical to assume that your Amazon Prime subscription will be taxable in Iowa. If you do not like that outcome, your beef is with the legislature, not the department. As an aside, I have long thought that the Iowa Department of Revenue was always very good when thinking about law and policy. I think it got this one right.


I had the privilege of speaking at the American Bar Association Tax Section’s mid year meeting on January 20, 2017. The topic was transactional nexus. I shared the dais with two super tax lawyers, Breen Schiller from Horwood Marcus and Matt Boch from Dover Dixon. They are not only super tax lawyers, but super nice people.