Tax Foundation - Commentary

• Tax Foundation's Wish List for Tax Policy in 2008
  

  The Tax Foundation staff has released its wish list for tax policy in the new year. Since 2008 is an election year in which a predicted economic slowdown could put pressure on some government budgets, reporters and politicians are likely to give the public a double dose of tax policy.

  Special interests will, as always, push tax policies that favor themselves at the expense of other taxpayers. Social engineers will continue pushing tax policies that redistribute money based upon health, age, income, and other demographics. And finally, gimmicks like tax holidays and tiny, overhyped tax cuts will be featured in legislatures and political campaigns. Champions of sound tax policy like yours truly at the Tax Foundation will view all these policies with a skeptical eye.

  Our Wish List for Tax Policy in 2008

  1. Politicians will stop playing word games, and call taxes "taxes" and not "fees," "surcharges," or "profits." Any assessment that raises money in excess of what is needed to defray costs is a tax.

  2. Politicians will stop using the tax code to give even more preferential treatment to sectors like housing and healthcare that are already tax-pampered. This includes using the tax code as a bailout for homeowners.

  3. Elected officials in state governments seeking to give property tax relief to homeowners will not do so merely by shifting to some other source of tax revenue like sales or income (which usually ends up as a tax increase) or by shifting it all to commercial property owners.

  4. Members of Congress will finally realize that two oceans can't protect us from the tax competition sweeping the rest of the world. China is now the latest country to cut its corporate tax rate.

  5. Politicians will stop raising taxes on arbitrarily targeted items like cigarettes, alcohol, bottled water, soda, tasty food, adult entertainment, gambling, etc. just because they want to raise revenue for some government program that is supposed to provide broad public benefits.

  6. State officials will stop obstructing our national market by attempting to export taxes to "out-of-staters." States should attract investment with pro-growth policies, not by protectionist penalties on the productive.

  7. At least one of the states that have recently considered lottery privatization will go through with a sale (not a lease!). That will reverse the domino effect of state governments going into the business of promoting gambling.

  8. States will eliminate gimmicks like sales tax holidays and instead lower sales tax rates for the entire year.

  9. TaxReformPanel.gov and TaxFoundation.org will be the most visited web sites of 2008, and our ultimate wish...

  10. Congress will avoid another AMT ping-pong match in late 2008, instead acting in the public interest by passing fundamental tax reform that merges the good features of the AMT (a broader tax base and lower tax rates) into the regular tax code.

• Don't Assume the U.S. Supreme Court Accepts Economic Nexus
  

  (The following article originally appeared in the December 17, 2007 edition of State Tax Notes).

  To the Editor:

  Andrew W. Swain and John D. Snethen suggest that the U.S. Supreme Court's refusal to hear four economic nexus appeals indicates that the Court "remains content to allow the states to develop...economic nexus."[i]

  This conclusion is unwarranted. The Supreme Court receives over 7,000 appeals per year, and hears less than 100. This does not mean that the Court approves of the lower court ruling in 98.5% of cases appealed, but simply that they don't have the time to consider all of them. The Court itself has put it best: "The denial of a writ of certiorari imports no expression of opinion upon the merits of the case, as the bar has been told many times."[ii] The Court later explained further:

  We have repeatedly indicated that a denial of certiorari means only that, for one reason or another which is seldom disclosed, and not infrequently for conflicting reasons which may have nothing to do with the merits and certainly may have nothing to do with any view of the merits taken by a majority of the Court, there were not four members of the Court who thought the case should be heard.[iii]

  Further, the real problem may be that the Supreme Court often does not get fired up about tax cases. Paul Caron, now editor of TaxProf Blog, has summarized this:

  The view that tax law is less interesting or important than other areas of law pervades even the Supreme Court. For example, one proffered explanation for Justice Marshall's productivity in the tax field is that the conservative Chief Justices under whom he served refused to assign him more important cases: "Justice Marshall was forced to write on federal income tax because he was given nothing better to do." Other members of the Court apparently share this view of tax law. For example, when asked why he sings along with the Chief Justice at the Court's annual Christmas party, Justice Souter replied, "I have to. Otherwise I get all the tax cases."[iv]

  Quill held that the states cannot impose sales tax collection and compliance burdens on an out-of-state business merely for having customers in the state. Swain and Snethen applaud recent state moves to tax "income" (measured entirely by sales in-state, so really a tax on sales) on businesses with no property or employees in the state, and who pay taxes to other states where they are located. It's exactly the same as Quill-states attempting to damage interstate commerce as they pursue their own parochial interest. Such a formalistic tweak does not remedy the serious constitutional problem.[v]

  Because there is real uncertainty out there as states embrace economic nexus and other schemes to boost tax revenues at the expense of our national economy, I hope the Supreme Court does reconsider its recent denials of certiorari in future nexus cases. But Swain, Snethen, state revenue departments, and other advocates of economic nexus are celebrating a bit prematurely if they treat silence as an endorsement.

  Joseph Henchman

  Joseph Henchman is Tax Counsel at the Tax Foundation, Washington.

  
  

  [i] Andrew W. Swain and John D. Snethen, Paying Their Fair Share: The Hidden Lesson of Complete Auto and Quill, 46 State Tax Notes 749 (Dec. 10, 2007), at http://services.taxanalysts.com/taxbase/tbnews.nsf/Go?OpenAgent&2007+STT+238-2.

  [ii]United States v. Carver, 260 U.S. 482, 490 (1923).

  [iii]Brown v. Allen, 344 U.S. 443, 491-92 (1953).

  [iv] Paul L. Caron, Tax Myopia, or Mamas Don't Let Your Babies Grow Up to Be Tax Lawyers, 13 Va. Tax. Rev. 517, 525 (1994).

  [v]See generally Joseph D. Henchman, Why the Quill Physical Presence Rule Shouldn't Go the Way of Personal Jurisdiction, 46 State Tax Notes 387 (Nov. 5, 2007), at http://services.taxanalysts.com/taxbase/tbnews.nsf/Go?OpenAgent&2007+STT+215-4.

• Why the Quill Physical Presence Rule Shouldn't Go the Way of Personal Jurisdiction
  

  (The following article originally appeared in the November 5, 2007 edition of State Tax Notes).

  I. Introduction

  If a Delaware company sells its products to customers in West Virginia, which state has the power to tax the transaction? Should it matter if the company has no employees or buildings in West Virginia? If the company sells products in all 50 states, should all 50 be able to impose their taxes on the company?

  In 2006, Americans spent $108.7 billion in online retail transactions, a 23 percent increase from the year before and 2.8 percent of total sales. Although that proportion is still small, it is growing quickly, and the increasing role of the Internet is challenging traditional legal concepts. As the world becomes less concerned with geographic boundaries, legal concepts premised on geographic lines -- such as personal jurisdiction and state taxes -- have grown more strained.