Would-Be Laws Threaten State and Local Revenue

Federal lawmakers are considering a slew of bills that would restrict the way that state and local governments tax businesses -- and those bills are gaining traction. The legislation seems to have more to do with industry than ideology, however. Cellular providers, for example, are pushing a bill that prevents state and local tax increases on their service for five years. More than half the members of the U.S. House of Representatives -- including members of both parties -- are co-sponsoring the bill. Other bills enjoying bipartisan support include measures to restrict the tax rate for rental cars and satellite television.

But the mother of all tax pre-emptions, state and local leaders say, is the Business Activity Tax Simplification Act, which has been introduced six times since 2003. The bill prevents a state from imposing various taxes on a business that lacks a physical presence within its borders, and even goes so far as to define exactly what that physical presence is. The legislation taps into a long-running debate regarding how and if online retailers like Amazon should be collecting local sales taxes from consumers. Supporters of the bill argue that it prevents businesses from being double taxed and that it simplifies an overly complicated patchwork of rules. But states vehemently oppose the legislation, citing a Congressional Budget Office estimate that puts the cost of a 2006 version of the bill to states and localities at $3 billion annually.

With states trying desperately to protect their revenue streams, industry associations are making an end-run to Congress, which wouldn’t have to deal with the fiscal realities of the lower revenue the restrictions could create. “It’s pretty easy right now for Congress to take a ‘no tax’ stand on something when it doesn’t cost them anything and it doesn’t affect their ability to appropriate funds,” says Bruce Johnson, chair of the Utah State Tax Commission. “They can look like they’re doing something very pro-business for their constituents.”

If successful, the bills would create a conundrum for state and local governments: Swallow a decrease in tax revenues or simply increase taxes to make up for the lost funding. Having already made deep cuts to services, states are most likely to shift the tax burden to others.

To a degree, the bipartisan support of the bills undermines each party’s typical stance. State leaders say Republican legislators are weakening the very state sovereignty they claim to champion. And Democrats, who insist that revenue increases are needed to restore the country’s finances, are restricting the ability of states to do exactly that. But some observers say that the bills are little more than a political tool to raise support and campaign money from the business community as the 2012 election approaches.

“We think local tax decisions should be made at a local level,” says Lars Etzkorn of the National League of Cities, which opposes many of the pre-emptions. “If people don’t like the taxes imposed by the local governments, they have the local ballot box.”