David Brunori - State Tax Policy: A Political Perspective

About the Author

David Brunori is a journalist, author, educator, and lawyer who specializes in tax and public finance issues. He is a frequent speaker at conferences around the United States on the subject of state and local tax policy. Brunori is executive vice president of editorial operations at Tax Analysts. He also serves as contributing editor for State Tax Notes magazine for which he writes The Politics of State Taxation, a weekly column focusing on state tax and budget policies. He is a research professor of public policy at the Trachtenberg School of Public Policy and Public Administration at The George Washington University, where he teaches courses in state and local tax law, fiscal federalism, and public finance. He has written several books and numerous articles about state and local taxation. Brunori has bachelor's and master's degrees from The George Washington University and a law degree from the University of Pittsburgh.

Acknowledgments

A s with previous editions, I have had a lot of help and encouragement. Chris Bergin, president and publisher of Tax Analysts, provided the inspiration to write about fair, efficient, and effective state policy. I continue to be inspired by the irrepressible Professor Richard Pomp, who cannot know the depth of his influence. It was his commitment to justice that first prompted me to take pen to paper. The Urban Institute Press once again afforded me the opportunity to write about state taxationa subject to which I have devoted my professional career. I owe a particular debt of gratitude to my editor, Fiona Blackshaw. The book once again is immeasurably better because of her work. Ariana, Nick, and Elena are my greatest joy, despite their complete disinterest in state taxation. Finally, none of this would have been possible without my wife Elisse Brunori. I owe all success to her.

If you happen upon any errors or failings herein, know they are all mine.

The Importance of State Taxation

T he ability of existing tax systems to adequately finance state governments has been the subject of considerable debate and discussion over the past three decades. Indeed, volumesincluding the first two editions of this bookhave been written describing the serious problems facing state taxation (Brunori 1998; Murray and Fox 1997; Sjoquist 2003; Snell 2004; Wallace 2010; Zodrow and Mieszkowski 2008). Many of these works warn of an impending crisis (Gold 1986, chapter 2), question the viability and in some cases the survivability of a particular tax (Fox 1998; Mikesell 1998; Pomp 1998), and suggest courses of action for saving the state tax system (Hellerstein 1998). The issue of state tax adequacy was heightened during the recession of 2008, the effects of which linger as this book goes to print.

That scholars and policymakers have weighed in on the fragile condition of state taxation is not surprising. The state tax systems in use today, after all, were implemented over 70 years ago. Their fundamental structure, however, has remained largely unchanged. The sales and personal income taxes, the two dominant sources of revenue available to the states, were developed during a different time to raise revenue in a vastly different economy. The sales and use tax began as a temporary revenue measure during the Great Depression. The personal income tax was implemented more than a generation before that. The other taxes levied by state governments (corporate income, excise, inheritance, and property) are just as old as, or in some cases older than, the sales and use tax. In many respects, the tax systems used by state governments today reflect the economy of the 19th century more than that of the 21st century.

New Challenges for State Tax Systems

There is an old shibboleth among tax lawyers that an old tax is a good tax. Unfortunately, the tax systems constructed by state governments in the past are often inadequate for raising revenue today. While state taxes have remained essentially unchanged, the economy has moved from a manufacturing base to one dominated by services and intellectual property. In this new economy, businesses, even small companies, no longer produce and sell products in one or in a few states, but throughout the nation and the world.

Electronic commerce has revolutionized how people work, play, and communicate. The economy in which people primarily bought locally manufactured goods no longer exists. In today's high-technology, global economy, the ability to purchase services or products from anywhere in the world is just a few keystrokes away.

To be sure, states are still collecting revenue. But state tax systems are not as efficient as they should be. The prosperity of the late 1990s led to record budget surpluses in most states. The recession at the end of the first decade of the 2000s in turn led to record budget deficits. State tax structures are incapable of dealing with economic swings.

Questions about the systems' efficiency are pressing, as state taxes have never been as important as they are today. State governments are providing more public services than ever. In addition to traditional services (e.g., state police, prisons, higher education, and highway maintenance), states are delivering many services once supplied and paid for almost exclusively by the federal and local governments. It is not surprising, then, that state governments have been raising unprecedented amounts of money. This growth in the importance of state taxation largely reflects several political and economic developments.

Devolution of Responsibility to the State Level

Since the 1980s, the federal government has been steadily shifting more responsibilities to the states, a phenomenon commonly called devolution in academic circles. States have been asked (or, in many cases, required) to administer and pay for many programs that traditionally were the responsibility of the federal government. Welfare, Medicaid, and highway maintenance are a few examples in which the states have replaced the federal government as the administrative body responsible for providing services. The war against terrorism has further complicated subnational finances, requiring state and local governments to spend more on public security than ever before. Although the costs of assuming many of these programs have been offset by increased federal funding and protections against unfunded mandates, devolution has contributed significantly to the recent growth in state government budgets.

Along with this shift in responsibility, political pressure and a flood of legal challenges have prompted state governments to take on an increasingly greater share of the cost of public education. While the federal government was traditionally responsible for elementary and secondary education, state governments have paid a decidedly greater percentage of school finance costs over the past two decades. Some states, such as Michigan, finance virtually all elementary and secondary education.

Two primary developments explain the increased state funding of public education. First, the property tax revolts of the late 1970s and early 1980s seriously curtailed the ability of local governments to raise revenue. Thus, many state governments were forced to provide additional financial assistance to local school districts laboring under tax limitations.

Second, and perhaps more significant, legal and political challenges to the constitutionality and fairness of how local governments fund schools became increasingly common in the 1970s and 1980s. Wealthier school districts with larger tax bases could provide more money for educating their students than could poorer school districts. In many states, the wide gap between per pupil spending by rich and poor school districts led to political protest and legal challenges. Many state supreme courts ordered their state governments to distribute school spending equally between rich and poor districts. No other development has burdened state budgets more than the shift in public education financing.