State-Tax Systems Need Fix, Report Finds

Like a Model T in the Daytona 500, many state tax systems are too dated and inefficient to enable state governments to run effectively in a 21st-century economy.

That’s the conclusion of “The Way We Tax: A 50-State Report” by Governing magazine, an ambitious study undertaken with the support of the Pew Center on the States (parent body that funds Stateline.org).

“The vast majority of state tax systems are inadequate for the task of funding a 21st-century government,” write the report’s authors. “Most of those tax systems are also unfair. They break the golden rule of tax equity: collect the lowest possible rates on the widest possible base of taxpayers.”

Governing provides no overall ranking, but the following five states — Alabama, Florida, Nevada, Tennessee and Texas received multiple one-star grades (one star is bad; four stars is excellent) in Governing‘s analysis. The three categories in which states are judged: fairness, adequacy of revenues and management of the system.

Nevada, the only state at the bottom of all three categories, could well lay claim to having the nation’s worst tax system. Not only are the state’s taxes narrow and illogically applied, according to Governing, but the state doesn’t even do a decent job collecting them.

“The sales tax base is narrowly drawn and riddled with exemptions, covering virtually no services in a state where the economy is almost entirely service-based,” said the report. “Nevada hasn’t been much better at administering the tax law than it was in creating it.”

A state task force charged with evaluating the Nevada’s tax structure, the Governor’s Task Force On Tax Policy, released a report last November calling for an increase in the property tax, a gross receipts tax on business with more than $350,000 of gross income, increases in cigarette and liquor taxes and a 6.5 percent tax on amusements.

The task force’s recommendations were quickly attacked by critics in the legislature.

Undaunted, Gov. Kenny Guinn (R) issued a new call for tax reform in his Jan. 20 State of the State address.

“Implicit in [our] tax strategy was a belief that the revenues from gaming and tourism could keep pace with our growing and diverse population. Unfortunately, this strategy has failed,” he said. “Therefore, I bring to you tonight a budget request for $980 million in new revenue. This budget is built on a series of broad-based business taxes that move Nevada toward a more stable revenue base.”

Florida, another state Governing says has a poor-performing tax structure, was the site of a halting reform effort last year.

Former Senate President John McKay (R) led a drive to expand the state sales tax to include some services and remove exemptions. The changes would have generated no additional revenue, since the rate would be lowered as the base was expanded. But new revenue was never McKay’s goal.

“The main issues I focused on were fairness and antiquity, the fact that it is outdated,” McKay told Stateline.org. “The system was put together in 1948. The whole economy has changed and unfortunately the tax system has not changed with it. There are a lot of things that are not taxed that should be taxed.”

For example, McKay said, the state taxes fishing poles but not trips on charter fishing boats. This, he said, makes little sense in Florida’s economy, which is heavily dependent on services and tourism.

McKay’s reform effort didn’t get far. Gov. Jeb Bush (R) opposed it. And a proposed ballot question on the matter was struck down by the 1st District Court of Appeals, which ruled that the referendum’s wording was misleading and too unclear for the November ballot.

No longer in the Senate but still concerned about Florida’s tax system, McKay said he may make a push for tax reform through the citizen initiative process.

Governing acknowledges how politically problematic tax reform can be, since most reform generally involves shifting the burden from one taxpayer to another.

Or as Minnesota Gov. Jess Ventura (I) put it in his 1999 State of the State address: “One taxpayer’s fix becomes another taxpayer’s problem.”

To read Governing‘s study, “The Way We Tax: A 50-State Report”, please click here. The report will also be published in the February issue of Governing magazine.