A group of academics has launched an effort to help policymakers respond to the fiscal crisis facing states amid the COVID-19 pandemic by offering policy recommendations supported by research.
The collaboration, called Project SAFE (State Action in Fiscal Emergencies), includes tax law professors from across the country.
The professors have made their recommendations and research — some of which has been published in Tax Notes — available in one place on the University of Virginia’s website to help guide lawmakers as they decide how to address fiscal issues stemming from the pandemic.
The website includes steps that lawmakers can take at the local, state, and federal level to respond to the fiscal crisis facing states — including ways to raise revenue to shore up budgets.
“I think using the website as a clearinghouse has been a really great way to help lawmakers get in touch with researchers who have expertise on these issues,” said Ruth Mason, a professor at the University of Virginia School of Law and a founding member of the group.
Mason was recently invited to testify on Maryland legislation (H.B. 495) that would decouple the state from some retroactive tax relief in the federal Coronavirus Aid, Relief, and Economic Security Act. In her testimony, Mason said that ending Maryland’s automatic conformity with retroactive tax changes puts tax authority where it belongs, “into the hands of Maryland’s elected representatives, who then can decide whether or not to conform with expensive retroactive tax changes.”
Mason’s testimony was based on a report she wrote in 2013 arguing that states should not have rolling conformity to the Internal Revenue Code.
“This is not a crisis position as far as I’m concerned; the right policy position for states is lagged conformity in my view, for exactly the source of phenomenon we’re seeing now — the federal government makes a retroactive change and the state takes a revenue hit for something it didn’t plan for,” Mason told Tax Notes.
Adam Thimmesch, a tax law professor at the University of Nebraska who also testified on the Maryland legislation and is part of the project, said the researchers want to be a resource for policymakers who are faced with increased pressure as they navigate these issues.
“We think about this. We research and write on it for a living, and hopefully that work is utilized,” said Thimmesch. “Legislating on tax is challenging enough in normal times, but when things are as unsettled as they are, it’s all the more important to be upfront and provide an easy-to-access resource.”
Observing that most states have balanced budget requirements and that governments usually cut spending or increase taxes during economic downturns, the Project SAFE website says, “Layoffs and service cuts would make things worse by taking even more money out of the economy at a time when employees and residents are already at their most vulnerable.”
The researchers say that to solve their fiscal problems, states could do several things, including raising new taxes and expanding their tax bases. States can levy taxes on the wealthy and on businesses that are less affected by the pandemic, impose new excess profits taxes, or impose mark-to-market taxes on some types of wealth or unrealized capital gains, according to the researchers.
The researchers say states could also expand sales tax bases through digital services taxes, broad-based advertising taxes, new broad-based consumption taxes, and taxes on services consumed mainly by households instead of businesses.
Digital advertising taxes have been proposed in some states as a means of raising revenue, although some questions have been raised about whether they would be constitutional.
Maryland lawmakers passed a digital ad tax last year (H.B. 732), which was vetoed by Gov. Larry Hogan (R). Democrats are hoping to override the governor’s veto, despite a lobbying effort to sustain it.
According to Mason, it is possible for states to impose taxes in digital advertising without violating the Constitution.
“If all you do is . . . apply the services tax that already applies to print ads, and you just apply that to digital ads, that should be fine, and it could be a significant source of revenue,” Mason said.
Maryland H.B. 732 would impose a graduated tax on digital advertising services in the state that are provided by entities with global annual gross revenue of $100 million or more.
Mason said the revenue threshold is problematic because “as applied, it will tend to make the taxable population foreign to Maryland so that Maryland will end up having a tax that hits mostly non-Maryland businesses and maybe disproportionately non-U.S. businesses as opposed to Maryland businesses, and that is a problem under the dormant commerce clause.”
Another researcher who is part of the project, David Gamage, a law professor at Indiana University Bloomington, said digital ad taxes are smaller steps states should consider, but are more likely to be regressive because any sales tax reform would raise more revenue from low- and middle-income taxpayers.
Gamage said that economic inequality, whether measured by income, wealth, or any other metric, has been exploding — especially in states like California, New York, and Washington — and that at the same time, it is very easy for multimillionaires and billionaires to avoid paying income taxes.
According to Gamage, the two main ways to address this form of economic unfairness are mark-to-market income tax reforms and wealth tax reforms.
Gamage said he talked with policymakers last year about quick ways to meet budget shortfalls, but that since then revenues have rebounded much faster than expected and some lawmakers have wanted to wait and see if there would be any changes with the Biden administration.
“Now I think there’s a desire, at least among progressive legislators in key states, to move forward with proposals that would raise significant revenues targeted especially at very wealthy individuals and, to some extent, businesses that have done very well during the downturn,” Gamage said.
The researchers have designed legislation for mark-to-market reform for New York and for wealth tax reform in California. They have also advised on wealth tax reform in Washington.
According to Gamage, for any state with an income tax, adopting a mark-to-market or deemed realization rule is “by far and away the best way to raise large amounts of revenues quickly” because millionaires and billionaires haven’t been paying tax on their economic income for decades.
“I think there are real problems in our economy and our tax system, and we urgently need tax reform to address those problems at the state and the federal level. Wealth tax reforms have the advantage of being overwhelmingly popular in every poll I’ve seen,” Gamage said.