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Full Text: Testimony Of Ncsl At May 1 W&M Tax Reform Hearing.

MAY 1, 1996

Full Text: Testimony Of Ncsl At May 1 W&M Tax Reform Hearing.

DATED MAY 1, 1996
DOCUMENT ATTRIBUTES
  • Authors
    Dorso, John
  • Institutional Authors
    North Dakota House of Representatives
    National Conference of State Legislatures
  • Cross-Reference
    For related text and news coverage, see the Tax Notes Today Table of

    Contents for May 2, 1996.
  • Subject Area/Tax Topics
  • Index Terms
    intergovernmental relations, fiscal federalism
    state taxation
    rates, flat
    exempt organizations, public charities
    sales tax
    income tax
    charitable deduction
    exempt bonds
    unrelated business income
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 96-13117 (8 pages)
  • Tax Analysts Electronic Citation
    96 TNT 87-59
====== FULL TEXT ======

Testimony of

 

State Representative John Dorso

on Behalf of

 

The National Conference of State Legislatures

regarding

 

The Impact of Federal Tax Reform

 

on State and Local Governments

before the

 

House Committee on Ways and Means

Wednesday, May 1, 1996

[1] Good morning, Chairman Archer, members of the Committee. My name is John Dorso, I am the Majority Leader of the North Dakota House of Representatives and a member of the Executive Committee of the National Conference of State Legislatures. I am delighted to be here and thank you for holding this important hearing. NCSL is a bipartisan organization representing the more than 7,000 elected state legislators in all 50 states and territories. At NCSL, legislators from both sides of the aisle come together to develop policies on issues of importance to the state-federal relationship. Members who testify on behalf of NCSL are guided by the policies and positions that have been developed over time and adopted by a three- fourths majority, ensuring a bipartisan approach to these vital issues. With that background, on behalf of NCSL, I am pleased to be able to talk with you today about our views of federal tax reform and its potential impact on the states.

[2] There are four main points that I wish to make today:

1. we are sympathetic to Congress' desire to reform a federal

 

tax system that is viewed as complicated and unfair

2. federal and state tax systems are inextricably linked

3. any federal reform will have serious ramifications on the

 

states, and

4. state legislators must be involved from the beginning of the

 

reform process

[3] NCSL understands completely the motivation for reforming the federal tax system in a way that encourages savings and simplifies the process. A strong argument can be made that America's low savings rate is related to slow economic growth over the past twenty years. The complexity and resulting unfairness of the federal tax code, in and of itself, undoubtedly adds economic costs, to say nothing about the way it infuriates the nation's taxpayers. I think it is safe to say that we are all quite sure our predecessors did not envision the type of tax system we have today when the states adopted the Sixteenth Amendment in 1913 and gave Congress the income tax.

[4] While any major restructuring of the federal system will raise complications for the states, NCSL nonetheless commends you for considering the pros and cons of reforms that may simplify the tax code and increase savings. Federal tax reform could have several advantages for the states. If reform led to a faster-growing economy, states would be able to collect more revenue and possibly lower rates. States and the federal government might also be able to cooperatively develop a more closely integrated system of federal and state taxation. Increased cooperation or integration could lower tax rates and increase the efficiency of tax administration, provided that it is approached in a manner that preserves the fiscal autonomy of the states.

[5] NCSL believes that federal tax policy should be fair and simple and should not encroach on the ability of state and local governments to adopt fair and effective tax systems to meet the commitments made to our shared constituencies. To preserve the fiscal viability of state governments, the federal government must consider the impact of changes in federal tax policy on the traditional revenue bases of state and local governments. You have started that process with today's hearing, and we hope that this is just the beginning of the dialogue between us.

[6] Let me illustrate these concerns with an example that hits particularly close to home. In North Dakota, I serve in what is truly a "citizen legislature." We meet for 80 days, once every two years. Our state income tax code is about as simple as it gets. North Dakotans pay fourteen and a half percent of their federal income tax liability in state income tax. Let's get right to the point. If you do away with the federal income tax completely, then we've got issues to deal with. Foremost among them is the mathematical fact that fourteen and a half percent of zero is zero. It may take you at least two complete, very active years, to run through the debate and construction of legislation to restructure the federal tax code here in Washington. Back in Bismark, we'll have to fix our end in much less time, possibly in a special session. The more consultation and involvement we have from the outset, as partners in the reform effort, the easier it is for us to take care of our end when the time comes.

[7] During the course of today's hearing, I know you will also be hearing from some experts in state and local finance, the Federation of Tax Administrators, the Multistate Tax Coalition and the Government Finance Officers Association among them. These are very knowledgeable, experienced professionals who can get into the details and complexities of the other issues, such as collections problems, that I'll touch on later. But let me recommend now, and NCSL endorses this recommendation, that not only should you have elected officials from state and local governments working with you at the table, but early in the process, we put together a staff level working group to help iron out the technical and transitional issues.

[8] I'll turn now to the remainder of our concerns. Specifically, state legislators are concerned about the following aspects of federal tax reform:

1. transition time,

2. the potential for shifting the overall burden of tax

 

administration to the states,

3. the elimination of state and local income tax deductions,

4. the potential effects on state and local bonds,

5. further intrusion into the excise tax base which is a

 

traditional revenue source for state governments, and of

 

displaced state revenues.

6. the negative impact of retroactivity

[9] You will hear others speak today on most of the above points, but I would like to address the first two items in greater detail. Despite the difficulties you have had here in Washington in getting a comprehensive restructuring plan passed, it seems that there is general consensus on the need to balance the federal budget and shift some responsibilities away from the federal government and back to the states. The details of that devolution obviously are still to come, but it is important that we take this opportunity to remember that state and local governments will need adequate transition time to adapt to the new system. Furthermore, as states begin to take on more decision-making responsibility for domestic programs, they will need added flexibility, not only in programmatic requirements, but in the ability to finance operations through a transition period. Just as block grants are not necessarily positive if the appropriations cuts that accompany them are too severe, tax reform may impose greater restrictive burdens on state and local governments if it is not done carefully. Too often, Washington limits revenue options by preempting state tax authority. During any tax reform effort, do not take further actions that would have the unintended consequences of limiting our options, such as preempting our ability to tax certain revenue sources. Of equal importance is the fact that the states have balanced budget requirements, and can ill-afford to lose revenue through the retroactive application of any tax change. Implementation of a new tax system will require significant transition time on its own, we will need an even greater range of options to manage our operations during any dual transition period of tax restructuring and devolution.

[10] NCSL has not taken a formal position on any of the individual tax reform plans that have been proposed during this session of Congress; however we can address the potential implications of the different models as examples of our overall concerns. A flat tax has significant impacts on state and local government, especially since, in theory, there would be no deductions. NCSL would argue that of any deductions in the current system, the deduction for state and local income and property taxes must be maintained, otherwise, you create the potential for double taxation of our taxpayers. A flat tax, potentially altering the tax advantages of our bonds, also has serious potential effects on our ability to finance a great deal of public infrastructure projects. Furthermore, the loss of data for the federal tax that comes from information about the taxpayers' sources of income would hamper any state's ability to maintain a comprehensive tax system. This becomes even more problematic if, in the course of changing to a flat tax you decide to abolish the Internal Revenue Service altogether without retaining or transferring some of the data management functions, because the problems of data loss are compounded by the loss of a central repository of information.

[11] Speaking of the IRS and the administration of the federal tax system, we know that at least one major proposal on the table includes the idea that the states would collect and remit a national sales tax to the federal government. This is not quite as simple as it sounds, especially for the five states that do not even have a sales tax. Furthermore, in order to avoid an unfunded mandate, adequate federal administrative funds would have to be forthcoming for any effort that involves increased collection responsibilities for the states.

[12] Many of the same data-collection issues apply for states if the federal government were to move toward a consumption-based income tax in that it would be difficult for states to maintain their current systems, and many would be forced to conform to the new federal system or risk losing significant portions of their revenue base. A change to a national sales tax or value-added tax would also pose serious issues for states in the area of displaced revenue. The sales tax and excise taxes have been the most significant traditional revenue source for states. Currently, state and local sales taxes range from 4.5 percent to 10 percent. A national sales tax rate on the order of 17 percent could raise some jurisdictions' combined rate to over 25 percent. This could create a severe disruption in state revenue from the consumer's negative reaction to such a high rate.

[13] In summary, all of your options create serious issues for states, and will require a considerable amount of planning, and detailed attention. However, as I mentioned at the beginning of my testimony, tax reform would also give us an opportunity to work together to resolve some difficult issues. NCSL supports enactment of legislation to initiate a joint state-federal effort to collect unpaid taxes as well as permitting federal refunds to be offset for state income tax debts. It is my understanding that you recently had a hearing on one such proposal, H.R. 757, which would establish an offset program on a reciprocal basis for legally enforceable, past due state tax obligations. This would further cooperative efforts in joint federal/state tax administration.

[14] In conclusion, any federal restructuring will create administrative complexities for all states, but especially for those states whose tax system is most closely tied to the federal code, like North Dakota. Regardless of the type of reform you undertake, if restructuring is going to take place, it is imperative that we have a place at the table and work with you as partners in that effort. As legislators, that type of consultation and the institution of adequate transition time to implement reform are our top concerns. NCSL will be reviewing our tax reform policies this year, and as you get closer to having some details regarding which direction you will go, we will develop greater details on the specific consequences for states, which will determine in large part our ability to support any particular reform plan.

[15] Again, Mr. Chairman, I appreciate the opportunity to testify at today's hearing. It is vital to our economic prosperity as a nation that we address the problems associated with the complexities of the federal tax system. We at NCSL, as elected leaders or the [sic] through a staff working group, are prepared to assist you and look forward to working with you as partners in your effort to undertake this challenge. I would be happy to answer any questions at the appropriate time.

DOCUMENT ATTRIBUTES
  • Authors
    Dorso, John
  • Institutional Authors
    North Dakota House of Representatives
    National Conference of State Legislatures
  • Cross-Reference
    For related text and news coverage, see the Tax Notes Today Table of

    Contents for May 2, 1996.
  • Subject Area/Tax Topics
  • Index Terms
    intergovernmental relations, fiscal federalism
    state taxation
    rates, flat
    exempt organizations, public charities
    sales tax
    income tax
    charitable deduction
    exempt bonds
    unrelated business income
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 96-13117 (8 pages)
  • Tax Analysts Electronic Citation
    96 TNT 87-59
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