Tax Reform & Its Relevance to High Tech Businesses: The State Perspective

1. Tax Reform & Its Relevance to High Tech Businesses:The State Perspective Joe Huddleston Executive Director 22nd Annual SJSU/TEI High Technology Tax Institute Palo Alto, California

2. Introduction • What is the Multistate Tax Commission? • Why Business Tax Reform? • Fundamental Federal Tax Reform & the States • Conclusions

3. What is The Multistate Tax Commission? • The Multistate Tax Commission was established in 1967 to — • Preserve states’ tax sovereignty. • Promote uniformity and compatibility in tax systems. • Facilitate the proper determination of the state and local tax liability of multistate taxpayers. • Facilitate taxpayer convenience and compliance. • Avoid duplicative taxation.

4. What is The Multistate Tax Commission? (cont.) • Forty-six states, plus the District of Columbia, participate in the Commission. • The Commission speaks with a strong voice to Congress and the courts on the need to preserve the legitimate tax authority of the States from unwarranted federal intrusion. • The Commission recommends uniform tax policies and practices to improve the efficiency and fairness of state tax systems for both taxpayers and the States.

5. Multistate Tax Commission Membership

6. Why Business Tax Reform?* • Business taxes are a significant portion of state and federal tax revenue • The design of the current system of business taxation is widely seen as flawed • Business tax reform is a part of the discussion about overall tax reform *This slide and the next are drawn from Highlights of GAO-06-1113T, Statement of David M. Walker, Comptroller General of the United States to the U.S. Senate Committee on Finance, BUSINESS TAX REFORM - Simplification and Increased Uniformity of Taxation Would Yield Benefits, Sept. 20, 2006. Notably, this otherwise excellent discussion of U.S. business tax reform does not mention state business taxation.

7. Why Business Tax Reform? (cont.) • States have the same reasons as the federal government to reform business taxes: • Some features of current business taxes channel investments into tax-favored activities and away from more productive activities • Complexity in business tax laws imposes costs of its own, facilitates tax shelters, and provides cover for cheating • Confidence in the fairness of the tax system —and thus voluntary compliance — is reduced

8. Why Business Tax Reform? (cont.) • But states have even more compelling reasons to engage in business tax reform efforts: • Business tax reform in neighboring states; and • Federal business tax reform

9. Fundamental Federal Tax Reform & the States* • State income taxes, for both individuals and corporations, are heavily reliant on the structure of the federal income tax and largely conform to many features of the federal tax base • 46 states and the District of Columbia impose a tax at the corporate or business entity level that uses net income as at least part of the base • All of these states effectively use federal taxable income as the starting point for state tax computations *This slide and following rely heavily on Harley T. Duncan’s testimony before the President’s Advisory Panel on Federal Tax Reform on April 18, 2005.

10. Fundamental Federal Tax Reform & the States (cont.) • State tax base must necessarily follow federal base • Taxpayer compliance & burden • Reliance on federal compliance systems • No 3rd party reporting systems • Basic Premise: Without a federal income tax, there can be no broadly-based state income tax

11. Fundamental Federal Tax Reform & the States (cont.) • A framework for analyzing federal reform proposals and their state tax implications: • Conformity impacts — what are the structural effects on state tax base? • “Crowding out” impacts — to what degree does federal taxation move into traditional state tax areas? • Sovereignty impacts — what is the effect on state tax authority and what range of options are left to the states? • Opportunity impacts — what avenues might be opened for improving state tax systems?

12. Conclusions • Business tax reform requires structured dialogue to assess interaction with and impact on other elements of overall tax system and to foster opportunities for improvement • This is especially true in respect of intergovernmental aspects, i.e., state-federal.

13. Conclusions (cont.) • Fundamental federal tax reform could substantially alter state tax bases and authority; federal changes will occasion state-level changes • Any restructuring or simplification of the federal tax system must take potential impact on state taxes into account, otherwise state reactions may negate any benefit of federal reform