Tax Activity Across the Nation

1. Tax Activity Across the Nation New York City TaxRAPP October 25, 2006

2. Purpose • Overview of tax activity across the country • Drivers of that activity • Attempt to separate some fact from fiction • Identify issues to consider

3. Business Tax Activity • General Themes/Drivers • Broaden tax base and range of taxpayers • Decrease volatility of corporate tax • Average change of 11 percent; maximum of -30 percent • Improve competitiveness/business climate • Arrest/reverse long-term decline in effective tax rate • Decline of about 40 percent in effective rate

4. Corporate Tax Volatility(Year over Year Change) Source: Rockefeller Institute and FTA

5. Effective Corporate Rate1980-2006

6. General Approaches • Alternative tax/tax base • Ohio, Texas, Kentucky • Add-back statutes • 15 states • Single sales factor • Several states • Combined reporting • Vermont and Pennsylvania

7. Alternative Taxes • Ohio Commercial Activities Tax • Gross receipts tax replaces net income and franchise tax • 0.23 percent tax rate • Applied to all but financials • Issues • MTC factor-presence nexus standard • Sourcing receipts -- services • Apportionment?? • Filing unit

8. Alternative Taxes • Texas Gross Margins Tax • Gross receipts less cost of goods, compensation ($300,000) or 30% • 1 percent rate; 0.5 percent retail/wholesale • Single sales factor apportionment • Issues • Not necessarily “simple” • Income tax issue • Long-term viability • Kentucky • Alternative tax calculation • Entity-level gross receipts tax on flow-throughs with withholding

9. Add-Back Statutes • Effort is to offset effect of intangible holding companies • Multiple states with varying approaches • Issues • Constitutional challenge in Alabama • Potential double taxation? • Disrupting ‘legitimate’ business transactions

10. Single Sales Factor • Current situation • 10 have equally-weighted three factor, and four allow it as an option for certain TPs • 18 have double-weighted sales with 9 having it as option for certain TPs • 9 have a single-sales factor with 7 others having it as an option for certain TPs

11. Single Sales Factor • Rationale • Promote facility/employee location in the state • Shift burden to those primarily marketing into the state • Results • Mixed, not consistent • Some SSF states lose more than average manufacturing jobs • Major locations not concentrated in SSF states • Incentive effect dependent on where you are now • Effect is not direct and other factors intervene • Need also to account for benefits of expenditures

12. Single Sales Factor • Issues • Revenue loss/impact • Constitutionality • Throw-back rule • Marginal impact of being the “next state” • Interplay with P.L. 86-272 and potential physical presence nexus standard

13. Combined Reporting • Adopted in Vermont in 2005 • Proposed in Pennsylvania • Coupled with rate reductions and movement toward greater weighting of sales factor • Issues • Change in audit process/issues • Institutional overhead requirement

14. Conclusion • Corporate tax likely to be area of continued attention • Focus on development • Focus on stability and horizontal inequity • Question of whether low-rate, broadly applied taxes are pro-growth and investment

15. Questions Harley Duncan Federation of Tax Administrators <harley.duncan@taxadmin.org>