Center for Tax and Budget Accountability’s 2008 Annual Fiscal Symposium

1. Center for Tax and Budget Accountability’s 2008 Annual Fiscal Symposium Mary Jo Waits Pew Center on the States January 29, 2008

2. Today’s Topic: What States Across the Country Are Doing to Address Severe Fiscal Problems My Answer: Tinkering While Rome is Burning

3. Five Shoes Waiting To Drop on Arizona’s Future Arizona Policy Choices, 2001 Mary Jo WaitsMorrison Institute for Public PolicyArizona State UniversityCollege of Public Programs, School of Public Affairs

4. The Five Shoes A Talent Shake Up Latino Education Dilemma A Fuzzy Economic Identity Lost Stewardship The Revenue Sieve: tax system is old and full of leaks What could make or break Arizona’s success in the future?

5. The Tax System Lacks Balance The State of Arizona’s dependence on sales tax collections for revenue increased dramatically over the last decade. Today 53% of total revenue comes from this one tax. --State Revenue FY 1992 & FY 2002

6. The Tax System is Old • Shift to service economy moves purchases beyond the reach of sales taxes • Shift in consumption patterns: buying more services than goods • E-commerce bypasses the state’s tax system

7. The Tax System Leaks The number of State sales tax exemptions nearly doubled in the 1990s… Source: Arizona JLBC, Arizona Department of Revenue

8. The Tax System Leaks The number of State income tax credits also proliferated in the 1990s Source: Arizona JLBC, Arizona Department of Revenue

9. Growth and Taxes: • PCS examined where states are, and assessed their tax systems in light of the new economy • Staying Stable: The stability of revenue streams • Baiting the Hooks: The transparency of tax incentives • Plugging the Leaks: The efficiency of tax collection • Breathing Room: Tax flexibility states allow their localities • Taxing Services: The largest sector of the economy • Governing Magazine, January 2008

10. Baiting Hooks: Tax incentives will always be with us, but states are finally keeping tabs on what they're getting for their money. • Every state that offers tax incentives for economic development monitors their incentives: • Eighty percent of states impose a penalty on recipients that do not meet their obligations. • Thirty-two states publicly disclose information about tax incentive recipients — either identifying the recipients, identifying the amounts of tax dollars involved or both. • Eighty percent of states have tax expenditure budgets, which provide data on the amount of potential tax revenue lost when exemptions or credits are granted.

11. Plugging Leaks: A tax policy is only as good as the systems that collect the taxes and make it simple for people to pay them. • States have been trying various ways to simplify collection and lock in compliance. The basic kit comes with 5 important tools: • effective use of the audit process, • interstate cooperation, • e-service offerings, • a timely and fair appeals process and • taxpayer buy-in to the design of the system and its administrative procedures.

12. Presence of Methods to Continually Review State Tax Systems’ Compatibility with State Economies Top Performers Need Improvement Iowa Main Minnesota Mississippi Nebraska New Jersey Texas Utah Arkansas Georgia Louisiana North Dakota Oklahoma Vermont

13. States that Tax Services In the service-based, new economy, states face the important question: What services to tax?

14. Breathing Room: States that give localities greater leeway to raise revenue • Flexibility: • Do states give cities or counties a local option to control the tax rate and use of the revenues they raise? • Increases global competitiveness, attracting international companies Only a handful of states give their local governments control over property, sales and income tax.

15. All that’s well and good, but…Rome is Burning • The tax questions that states will need to grapple with in coming decades concern • Companies that create • Borders that disappear • Business models that change • Baby boomers that retire • A world that is spiked, not flat • Quality place calculus that is complex

16. Companies that Create “The first 100 years of our country’s history were about who could build the biggest, most efficient farm. The second 100 years were about the race to build efficient factories. The third 100 years are about ideas.” -- Seth Godin Fast Company, August 2000

17. Shifts in the Work We Do Agriculture12% Creative Work30% Creative Work 16% Service Work31% Service Work43% Production Work41% ProductionWork26% Source: Richard Florida

18. Right Brain vs Left Brain Work Can Stay Will Go

19. What Matters for Innovation? New Growth Theory “In advanced economies, smart people and new ideas are the primary catalysts for economic growth.” Paul Romer • Ingredients • Ideas (Intellectual capital) • Talent (Human capital) • Money (Financial capital) • Collaboration • Innovation • Entrepreneurs • Networks • Results • Productivity • Prosperity • Cluster vitality

20. How do states generate revenue from the intangible inputs and products of knowledge-based firms? Council on Competitiveness, Competitiveness Index, 2007

21. Borders that Disappear Firms tap talent and capital and serve markets globally, from their start… • Washington D.C. • Boston • Minneapolis • Atlanta • Phoenix • Seattle • Austin • San Diego • Portland • Raleigh-Durham • Denver • Sacramento • Salt Lake Moscow BudapestPrague Dublin BeijingShanghaiShenzhenGuang ZhouHong Kong Israel Hsinchu BangaloreBombayHyderabadChennaiiPune Costa Rica Manila …and can easily elude the grasp of taxing authorities

22. Business Models that Change To: From: Production is more flexible, networked--and hard for states to track

23. A world that is spiked, not flat Collaborative Economics Inc, Index of Silicon Valley, 2007

24. “America is a Metropolitan Nation” Which government is taxing what and how will those taxes be used? Brookings Institution, Blueprint for American Prosperity, 2007

25. Companies follow Talent …and High-end Talent is looking for more than low costs and basic entertainment. “Arugula is how I define cities. I go to a grocery store, and either you can get arugula or you can’t.” Cindy Crawford international super model

26. A More Complex Calculus for Quality Place • Natural environment counts for a lot. • But natural features aren’t enough. Places must have distinctive urban amenities as well. • Choice (in lifestyle) matters in the talent war. • Being a smart, innovative place matters. • It’s not just about physical attributes. Intangibles such as tolerance and entrepreneurial culture are part of the calculation. • Speed is a vital amenity. Waits, Which Way Scottsdale?, 2003

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28. Tax System in the 21st Century Industrial Economy Innovation Economy Raw Materials Natural resources, labor, capital Ideas, patents, brand Mass production Internet, information and communications technologies Enablers Labor, quantity, low cost, stability, control Talent, innovation, speed, flexibility, networks Success Factors Organization Large corporations, economies of scale Networks, entrepreneurs, small scale, free agents

29. Okay, What’s Next In the face of new technology, new economy, new demography, new geography, it will not work to redouble our efforts, essentially aiming to do all the same things we’ve always done, but better.