Month: April 2012

Tennessee lawmakers are seriously considering repealing their state estate tax, in part because of a comically flawed report from supply-side economist Arthur Laffer.  The report’s bottom-line conclusion is that Tennessee would have benefited from 220,000 more jobs in 2010 if lawmakers had simply repealed the Tennessee estate tax one decade earlier.  But as the Institute on Taxation and Economic Policy (ITEP) explains in a new brief, while 220,000 jobs is certainly an impressive number, the reasoning Laffer used to arrive at that figure is far from convincing.

Laffer begins his argument by pointing to the “Laffer-ALEC State Competitiveness Index,” which is basically a wish list of fifteen conservative policies he would like to see states enact (low income taxes, low corporate taxes, low minimum wage, etc).  Tennessee ranks 8th overall on the Laffer-ALEC Index, and if the Index has any predictive power whatsoever, that means Tennessee’s economy should be doing pretty well.  But as Laffer admits, the reality is exactly the opposite.

Tennessee’s low economic and employment growth is particularly puzzling to Laffer because in a series of prior reports, he’s argued that states without income taxes (of which Tennessee is one) are outperforming the rest of the country.  So how then does Laffer explain Tennessee’s disappointing growth?  He decides to ignore a slew of factors that affect state economies in today’s complex world, and instead place all of the blame in one place: the state estate tax.

According to Laffer’s reasoning, if Tennessee had jettisoned its estate tax one decade ago, employment and economic growth more broadly would have sped up to a rate exactly equal to the average among all states not levying an income tax.  The natural result of this would be 220,000 more jobs in 2010, as well as $36 billion in additional yearly economic output.

Laffer says he can think of “no reason to believe” that things wouldn’t have played out this way.  But as ITEP explains in its brief, differences in economic growth rates are influenced by a range of factors that don’t appear to have even crossed Laffer’s mind, like differences in natural resource endowments, educational attainment, and infrastructure quality.  The unavoidable conclusion is that Laffer’s choice of scapegoat in Tennessee had a lot more to do with his ideology than with any sort of rigorous economic analysis.

For a closer look at Laffer’s deeply flawed argument in favor of repealing Tennessee’s estate tax, be sure to read ITEP’s full brief.

Photo of Art Laffer via  Republican Conference Creative Commons Attribution License 2.0

Last week Florida Governor Rick Scott signed into law legislation implementing a state sales tax holiday from August 3rd to the 5th even though these sales tax holidays are a real boondoggle for consumers (mostly PR for policymakers) and cost state treasuries needed revenues.

Will Missouri give tax credits to Ford for rehiring previously laid off employees? Read more about it in the Missouri Journal, which promises to follow up the story.

We’ve been closely following developments in the Kansas tax reform debate and here’s the latest update.  Last week, the conference committee began meeting to try to reconcile the differences between the House and Senate bill.  But compromise will have to wait until after spring break. The legislature adjourned and lawmakers won’t be meeting again until April 25. Read ITEP’s analysis of the Governor, House, and Senate plans.

Read here about an effort to end the Missouri – Kansas tax credit border wars (a.k.a. race to the bottom).  Hoping to create jobs within their borders, both states have been “willing to pay for it with tax credits and other deal sweeteners” that businesses have exploited – without necessarily delivering on the jobs.

Photo of FL Governor Rick Scott via Gage Skidmore Creative Commons Attribution License 2.0

While the sale of online coupons for local merchants boomed in 2011 – Living Social sold $750 million and Groupon sold an astounding $1.62 billion in online coupons last year – state governments are still trying to play catch up and figure out how to ensure these sales are taxed fairly.

The central question facing the states is whether a state or local sales tax should be applied on the cost of the online coupon, or on the face value of the coupon, meaning the list price of the product for which the coupon is being redeemed. For example, if you were to buy a Groupon for $25 that allows you to purchase $50 worth of books at a local bookstore, the question is whether sales tax should be assessed on $25 (the cost of the coupon) or $50 (the face value of the coupon). Whatever the amount, the tax could be collected either at the time of coupon purchase or product purchase.

As Forbes’ Janet Novack reports, right now states are treating online coupons for sales tax purposes differently, or in many cases don’t even have a definitive answer to this question. For example, New York requires that sales tax be collected by retailers on the full face value of the items purchased with coupons, but only in the case where the coupons are for a specific dollar amount of spending. California, by contrast, only applies the sales tax to the price paid for the coupon itself in any case.

So why isn’t Groupon itself collecting sales tax on the original coupon purchase, rather than having the tax collected by the merchant?  After all, it’s reasonable to compare their service to the one provided by  Expedia, Orbitz, Priceline and other travel sites who sell discount hotel rooms, as should be done in our view. The difference is that online coupon sites consider what they do to be advertising and, in fact, it’s part of Groupon’s contract with merchants that merchants handle all the taxes. Discount travel sites are more properly reselling those hotel rooms.

A promising development is that 24 states who collaborate in the Streamlined Sales and Use Tax Agreement, which grapples with state sales tax issues, are moving to tackle the coupon question head on by surveying member states and putting out model policy for all states, possibly as soon as May. The Streamlined Sales Tax Governing Board, of course, faces a difficult task because it’s a brave new world of e-commerce.  While there is more than one good way to solve the problem – as states like New York and California have shown – states need to act sooner rather than later.

Photo of Movie Ticket Groupon via Groupon Creative Commons Attribution License 2.0