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A new report about the long-term fiscal problems facing the states is making news, and for good reason. While much of the report focuses on spending-side issues that we’ll leave for others to address, one of the main findings of the State Budget Crisis Task Force is that state tax bases are narrow, shrinking, and increasingly inadequate.  That finding is largely spot-on, even if it’s not terribly surprising.  According to the report, the causes of this growing inadequacy are, in no particular order:

  • Sales tax bases are shrinking as consumers spend more on personal services that, unlike tangible products, are not subject to sales taxes.
  • States are often unable to enforce their sales taxes on online shopping—which is on track to account for ten percent of all purchases in the next few years.
  • State corporate income taxes are declining due to a multitude of tax breaks given to business, and sophisticated tax avoidance strategies used by corporations.
  • State gas taxes are being squeezed by rising construction costs and growing vehicle fuel-efficiency, due largely to a structure that has left rates stagnant for decades.

The Institute on Taxation and Economic Policy (ITEP) has an array of policy briefs and reports that elaborate on and confirm these findings, and that offer suggestions for reforming their tax systems.

One area where the Task Force seems to have strayed from its mission, however, was in devoting excessive attention to concerns over tax volatility.  The Task Force’s suggestion for dealing with volatile revenues is a good one (use rainy day funds (PDF) more responsibly).  But it misses the mark by failing to point out that more volatile taxes are often the best (PDF) at addressing the Task Force’s main concern—inadequate long-term revenue growth.

Volatility is an inevitable part of state tax systems that can be managed.  But anemic long-term revenue growth is a much more serious problem that can only be addressed with fundamental tax reforms designed to allow state tax systems to operate effectively in the 21st century economy.