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Sunday, October 24, 2010

Various Tax Measures on November 2 Ballots in Several States

California is not the only state with tax-related ballot measures to be decided by voters on November 2, 2010. The National Conference of State Legislatures has compiled a list indicating tax and budget measures under consideration in 16 states. It is puzzling why voters are voting on most of these measures rather than having them decided by legislators who have the ability to improve the measures and determine how they fit within the bigger picture of balanced budgets and an appropriate tax system, and can deal with tax system improvements using something other than a piecemeal change approach.

I think a good example of a measure that really should be decided by legislators is Prop 24 in California. Part of the question here is whether the state should keep the change approved in 2009 by the legislators and the governor whereby multistate businesses can chose to determine the amount of income apportioned to California using either a 4-weighted formula or a single sales factor approach. This is a fairly complex calculation to understand. Also, it is part of a bigger business tax question that involves sourcing rules, combined versus separate reporting, the tax rates and economic development decisions.

The use of a single sales factor is really a decision to use the tax law for economic development purposes. The rationale typically offered for a single sales factor to determine how much of a multistate business' income is apportioned to a state is to encourage that business to place more property and payroll in the state because doing so, won't lead to a tax increase for them. The benefit to the state is hopefully getting businesses to place more payroll and property in the state.

But I think the theory isn't always easy to prove in fact and many factors come into play on what causes businesses to locate operations in one state or another. But, it is a complex tax rule and pulled out of the whole picture of business taxation in order to be determined by voters rather than legislators is not the ideal way to design a tax system. And it overlooks a question voters should have asked legislators (and they should have asked themselves back in 2009), why was this law change structured as a choice rather than changing the apportionment formula for all businesses as other states who adopted the single sales approach did?

Perhaps a better approach would be to use ballot measures for getting non-binding opinions of voters (like a survey) rather than having voters build parts of a tax system which typically really means that voters have placed some restriction in the law that then ties the hands of legislators such that they do not have access to the complete tax system in designing the best possible tax system for a state.

What do you think?

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