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Sunday, March 13, 2011

Illinois Governor Quinn's Request for 21st Century Tax Code - First, the Commission

On 2/16/11, Illinois Governor Pat Quinn delivered his budget speech to the legislature. He said he would form a commission to write a new tax code.

"We must be a state that has a dynamic, growing economy. We must provide a first class education for our people and training that helps our workers succeed at all levels. But we must also be a state with a tax system that is fair and responsible. For too long Illinois has had a tax code that is not fair. It is regressive and is not based on ability to pay.

We can do better.

For this reason, I will appoint an Illinois Revenue Reform Commission—and charge the members with recommending a plan to write a 21st century tax code for Illinois that focuses on fairness and promotes economic growth." [click here for video]

Sounds ambitious - writing a new tax code. If that means starting from scratch, perhaps that is a good idea as a way to truly get a 21st century tax code rather than just a tweaked 20th century one.

Given the name of my blog and website, I am particularly intrigued. What does it mean to have a 21st century state tax law? I'll leave that for a second post of Illinois, but first ...

I repeat a set of suggestions I first offered in July 2008 (article on California Progress Report) on how to have an effective tax study commission. Ideally, "effective" should mean that the commission's work is solid in that it would truly improve the tax system and meets principles of good tax policy and is enacted. Here is a summary of my six suggestions for an effective commission:

  1. Serious commitment. There must be serious buy-in from the legislature and Governor. Legislative hearings on the final report should be required within two months of its issuance. If recommendations are found to be unacceptable, the governor and/or legislature should be required to issue a statement explaining why.
  2. Able, willing and non-partisan commissioners. Commission members should have a strong technical and practical understanding of our tax system and the economic impacts of taxes. They should understand today’s global economy and how it affects business decisions and how a tax system can support economic growth. Commissioners should be willing to propose changes even if they would result in tax increases for themselves or their employers. Appointments made for other reasons harm the ability of the commission to achieve its goal. A non-partisan committee would be better than a bi-partisan one which by its description already brings politics into the task.
  3. Principles and goals. A set of principles should be adopted and followed that support good tax policy, such as equity, efficiency, transparency and simplicity. The National Conference of State Legislatures has a set of these principles, as does the AICPA. I have a document that includes various sets including a recent one used by Georgia by its tax reform commission - here (pages 16 - 23).
  4. Reality. Taxes must make sense for the system to be respected such that compliance is high. An approach that might make great economic sense but is too difficult to comply with won’t be a lasting change. Also, change can’t happen overnight so transition rules must be considered. Helpful and appropriate uses of technology were not part of 20th century tax systems, but should be part of 21st century tax systems. Also, the reality of mobile capital and workforce and that software and machines can do some of the work done manually in the 20th century must be considered.
  5. Time-saving background work. There are numerous reports from other states, think tanks, business and government organizations, and academics that can help the commission with its work. Also, lessons can be learned from other states that have recently studied and analyzed their tax systems, such as Georgia, Vermont, South Carolina, and Maryland.
  6. Public education. Concurrent work is needed by the legislature and tax agencies to help the public understand current tax problems and their direct and indirect effects on their lives and the state. This will help ensure that the commission’s recommendations get the careful consideration they’ll need in order for tax system modernization to become a reality. Check out the Vermont Tax Commissions "fact or fiction" feature on its website, as one approach for broadening understanding of a tax system - here.

Illinois recently increased its corporate tax rate which got a lot of attention as it makes the US combined federal and state corporate tax rate second highest among OECD countries. [See Tax Foundation news release of 1/14/11 and 3/11/11 news release about the situation when Japan's rate drops April 1.]

I'll have a second post on thoughts about a "21st century tax code" for a state.

What do you think about Illinois Governor Quinn's suggestion on a tax reform commission and its chances of success?

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