Tax Reform

1
Tax Reform Its Relevance to High Tech
BusinessesThe State Perspective

• Joe Huddleston
• Executive Director
• 22nd Annual SJSU/TEI High Technology Tax
  Institute
• Palo Alto, California

2
Introduction

• What is the Multistate Tax Commission?
• Why Business Tax Reform?
• Fundamental Federal Tax Reform the States
• Conclusions

3
What is The Multistate Tax Commission?

• The Multistate Tax Commission was established in
  1967 to
• Preserve states tax sovereignty.
• Promote uniformity and compatibility in tax
  systems.
• Facilitate the proper determination of the state
  and local tax liability of multistate taxpayers.
• Facilitate taxpayer convenience and compliance.
• Avoid duplicative taxation.

4
What is The Multistate Tax Commission? (cont.)

• Forty-six states, plus the District of Columbia,
  participate in the Commission.
• The Commission speaks with a strong voice to
  Congress and the courts on the need to preserve
  the legitimate tax authority of the States from
  unwarranted federal intrusion.
• The Commission recommends uniform tax policies
  and practices to improve the efficiency and
  fairness of state tax systems for both taxpayers
  and the States.

5
Multistate Tax Commission Membership
6
Why Business Tax Reform?

• Business taxes are a significant portion of state
  and federal tax revenue
• The design of the current system of business
  taxation is widely seen as flawed
• Business tax reform is a part of the discussion
  about overall tax reform

• This slide and the next are drawn from
  Highlights of GAO-06-1113T, Statement of David M.
  Walker, Comptroller General of the United States
  to the U.S. Senate Committee on Finance, BUSINESS
  TAX REFORM - Simplification and Increased
  Uniformity of Taxation Would Yield Benefits,
  Sept. 20, 2006. Notably, this otherwise
  excellent discussion of U.S. business tax reform
  does not mention state business taxation.

7
Why Business Tax Reform? (cont.)

• States have the same reasons as the federal
  government to reform business taxes
• Some features of current business taxes channel
  investments into tax-favored activities and away
  from more productive activities
• Complexity in business tax laws imposes costs of
  its own, facilitates tax shelters, and provides
  cover for cheating
• Confidence in the fairness of the tax system and
  thus voluntary compliance is reduced

8
Why Business Tax Reform? (cont.)

• But states have even more compelling reasons to
  engage in business tax reform efforts
• Business tax reform in neighboring states and
• Federal business tax reform

9
Fundamental Federal Tax Reform the States

• State income taxes, for both individuals and
  corporations, are heavily reliant on the
  structure of the federal income tax and largely
  conform to many features of the federal tax base
• 46 states and the District of Columbia impose a
  tax at the corporate or business entity level
  that uses net income as at least part of the base
• All of these states effectively use federal
  taxable income as the starting point for state
  tax computations

• This slide and following rely heavily on Harley
  T. Duncans testimony before the Presidents
  Advisory Panel on Federal Tax Reform on April 18,
  2005.

10
Fundamental Federal Tax Reform the States
(cont.)

• State tax base must necessarily follow federal
  base
• Taxpayer compliance burden
• Reliance on federal compliance systems
• No 3rd party reporting systems
• Basic Premise Without a federal income tax,
  there can be no broadly-based state income tax

11
Fundamental Federal Tax Reform the States
(cont.)

• A framework for analyzing federal reform
  proposals and their state tax implications
• Conformity impacts what are the structural
  effects on state tax base?
• Crowding out impacts to what degree does
  federal taxation move into traditional state tax
  areas?
• Sovereignty impacts what is the effect on state
  tax authority and what range of options are left
  to the states?
• Opportunity impacts what avenues might be
  opened for improving state tax systems?

12
Conclusions

• Business tax reform requires structured dialogue
  to assess interaction with and impact on other
  elements of overall tax system and to foster
  opportunities for improvement
• This is especially true in respect of
  intergovernmental aspects, i.e., state-federal.

13
Conclusions (cont.)

• Fundamental federal tax reform could
  substantially alter state tax bases and
  authority federal changes will occasion
  state-level changes
• Any restructuring or simplification of the
  federal tax system must take potential impact on
  state taxes into account, otherwise state
  reactions may negate any benefit of federal reform