Tax Tools to Help Local Governments

WM Special Revenue Measures, Tax Tools to Help Local Governments, March 11, 2021

There are four options to deal with this issue.

Step one passed yesterday. Thank you. May it be the camel’s nose for #3, just as some fear

The second option is to enact a no-year disaster assistance appropriation with provisions for revenue loss during a long-term event. Disaster supplementals used to be a way to be seen as bringing home the bacon. Of late, they have become a way to grandstand on the debt, which is perverse. Until our politics becomes about governing rather than winning elections, automatic government is sadly necessary.

The third option is tax reform  The Urban Institute’s State and Local Finance Initiative study on How the COVID-19 Pandemic is Transforming State Budgets show that 

Those who did best include states that have progressive income taxes, those that tax groceries, and those that enacted tax rate increases for fiscal year 2020. States with these characteristics saw some growth in overall tax revenues.

 This finding shows that comprehensive tax reform is necessary, especially for states whose systems were inadequate to face the pandemic. This is option 3. Our current proposal is attached. Such reform should, at best, be bipartisan rather than passing under reconciliation.

Reform allows a rebalancing of fiscal responsibilities. The federal child tax credit we propose, plus increases in the minimum wage to at least $12/hour may provide enough family income in most states. Other states would add additional support through a state subtraction VAT.  Comprehensive reform will truly end welfare as we know it by giving families what they need for a decent living.

The state SVAT would fund education, with options for funding private schools either as donors or clients. Espinoza v. Montana has settled the question of whether this is constitutional. Now the question is the political will to enact such tuition support and for private schools to allow teachers to organize. 

It would also fund remedial education, english as a second language (regardless of immigration status), junior college and technical education and pay for all students who have completed sophomore year in high school or, after their cohort has reached that level.

Retail sales taxes, corporate income and most personal income tax filing would be replaced with the SVAT and a border adjustable goods and services credit-invoice tax (which we call IVAT for short). The state-level IVAT would fund public safety and commercial regulation. Property taxes, without the burden of funding education, would fun both building inspections and local public works, with the latter supplemented by tolls, motor fuel and/or carbon value added taxes (also receipt visible). 

States would collect federal SVAT and IVAT, review compliance audits and investigate and prosecute criminal violations.

An asset VAT at the state level would collect taxes on rental income (as would the federal AVAT), with states collecting an additional AVAT on real property transfers with price appreciation. This levy would be collected at closing and forwarded to states. Other AVAT collections would be collected by brokers and submitted to the U.S. Securities and Exchange Commission. 

Any state AVAT collected on financial transactions would be forwarded to the states by the SEC. I would not recommend state enactment of such levies should an international or OECD AVAT rate be negotiated. This type of competition leads to a race to the bottom.

Any state-level debt service and retirement would be satisfied by higher salary surtax. State constitutional amendments to implement these changes would also include permission to incur debt in a federally declared disaster. This debt would be satisfied by any federal disaster assistance and the salary surtax.

Option 4 is to do all of the above. This sounds like the best choice.

Attachment: Tax Reform