Book Sheds Light on the Politics of State Tax Policy

WASHINGTON, D.C., March 13, 2006—As governors and state legislators contend with public demands for both tax relief and more services, the Urban Institute Press's State Tax Policy: A Political Perspective frames the issues these leaders face when setting tax policy and recommends strategies to address them.

"The question is not whether states will raise the necessary money. Rather, it's which groups they will tax," says author David Brunori, who writes the "The Politics of State Taxation" column for State Tax Notes magazine.

How the question is answered depends on state leaders' ability to navigate choppy political waters. After first laying out the principles of sound tax policy—that taxes should be fair, efficient, stable, and accountable—Brunori addresses specific tax problems and possible solutions.

In the economic development arena, Brunori notes, interstate competition using tax policy can lead to innovation, experimentation, and efficiency. However, he concludes, tax incentives aimed at particular industries or companies violate the tenets of good tax policy.

Brunori dissects how gubernatorial and legislative races have been won or lost because of candidates' positions on state taxes. He also explores how lobbyists put forth their positions on tax issues and how ballot initiatives give citizens a louder political voice.

State Tax Policy describes how the sales tax is not the powerful revenue source it once was, due to electronic commerce, the shift to a service-based economy, and political pressure to spare broad categories of products from the tax. At the same time, the personal income tax, accounting for about one-third of state tax revenue, is enjoying unprecedented growth and widespread public support, yet is under considerable political pressure from antitax adherents.

State governments and taxpayers are spending a growing share of their resources administering and complying with the corporate income tax, which accounts for less than 6 percent of state tax revenue. Brunori relates how many policymakers have come to question the tax's long-term viability. Property and estate taxes, he says, also generate very little revenue but entail considerable compliance and administrative costs and use up political capital. Excise taxes, often designed to achieve social policy objectives, frequently conflict with the idea that taxation should have a neutral effect in the market and strike most analysts as regressive and an unreliable revenue source.

As Brunori describes, intergovernmental aid, lotteries, fees, and licenses cushion states looking to execute politically charged strategies, such as heftier consumption or business taxes. But, he argues, states' ability to rely on alternative revenue sources is limited.

Advice for State Policymakers

Brunori concludes his book with five easy-to-implement recommendations for states to consider as they grapple with tight budgets and overburdened tax systems:

• Learn what works: Systematically evaluate revenue systems. Knowing what works is vital in tax systems that were designed a half-century ago. Legislators and policymakers are often surprised to learn that many taxes—costly to impose—raise paltry sums.
• Find out who pays: Conduct "incidence analyses." A tax system must be fair, but few states do the research necessary to find out who bears the burden or reaps the benefits of proposed tax policies. Every state legislature should independently analyze all tax proposals and publicize the results.
• Discover what the experts think: Seek economic and public finance opinions. Many tax laws are supported for short-term political purposes alone. Experienced economists and public finance experts can analyze proposed legislation and help legislators make more informed policy decisions that further the state's long-term interests.
• Work together: Cooperate with other states. The problems plaguing tax systems cannot be solved by any one state. By working together, states can avoid harmful tax competition, an ever-shrinking tax base, and federal obstacles to their tax policies.
• Demand what you deserve: Strive for sound tax policy. States should have stable tax systems, in which the rules of the game rarely change. Diverse revenue sources and a broad tax base can protect revenue streams and keep taxes lower for everybody, for example.

"There's more to state tax policy than new taxes or cutting taxes," remarks Brunori. "Good state tax policy will require policymakers and legislators to change the way they think."

David Brunori is executive vice president of editorial operations at Tax Analysts and a research professor of public policy and administration at George Washington University. He is also the editor of The Future of State Taxation and author of Local Tax Policy: A Federalist Perspective (both from the Urban Institute Press).

State Tax Policy: A Political Perspective, 2nd edition, by David Brunori, is available from the Urban Institute Press for $26.50 (158 pages, ISBN 0-87766-726-8). Order online at www.uipress.org, call 202-261-5687, or dial 1-877-847-7377 toll-free.

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