States Look to Update Tax Systems

"The new economy is more than a swing from manufacturing to services. Thanks to new technology and telecommunications, products can be purchased as easily from an outlet 3,000 miles away as from one down the block. Small businesses are increasingly vital — they now account for about a third of the value of U.S. exports. Moreover, the service economy is moving toward a further evolution: It's becoming increasingly knowledge-based. Where managerial and professional jobs accounted for roughly one-fifth of total employment in 1979, such jobs are now moving past the one-third mark."

"And yet, state tax structures, developed at a time when computers — 'thinking machines' — were the stuff of science fiction, and the American economy flourished with the automobile industry, have failed to evolve. They are 'completely inefficient,' says Ray Scheppach, executive director of the National Governors Association. They stifle economic vitality by creating an environment that's inhospitable to businesses."

"Since 2000, virtually every state has commissioned at least one major tax reform panel to study the issue and develop proposals for modernization. Seventeen states now have in place at least an informal mechanism for continuous review of their structures. Much of this action has been propelled by fiscal shortfalls or the realization that various revenue streams are declining relative to spending pressures. In more than a handful of states, the property tax — which has tended to rise inexorably to make up for some of these gaps — has led to citizen rebellions. Both Florida and New Jersey, for example, have been responding to public fury about the property tax by considering major tax restructurings."

"The tax questions the states will need to grapple with in coming decades are ones that lie at the heart of the new economy. How can states reshape and modify their tax systems to encourage greater interstate, federal-state and state-local cooperation — and still retain the autonomy of each level of government? In an age of globalization, how do states compete with other countries, yet minimize tax competition among the various levels of government? How do states generate revenues from the intangible products of knowledge-based firms? How do they capture business activity within state borders when borders are increasingly irrelevant in conducting business?"