New America on Fiscal Policy

There's little chance that the state budget eventually passed in Sacramento will actually rid California of its stubborn $15.2-billion deficit. But in the improbable event that the Legislature and governor balance the budget without resorting to such gimmicks as raiding other accounts, enjoy the moment. In just 10 weeks, California voters will likely throw it out of whack again. California has two budgets. One is passed by lawmakers. The other is improvised at the ballot box. The state's Constitution requires that the budget put together in Sacramento… more

As far back as 1872, when Montgomery Ward issued its first mail-order catalog, vendors have sold to customers without being physically present in the customer’s state. Although sales taxes have existed since the 1920s, we have no effective system for collecting sales-and-use tax on sales by remote sellers.

Today we’ll look closer at the history of the remote sales tax issue, clarify New York’s law change and note possible solutions.

As a 1965 congressional report noted: “The present system of State taxation as it affects… more

Both Governor Schwarzenegger and Assembly Speaker Bass have stated that they would like to form a bipartisan commission to find ways to improve California’s tax system. They seek to modernize our tax system, make the state more economically competitive, and have a system that produces stable revenues.

These are great goals. California’s tax system was designed decades ago in a manufacturing era when borders were important and tangible goods ruled. Our tax system was not designed for the current information age with its mobile capital, worldwide-based workforce,… more

After a two-year hiatus, Social Security has made its way back onto the political stage. Both presidential candidates, recognizing that the program is insolvent over the long-run, are claiming that they will confront the system’s $4 trillion long-term shortfall. Senator Barack Obama has made a specific proposal to finance part of the shortfall through a tax on people making over $250,000 a year, while Senator McCain has pledged that he’ll "fight to save the future of Social Security” and “won't leave office without doing everything [he] can… more

Twenty years ago, with just under 51% of the vote, California voters approved Proposition 98, a constitutional amendment establishing a minimum funding guarantee for education. For years afterward, officials at the California Teachers Assn. (the initiative's main backer) and other proponents made a habit of describing Proposition 98 as having receiving "overwhelming support" from voters.

Today, the education funding guarantee is as popular as the teachers union has long wished -- a true third rail of California government that zaps politicians who dare to suggest altering it. So… more

Gov. Arnold Schwarzenegger says he wants more than a balanced budget this year. He wants budget reform too.

For a state that has already laced itself into straitjackets of spending mandates and formulas, Schwarzenegger proposes new constitutional chains: a combined rainy-day fund and spending limit, to be added on top of the rainy-day fund and spending limit that voters have already approved separately. His implicit message: The Legislature and I have chosen badly, so please restrict our ability to choose again.

As… more

California State Board of Equalization Chair Judy Chu believes it is time to address our deficit and modernize our sales tax by applying it to services. Her call to modernize our sales tax would be a good start in addressing an underlying cause of our budget problems.

Taxing services is not an outlandish idea. Most states already tax more types of services than does California.

Taxing services is also not a bad idea. Lifestyle changes have led us to spend less on… more

PL 86-272 provides that if the only in-state activities a business has is the solicitation of orders for tangible personal property that is approved and filled from outside the state, the state may not impose a net income tax on the business. States set the rules, within due process and commerce clause constraints of the U.S. Constitution, for businesses that sell services or intangibles.

States tend to take broad approaches. A 2007 Illinois Department of Revenue ruling notes that… more

As Congress prepares to consider the annual Department of Defense authorization bill and other military spending legislation totaling more than $700 billion, the need for more aggressive scrutiny is abundantly clear. At a time when we have a $9.3 trillion national debt and large unmet social needs, oversight of these enormous and ever-increasing sums has failed to keep up.

The Pentagon’s procurement and budgeting processes are rife with problems. For example, the Government Accountability Office has identified $295 billion in cost… more

Californians could be forgiven for worrying that an important state asset -- the state lottery -- is in grave danger. In recent weeks, a rhetorical barrage, bordering on the hysterical, has been directed at Gov. Arnold Schwarzenegger's proposal to borrow against future lottery receipts to help close a $15.2-billion budget gap.

The Contra Costa Times darkly suggested that the governor's idea would mortgage the lottery's future and "saddle future generations with irresponsible debt." The top Democrat in the state Senate, Don… more

The Pentagon is in crisis: The war in Iraq is entering its fifth hot summer. And while U.S. troop casualties are down, the light at the end of the occupation tunnel is no closer and no brighter.

Headaches mount on the home front as well. The head of the Air Force was recently embarrassed and forced from the cockpit. Billions of dollars have been misplaced or misspent. Huge cost overruns bedevil weapons contractors. And, private contractors have… more

Voting just three days before the 30th anniversary of the passage of Proposition 13, the landmark Jarvis-Gann initiative that cut property taxes and triggered a tax revolt across the country, voters in the primary election approved dozens of tax increases in local communities around the state.

By my count from semi-official election results available the day after the election, they passed 26 of 32 proposals to issue school and community college bonds; each of these measures, which raise local property taxes… more

"Saving our future requires tough choices today" may be a banal sentiment, but it's not an easy one to challenge. That is the headline on the "Fiscal Wake-Up Tour," a slide show created by David M. Walker, formerly head of the Government Accountability Office. In hopes that it will be to the long-term budget deficit what Al Gore's "An Inconvenient Truth" slide show has been to climate change, Pete Peterson has set aside a billion dollars out of his recent… more

In the Feb. 20 issue of Paybefore Update, my colleague, Melissa Koide, discussed a proposal to use prepaid cards to deliver tax refunds through a unique alliance of government and industry, Viewpoints: A Convergence of Opportunities: Delivering Prepaid Accounts at Tax Time (February 2008). We believe the prepaid sector can and should play a major role in working with government to provide an "assets and transactions account" (ATA), a low-cost, high-value transaction account that facilitates savings for… more

In recent years, concern over declining corporate tax collections, aggressive tax planning and state revenue needs have led a few states to consider and even enact a gross receipts tax (GRT) on companies that do businesses within its borders. On the surface, a GRT is simple since it allows no deductions. The broad base allows for a very low rate that can make the tax more palatable. Further, all businesses are typically subject to the GRT, with the result that… more

The 1984 Treasury Department report (PDF) that laid the foundation for the base broadening and rate reductions of the Tax Reform Act of 1986, called for complete repeal of the itemized deduction for state and local taxes. Citing similar reasons, the 2005 final report of the President’s Advisory Panel on Federal Tax Reform also called for repeal. Yet, there are also proposals to make permanent the ability to deduct either state income or sales tax (for… more

Recent tax reform efforts in Ohio, Texas and Michigan have led to an increase in the number of states imposing gross receipts taxes (GRT). Let's take a closer look at GRT and some important legal issues surrounding it.

The Multistate Tax Compact defines a GRT as "a tax, other than a sales tax, which is imposed on or measured by the gross volume of business, in terms of gross receipts or in other terms, and in the determination of which no… more

Politicians don't like to talk about taxes except to brag about cutting them. But with California's widening budget deficit threatening deep cuts in education and other public services, it's difficult to avoid discussions about raising taxes.

Unfortunately, what's likely to be lost in the upcoming partisan melee over whether new taxes are needed to close the $16-billion gap is an equally important tax issue -- California's aging and often unfair tax system needs to be overhauled.

The goal of tax… more

The IRS was so confident in the legendary observation of Oliver Wendell Holmes, Jr. that “taxes are the price we pay for a civilized society” they chiseled it above the entrance to their Washington D.C. headquarters. Still each year Tax Day makes incumbent politicians uneasy -- especially at times when recession fears mount and fall elections loom. This year this perilous combination spurred them on to take prompt and bipartisan action. Who wants to be accused of sending families their… more

Education cuts and reform campaigns can be the drinking and driving of California politics. Each carries certain risks when pursued separately. Combined, they can be deadly.

This is a truth that Gov. Arnold Schwarzenegger has found hard to accept. Three years ago, just as he launched his breakneck drive to win voter approval of budget and political reforms, he decided to withhold part of a mandated increase in education funding from his 2005-06 budget proposal. The delay in Proposition 98 funding… more