A Day to Talk Taxes

Vermont Governor Jim Douglas and several state tax experts marked Tax Day Thursday (April 15) on Capitol Hill, where they debated the merits of several congressional proposals that could give the federal government a bigger say in determining some state and local tax rates.

Douglas, the chair of the National Governors Association, told members of a U.S. House subcommittee that Congress should let states determine their own tax structures, even if the federal lawmakers disagree with the decisions states make.

“It seems to me states ought to make those decisions for themselves,” said Douglas, a Republican who is retiring as governor this year. “In the context of the fiscal crisis we’re facing, we have to maintain the flexibility to solve our problems as we see fit.”

But Rep. Hank Johnson, a Georgia Democrat, said state-by-state arrangements can lead to people who live and work in different jurisdictions paying income taxes in both for the same job. Johnson is a sponsor of legislation, called the Mobile Workforce State Income Tax Fairness and Simplification Act, that would streamline the process across state lines.

Congress, he said, should address the issue. “There has never been an instance where all states have enacted a uniform tax law,” he said.

In written testimony from the NGA, Douglas argued that Congress is increasingly interfering with state tax efforts. Congress placed a moratorium on taxes for Internet access, prohibited taxes on nonresident pension income and sped up the elimination of the state estate tax credit.

“Congress under its authority of the commerce clause has broad authority to regulate state taxation, Douglas said at Thursday’s hearing. “The key question is not whether Congress can regulate state taxation but whether Congress should. The governors’ answer stems from the basic principles of federalism. We believe the ability of states to develop and manage our tax systems is a core element of sovereignty.”

The hearing came as the drumbeat of bad budget news for states continued. Robert Ward, deputy director of The Nelson A. Rockefeller Institute of Government , said last year was the worst calendar year for state revenues on record, with revenue falling 11 percent compared to the year before.

The last quarter of 2009 marked the fifth quarter in a row that revenues fell below their level in the previous year, and signs suggest that trend will continue for the first quarter of 2010, Ward said.

Earlier this week, the National Conference of State Legislatures called the revenue drop-offs the “principal cause” for state budget woes this fiscal year. Half of states reported that personal income tax returns came in below projections in the first eight months of the current fiscal year. Sales taxes fell short in 23 states.

Both of this week’s reports, though, had glimmers of optimism. NCSL noted, for example, that 41 states expected revenues finally to pick up in the next fiscal year, which, for most states, starts in July. And the Rockefeller study pointed out that, during the last quarter of 2009, nine states actually saw an uptick in revenue.