Growth & Taxes

It's been known for a long time that obsolete state tax systems are not producing the revenue states need. But what's becoming clear today is that those tax systems are not only failing to keep up with the dramatic shifts in the U.S. economy. They are a drag on economic growth. 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.

This report was originally published in Governing magazine.  For the full report, please click below.