On The Record: An Interview with Tax Expert John Petersen

On The Record: An Interview with Tax Expert John Petersen

ARLINGTON, Va. -- John E. Petersen, director of the Government Finance Group, a financial advisory and research firm based in Arlington, Va., recently discussed the Internet tax debate and other key issues with senior writer Blair S. Walker.

A recent appointee to Virginia's tax commission, Petersen writes a regular finance column for "Governing" magazine and last year authored a study on the future of Michigan's state and local taxation. Do think the Internet taxation issue will ultimately wreak major economic havoc on the states, or has the whole thing been overblown?

Petersen: I think that for certain states it could be quite a problem. You can't generalize for all states -- not all are heavily reliant on the sales tax. But, as highlighted by the Internet taxation issue, you have this ongoing problem of accelerating erosion of the tax base. Which states would be damaged most by not being able to tax goods sold over the Internet?

Petersen: The state of Texas, the state of Louisiana -- virtually all of the states in the South and West have typically relied fairly heavily on the sales tax. And you have certain states in the East, like New York, that have a pretty stiff sales tax. Virginia Gov. James Gilmore has been quite vocal in his opposition to levying a sales tax on Internet commerce. Why?

Petersen: Well, I'm certainly aware of the governor's position on this -- again, the tax commission is made up of independent individuals, so I don't represent anyone. But the governor's attitude, I think, springs from two sources. One is that he's very aware of the role that high-tech industries and the Internet play in the Virginia economy. As you know, we're the home of AOL and a lot of other high-tech companies, so he's sensitive about preserving an environment for them. Secondly, I think that philosophically the governor feels that wherever a tax can be constrained or diminished, that's probably a positive thing.'ve stated that the next economic downturn will probably affect the states a lot differently than in the past. In what regard?

Petersen: One of the things that I've seen happen -- and the sales tax is a good example -- is a narrowing of the tax base. The good times and prosperity (that states currently enjoy) in some cases has led to a change in the tax base, something I think you need to view with a good deal of caution. And which is probably going to add to the volatility of revenues in the future. During a downswing, that can be a very difficult problem. states are well-positioned to weather an economic downturn?

Petersen: I think states that have avoided permanent tax cuts. Texas is a state that has followed policies designed not to add volatility to its tax base. But some states, like Tennessee for example, have had some real problems because of their tax policies. Excluding Virginia, point out a state that's done innovative things fiscally.

Petersen: An example would be the state of Maryland. Maryland has one of the revenue systems that allows the localities to tap into the income tax. They have a piggyback system. I believe it's about the only `pure' piggyback system around.

Stateline: Which states could have been more prudent in handling their fiscal responsibilities?

Petersen: Well . . . let me say that one of the states that has had an ongoing problem in my opinion has been the state of Louisiana. The property tax in Louisiana is almost strictly a commercial tax. It has a very, very high effective exemption level, and I guess this is rooted in a populist notion of simply not taxing homeowners. I think that that's very questionable, in view of the fact that many local government services really are for the benefit of property. What state fiscal trends do you see emerging in 2000?

Petersen: Keep your eye out for the slowdown, which is bound to come. Certainly, the indications are that the Fed is cranking up the interest rates. They are now back to levels they were in 1996. And increasing inflation is now an emerging problem. Given that states have enjoyed tremendous economic prosperity over the last five to 10 years, are you concerned they may not be able to turn on a dime when an economic downturn does arrive?

Petersen: To the degree that they have rainy day funds, hopefully they can buy some time. And certainly their overall financial condition is about as good as it's ever been. I'm not too concerned about the ability of state governments to move fairly rapidly. I don't think we're looking at any precipitous situations, but it can be strenuous for a couple of years as they go through reductions.

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