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How Electronic Commerce will Affect State and Local Government Storm Over Troubled Waters for State and Local Government?

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Presentation on theme: "How Electronic Commerce will Affect State and Local Government Storm Over Troubled Waters for State and Local Government?"— Presentation transcript:

1 How Electronic Commerce will Affect State and Local Government Storm Over Troubled Waters for State and Local Government?

2 Robert P. Strauss Professor of Economics and Public Policy The Heinz School Carnegie-Mellon University How Electronic Commerce will Affect State and Local Government Storm Over Troubled Waters for State and Local Government?

3 Goals of Presentation: 1. Describe the Role of Sales and Excise Taxes Nationally 2. Review Importance in Ohio 3. Review: Where, Who, What and When of Taxation and Problems Caused by Ecommerce 4. Examine Emerging Sales Tax Issues: A. Electronic Commerce Induced Problems B. Review of Policy Responses to Electronic Commerce Problems for Sales and Use Tax C. Review other Sales and Use Tax Issues

4 5. Explain the Local Property Tax Revolt Conclusions: Two Predictions and a Worry: Prediction 1: A Sales Tax - Property Tax Collision in Ohio Prediction 2: A Growing Role for Residence based Income Taxation and State Intergovernmental Transfers The Worry: Can Local Government Trust State Government to Keep them Whole in the new Era of Electronic Commerce?

5 1. Role of State Sales and Gross Receipts Taxes Nationally: 1994 State sales and gross receipts taxes: better than $185 billion out of $374 billion50% nationwide $714 per capita Largest revenue source for 23/50 states Over 40% of state tax revenue in 12 Local Sales & Gross Receipts Taxes 15% of Local Tax Revenue in 1993

6 2. Ohio Sales and Gross Receipts Taxes in 1994 n 1994 ($billions) n $7.2 state sales & gross receipts out of $14.2 state taxes (51%) n Major Components: n General Sales & Use: $4.5 Motor Fuels : $1.2 “Sin” Taxes : $.4 Utility Taxes : $.7 n

7 7 Ohio Sales and Excise Taxes in 1996 n Sales and Use Tax 21.2% of combined state and local taxes in Ohio n Selective Excise Taxes 9.6% of combined state and local taxes in Ohio n Transaction Taxes 31.6% of combined state and local taxes in Ohio

8 3. Review of Electronic Commerce and the Sales and Use Tax n The Big Four Problems Posed by Electronic Commerce and Remote Sellers: n ---WHERE is the location of the buyer? n ---Who is buying and selling? n ---What is being transacted? n ---When is the transaction occurring?

9 4A. Sales and Use Problems from Electronic Commerce and One Rate per State n Risks of greater multiple taxation n Risks of greater geographic tax planning (Oregon) n Risks of more sluggish revenue growth Two Competing Views of the Risks: n Fiscal Sky is Falling n May never be more than 2-3% of Commerce

10 4B. National Policy Responses to E-Commerce Issues for Sales and Use Taxes n Newly Enacted State and Federal Moratoria on New E- Commerce Taxes n National Commission and National Tax Association n Processes: Development of Model Legislation, Interstate Compact, and/or Federal Legislation n Fights in National Commission Likely, Stalemate? n Long-term Elimination of Local Sales Tax Flexibility --One Rate/State

11 4C. Other State Sales and Use Tax Issues n ---Long term erosion of base as service economy emerges n ---Growth in inter-state vs. intra-state commerce n ---Historical regressivity of tax: some analysis for California, Michigan, and Minnesota

12 Sales Tax as % of Income in 1984

13 5. The Status of the National Property Tax Revolt n ---An explanation for the property tax revolt: n stagnant state aid for public education n + growing local school budgets n + changing federal depreciation rules n + decline of manufacturing property tax base n + relative growth of residential property tax n + stagnant personal income levels n = Very Angry Homeowners

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15 Residential Share of State-Wide Property Tax Base: 18 states

16 The Combined Facts and Implications n --Changing base of economy adversely affects sales and use tax revenues n --E-commerce issues are causing more friction over state and local sales taxes n --In Ohio, counties and schools may increasingly collide over the property tax base

17 Central Tax Policy Questions for States: n How will local governments be able to finance themselves in the future? n Can State Legislatures Give More Aid to Local Government? Need to Give Credit to State n Likely Increased Reliance on Resident Income Taxes at State Level

18 18 Central Tax Policy Questions for States: n Greater inter-governmental Tensions n Political Implications of Transparency n States that Anticipate/Solve these Problems May be Economic Winners


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