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

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?

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

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?

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

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 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

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?

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

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

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

Sales Tax as % of Income in 1984

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

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

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

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 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