First, I recommend Michael Mazerov's excellent paper "Expanding Sales Taxation of Services: Options and Issues," State Tax Notes, Aug. 24, 2009, p. 517. Mazerov, as most know, is with the Center on Budget and Policy Priorities. This report describes all of the reasons why the sales tax base should be extended to all services consumed by individuals. Profs. John L. Mikesell and John Due, who wrote an outstanding book on sales taxation, could not have made the case better or clearer. To be sure, one of the center's goals is to increase revenue. And Mazerov makes the point that expanding the base to include services will raise substantial revenue.
But he also points out the other benefits from taxing services. Expanding the base will make the sales tax (and the overall system) fairer. It will make sales tax revenue less volatile. It will curb the enormous distortions created by taxing personal property while exempting services. And expanding the base will improve tax administration and compliance. Importantly, Mazerov limits his discussion to personal consumption and refrains from calling for taxation of business inputs. Expanding the sales tax to services is, politically, among the most difficult policies to implement. But it's also one of the most necessary from the perspective of advocates of sound tax policy. Read this report and learn why.
Second, also from the CBPP, you should read "Promoting State Budget Accountability Through Tax Expenditure Reporting," State Tax Notes, May 25, 2009, p. 641. This report was written by Nicholas Johnson, Jason Levitis, and Jeremy Koulish. Public finance experts have long called for more transparency in tax policy, particularly regarding tax benefits. Exemptions, exclusions, deductions, and credits are routinely proposed and handed out by political leaders. But the myriad tax benefits cost society substantial amounts of money in the form of lost revenue. Since the time of Stanley Surrey, good-government advocates have urged an accounting of these benefits.
The report makes the case for tax expenditure budgets, something both liberals and conservatives should support. Tax expenditure budgets bring transparency to the process. Tax benefits have never received the scrutiny of direct expenditures. And once in place, tax benefits usually become the gift that keeps on giving because they are rarely reexamined. Without tax expenditure budgets, there is no way of knowing if the intended policy goals have been reached or if the benefits are still necessary. The center's report evaluates the tax expenditure budgets in the 42 states that produce them. Read it if you would like to learn about a necessary anchor in a sound fiscal system.
Third, as readers know, sales tax holidays are among my pet peeves. They illustrate everything that is wrong with state tax policy. I have been ranting on the subject for years. The Tax Foundation recently released a report titled "Sales Tax Holidays: Politically Expedient but Poor Tax Policy." Sales tax holidays don't cost a lot of money, but they reinforce the idea that politicians can play with the tax system without regard to principle. The Tax Foundation's philosophy is rooted in low tax burdens and limited government. The report, however, advocates classic good tax policy. It shows how tax holidays create complexities and unfairness and generally do not work as intended. They're political gimmicks. The report was written by Joe Henchman, Mark Robyn, and Micah Cohen. Henchman is fast becoming one of the nation's leading thinkers on tax policy. Legislators in states contemplating a sales tax holiday would do well to read this report.
Fourth, you should read New Jersey Policy Perspective's "All That Glitters Isn't Gold: Property Tax Abatements in Jersey City," State Tax Notes, Aug. 10, 2009, p. 373. Property tax abatements have been among politicians' favorite development tools. Full and partial abatements are used frequently to encourage investment and job creation or to reinvigorate poorer sections of cities. Nearly every state gives away some of its property tax base this way. The report, by Naomi Mueller Bressler and Carolyn Topp, examines the use of tax abatements in one New Jersey municipality, although the issues are the same across the state and indeed across the country. The authors find many problems with the abatement program, including a lack of transparency, a lack of eligibility requirements, a lack of public input, and a lack of oversight. In short, the problems associated with Jersey City's abatement program are similar to problems associated with tax incentives in general. It is an excellent report for explaining the details of how property tax abatements work — and don't.
Finally, you should read Prof. Ronald Fisher's "What Policymakers Should Know About Property Taxes," State Tax Notes, Feb. 23, 2009, p. 591. Fischer, as many know, is one of the great researchers and teachers in the state and local public finance field. The paper was originally published in the Lincoln Institute of Land Policy's January 2009 issue of Land Lines. In it, Fischer notes some simple facts that every politician, particularly those who have called for property tax limits or repeal, should know. He illustrates the enormous importance of property taxes for local government finance. He explains why the property tax is ideal for financing local government and points out the costs of replacing the tax with other financing mechanisms. It's an easy-to-read, excellent primer (or reminder) on the virtues of the property tax.
I found these five papers particularly instructive on good tax policy. They are excellent teaching tools as well as road maps for designing better fiscal systems.
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The Politics of State Taxation is by contributing editor David Brunori, who welcomes comments at email@example.com.