Magazine article Government Finance Review

State Tax Systems Need Overhauling. (News & Numbers)

Magazine article Government Finance Review

State Tax Systems Need Overhauling. (News & Numbers)

Article excerpt

Amid what the National Governors Association has called "the most dire fiscal situation since World War II," Governing magazine in February released the results of a year-long effort to evaluate the tax structures and tax management of the 50 states. The conclusion: most state tax systems are both inadequate and unfair.

The study found that as states grapple with their worst revenue shortfalls in 50 years, 11 states, representing nearly a third of the U.S. population--including California, Florida, and Texas--have tax codes so outmoded and inefficient that they need to be redesigned from the bottom up. The rest--with the exception of only four (Delaware, New Mexico, North Dakota, and Wyoming)--require substantive overhaul. The study also found that at a time when their treasuries are starved for cash, many states have cut back funding for their revenue agencies.

Entitled "The Way We Tax," the report is the fifth installment of the Government Performance Project, a journalistic-academic effort funded by the Pew Charitable Trusts to promote effective government management. Previous reports, also written by Governing's Katherine Barrett and Richard Greene, graded the governing practices of cities, counties, and states. All of these reports are available on Governing's Web site at www.governing.com.

The rating system used to assess state revenue systems was derived from "Principles of a High-Quality State Revenue System," a 1992 document prepared by the Foundation for State Legislatures and the National Conference of State Legislatures. The authors categorized the nine principles in the book into one of three criteria: adequacy, fairness, and management. With the help of a team of experts on tax policy, the authors then outlined the elements that contribute to each of these criteria. Through interviews and document review, each of the 50 states was assigned a rating from one to four stars--four being the highest--on each of the three criteria. (See table.)

While most states thus far have preferred cost cutting measures and targeted tax increases (e.g., cigarette taxes) over broad-based tax increases, the authors assert that many state legislatures will soon be forced to consider politically unpopular revenue measures. While they are at it, the states should also take a close look at their tax systems.

The study places much of the blame for the current fiscal woes of the states squarely on outdated tax systems that are not diversified and were designed for a different economy. …

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