TAX - FOUNDATION

TAX FEARSeptember 1995 Volume 39, Number 7 Foundation alysis Contrasts Income Tax to Flat T for Four Middle-Clas s

Representative Dick Armey (R-Texas) and two years and then reduce the rate to 1 7 his Senate co-sponsor Richard Shelby (R-Ala .) percent in the third year of enactment . have formally introduced legislation that pro- Tax Foundation Senior Economist Arthur P . poses to replace the current federal incom e Hall's research shows that the Armey-Shel- tax system with a " ." As proposed the by proposal would decrease the personal plan would set the tax rate at 20 percent for tax liability of taxpayers in all incom e groups, even at the proposed 20 percent rate . Income Tax vs . Flat Tax (20% Rate) fo r The accompanying table (page 2 ) Four Annual Incomes, 1996 Projectio n compares the tax liability of the current personal income tax with the individua l portion of the Armey-Shelby flat tax . Using $14,000 — Statistics of In- come data, Dr . Hall created four statistical- $12,000 Income Ta x ly-typical families to represent a wide rang e of middle class families. For comparison Flat Tax purposes, the tables include an income- $10,000 N tax-liability calculation for taxpayers that U) choose either the o r $8,000 itemized deductions under the present sys- tem . The flat tax calculations include bot h the 20 percent and 17 percent rates . The fiat tax plan substantially changes the definition of taxable income for both $4,000 individuals and businesses. In particular, individuals, after an allowance, would pay tax only on their wage and salary incom e $2,000 and any retirement income they receive from pension plans and individual retire- ment accounts. The schedule of proposed $25,000 $50,000 $75,000 $100,00 0 1996 allowances, if the plan were enacted Annual Incom e this year, is : $21,400 for married taxpayers; Sourcc : Tax Foundation . Flat Tax continued on page 2 FRONT & CENTER A Convenient Way to Contribute to Federal Debt Reduction

Reps. Jan Meyers (R-Kan .) and David Minge (D-Minn .)

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Income v. Flat Tax est, dividend, or capital gains effects of business taxation on income . These forms of incom e individuals are not included in th continued from page 1 e would continue to be taxed on th e accompanying table. The flat tax business side of the flat tax. Busi- shifts a significant share of the total $10,700 for singles ; $14,000 for head of nesses would pay tax on the differ- tax burden to businesses, which - household filers ; and $5,000 for eac h ence between the gross revenue like the current income taxation o f dependent . These levels would be ad- they recieve from sales of goods and corporations, partnerships, and sol e justed for inflation annually . services and the cost (including wag- proprietorships - is ultimately To eliminate the double taxation of es and contributions to qualified re- passed on to individuals in the form investment income, the Armey-Shelb y tirment plans) of producing suc h of lower wages and lower invest- flat tax does not tax individuals' inter- goods and services. (The indirect ment returns .) •

1996 Income Tax v. Flat Tax, Four Families (Married, 2 Kids) and Their Respective Tax Burdens

Jones Family : $25,000/Year Smith Family : $50,000/Year Williams Family : $75,000/Year Johnson Family : $100,000/ea r

Current Income Ta x Current Income Ta x Current Income Tax Current Income Tax

Wage/Salary $24,417 Wage/Salary $47,980 Wage/Salary $71,531 Wage/Salary $90,84 7 Interest 444 Interest 1,425 Interest 2,073 Interest 4,61 8 Capital Gains 47 Capital Gains 139 Capital Gains 368 Capital Gains 1,165 Dividends 92 Dividends 456 Dividends 1,028 Dividends 3,370 Gross Income 25,000 Gross Income 50,000 Gross Income 75,000 Gross Income 100,00 0

Less : Less : Less : Less :

Standard Deduction 6,750 Standard Deduction 6,750 Standard Deduction 6,750 Standard Deduction 6,750 Itemized Deductions* 9,675 Itemized Deductions* 11,228 Itemized Deductions* 16,911 Itemized Deductions* 24,21 9

Exemptions 10,300 Exemptions 10,300 Exemptions 10,300 Exemptions 10,300

Equals : Equals : Equals : Equals :

Taxable Income-Standard 7,950 Taxable Income-Standard 32,950 Taxable Income-Standard 57,950 Taxable Income-Standard 82,95 0 Taxable Income-Itemized* 754 Taxable Income-Itemized* 28,472 Taxable Income-Itemized* 47,789 Taxable Income-Itemized* 65,481

Tax Liability-Standard s $763 Tax Liability-Standard $4,943 Tax Liability-Standard $11,004 Tax Liability-Standard $18,004 Tax Liability-Itemized* s $32 Tax Liability-Itemized* $4,271 Tax Liability-Itemized* $8,159 Tax Liability-Itemized* $13,11 3

Armey-Shelby Flat Ta x Armey-Shelby Flat Tax Armey-Shelby Flat Tax Armey-Shelby Flat Tax

Wage/Salary 24,417 Wage/Salary 47,980 Wage/Salary 71,531 Wage/Salary 90,84 7

Less : Less : Less : Less :

Personal Allowances 21,400 Personal Allowances 21,400 Personal Allowances 21,400 Personal Allowances 21,40 0 Dependent Exemption 10,000 Dependent Exemption 10,000 Dependent Exemption 10,000 Dependent Exemption 10,00 0

Equals : Equals : Equals : Equals :

Taxable Income 0 Taxable Income 16,580 Taxable Income 40,131 Taxable Income 59,44 7

Tax Liability @ 20% rate $0 Tax Liability @ 20% rate $3,316 Tax Liability @ 20% rate $8,026 Tax Liability @ 20% rate $11,88 9 (Tax Liability @ 17% rate $0) (Tax Liability @ 17% rate $2,819) (Tax Liability @ 17% rate $6,822) (Tax Liability @ 17% rate$10,106)

*About 23 percent of taxpayers i n *About 66 percent of taxpayers i n *About 84 percent of taxpayers i n *About 93 percent of taxpayers i n this income range itemize . this income range itemize . this income range itemize . this income range itemize . Includes $430 Earned Income Ta x Credit .

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Exploring How Plans Would Affect the Jones Family

Any of the three major congres- Arthur P. Hall calculated a specially a story on tax reform . Since Dr . Hall's sional tax reform proposals - the selected Tennessee family's tax burde n original study, Rep. Dick Armey (R- Armey-Shelby Flat Tax, the Gephardt under the flat tax, the USA Tax System , Texas) and Sen . Richard Shelby (R- "10% Tax," and the Nunn-Domenici and a national sales tax, comparin g Ala.) have formally introduced legisla- USA Tax System - would lower a these burdens with those under th e tion for their plan, with some modifi- typical middle-class family's tax burden , current income tax system . The cations from their initial proposal, an d according to the latest Tax Foundatio n Joneses, Bob and Susan and their tw o Rep . Richard Gephardt (D-Mo.) has analysis. (See table on reverse side .) dependent children, were selected as a introduced his own tax overhaul Earlier this year, Senior Economist typical middle-class family by CNN for legislation. The latest Foundation analysis shows that in tax year 1997 Bob an d A Comparison of Tax Reforms Plan s Susan Jones would have a tax liabilit y of $3,967 under the current federal income tax system . (The indirec t Current Income Tax USA Tax System Gephardt Tax effects of business taxation on indi- Income : Income : Income : viduals are not included in the accom- panying table .) However, under th e Wage/Salary $ 49,890 Wage/Salary $ 49,890 Wage/Salary $ 49,890 Interest 67 Interest 67 Interest 67 USA Tax System - formally intro- Capital Gains 139 Capital Gains 139 Capital Gains 13 9 duced by Sens . Sam Nunn (D-Ga .) and Dividends 303 Dividends 303 Dividends 30 3 Pete Domenici (R-N .M.) this spring - Gross Income 50,399 Gross Income 50,399 Fringe Benefits 4,98 9 that liability would fall to $1,792 . Gross Income 55,388 Under the Armey-Shelby Flat Tax, Less : Less : x Less : at a 20 percent rate, the Jones's ta Standard Deduction 6,950 Family Allowance 7,600 liability would be $3,518. (The 2 0 Exemptions 10,600 Exemptions 10,400 Standard Deduction 8,350 percent rate would be implemented Previously Taxed 1,667 Exemptions 11,00 0 Taxable Income : 32,849 the first two years, and then would Savings* Taxable Income : 36,03 8 0 drop to 17 percent the third year i f Tax (15% Bracket) 4,927 Mortgage Interest 4,25 Charity 240 Tax Liability $ 3,18 8 accompanied by the requisite spend- Child Care Credit 960 Savings Allowance 3,600 (10% Bracket ) ing cuts. At the 17 percent rate, th e Taxable Income : 22,642 Joneses would owe $2,990.) Tax Liability $ 3,967 Under the Gephardt tax reform Tax (19% on first 5,665 plan, the Jones's tax liability would b e $5,600, 27% on Difference ) National Sales Tax $3,188, even though they would be in Armey-Shelby Flat Tax Refundable Credit for 3,873 Income: the 10 percent tax bracket . The (20% rate) Payroll Tax* * reason: As shown in the table on the Wage/Salary $ 49,89 0 reverse side, the family's gross incom e Income: Tax Liability $ 1,792 Interest 6 7 Capital Gains 13 9 under Rep . Gephardt's plan would be Wage/Salary $ 49,89 0 *Under the USA Tax transitio n Dividends 30 3 higher since fringe benefits would be Personal Allowances 22,00 0 rules, most taxpayers will be abl e Gross Income 50,39 9 considered taxable income . Dependen t to amortize over a three-year Only a national sales tax would Exemption* 10,30 0 period previously taxed saving s Less : result in a higher tax liability for the Taxable Income : 17,59 0 assets acquired prior t o enactment of the USA Tax . Th e Payroll Taxes 3,87 3 Jones's than the current tax system . Property Tax 74 0 Tax Liability (20%) $ 3,518 $1,667(one-third of $5,000) While no legislation has been drafted amortization deduction assume s Mortgage Interest 4,25 0 for this form of tax overhaul, severa l Charity 240 that the Jones family ha d key policymakers - including Senato r Armey-Shelby Flat Tax previously taxed savings of Savings 3,600 Richard Lugar (R-Ind .), a presidential (17% rate) $5,000 Other Gov't. Fees 15 0 Taxable Expenditures 37,54 6 candidate - have come out in favor of Income: **Both the Social Security and such a system . With a national sale s Medicare portion of the payroll Tax Liability* $ 6,383 Wage/Salary $ 49,89 0 tax of 17 percent (which would resul t tax are included in the tax credit (17% rate ) for wages up to the Socia l in revenue neutrality), the Jonese s Personal Allowances 22,00 0 Security wage cap . No credit is Some proponents of a nationa l would owe $6,383 unless a rebate Dependen t available on the payroll taxe s sales tax are calling for a family scheme accompanies the plan . One Exemption* 10,30 0 levied on wages above this cap . rebate for the first $2,000 of con- such scheme - a family rebate for th e Taxable Income : 17,59 0 sumption for each famil y first $2,000 of consumption for each member . This would mean a re - Tax Liability (17%) $ 2,99 0 bate of $1,360 ($8,000 multiplied family member - would result in a by 17%) for the Jones family, return of $1,360 to the Jones's, leaving Two children at $5,150 . leaving a tax liability of $5,023 . a tax liability of $5,023 . •

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A Convenient ay to Contribute Federal Debt Reduction

Reps. Jan Meyers (R-Kan .) While congressional plans t o and David Minge (D-Minn.) reduce federal spending may be ou r economic saving grace tomorrow , many Americans are taking a mor e tangible tack today . in Kansas City, Mo ., members of the St. Luke Presbyterian Church fas t one meal a week and donate th e money saved to reduce the nationa l debt . The tradition was started i n 1993 by Pastor Joseph Palikkathayil . "I kept asking the Lord, `Wha t can I do?' Finally it came to me — maybe a seven-year fast and prayer , effort, including largely symboli c ones such as this check-off, to attac k our staggering national debt . The Act would give taxpayers a During fiscal year 1994, $20.7 million was convenient way to contribute money to reduce the debt. All they would contributed to the U.S. Treasury to reduc e have to do is write on their tax form the amount of their tax refund they the debt. Certainly, this amount is hardly wish to contribute toward defici t a major reduction in the $4.8 trillion reduction . The legislation would build upon current law, which allow s national debt. But we can use all the help individuals to send checks to the U .S. Treasury to reduce the national debt . we can find to reduce the debt. The check-off would make thi s process more convenient . While the check-off may b e largely symbolic, cynics should no t and 1 could inspire the congrega- sneer. During fiscal year 1994, $20 .7 tion," the pastor told the Kansas City million was contributed to the U .S. Star. Treasury to reduce the debt. Cer- In Alexandria, Minn ., Dan tainly, this amount is hardly a majo r Lindquist, Wayne Wormsbecker, an d reduction in the $4 .8 trillion national Jeff Schmidt held an auction an d debt . But we can use all the help w e raised $3,350 to reduce the debt. can find to reduce the debt . This In Bellevue, Neb ., two high check-off also would be an annual school students, Bryan Scott an d reminder on our tax forms that w e Ryan Janisch, placed canisters fo r must renew our resolve to eliminat e contributions from the community a t the nightmare that is our nationa l area businesses . They also held a debt. With the public pressuring fo r coloring contest and plan to sponsor action each year, Members of Con- a Casual Day for Bellevue Wes t gress would find it harder to discard teachers. Teachers can pay $2 to plans to attack our deficit and debt . dress casually for one school day The benefits of a concerted effor t with the money going to debt reduc- to eliminate our debt are bountiful . tion. Our children would inherit a These extraordinary examples o f country capable of investing in its direct democracy should be encour- people and its infrastructure, instead FRONT & aged. That's why we joined with of struggling to make the ever- Reps. Peter DeFazio and Tillie Fowler increasing interest payments on it s CENTER to introduce the Check-Off for Ou r debt and struggling to pay for it s Children Act. We must make every entitlement programs . 5

0 4 6 465 5 74 n National Debt: Several Perspectives

Every day on the floor of the military retirement, Social Security , United States Senate, Senator Jess e and Medicare trust funds . Helms (R-N .C.) announces the lates t There are other forms of debt , daily tally for the national debt . As of too, money owed by state and local mid-September, that number hovere d governments and money owed by around $4.9 trillion — a number s o the private sector — including high, it would take the bank ac- household debt, corporate business counts of 4,900 billionaires to liqui- debt, and non-corporate business date it . debt. But the federal gross debt is That figure represents the feder- the largest . The impact would be felt more al gross debt. This measuremen t Americans in recent years have immediately as well . A smaller combines the federal debt held b y grown accustomed to public polic y federal debt would require smalle r the public and the federal debt hel d debates over both the federal deb t interest payments, which would by federal government accounts. Fed- and the federal deficit. Unfortunate- reduce our federal budget needs . A eral debt held by the public, mor e ly, there appears to be a degree o f smaller deficit and debt also woul d commonly called the public debt, in- public misunderstanding as to the stabilize interest rates, and the risk cludes principal owed by the govern- difference between the two terms . of inflation would decrease as exces s ment to the private sector . The pub- (Indeed, the terms are often mistak- cash is applied to debt retirement . lic debt, which presently sits at enly used interchanbeably .) Janisch and Scott, the Bellevu e around $3.7 trillion, is the measure- Simply put, the deficit refers to a West High School students, should b e ment most commonly cited in the shortfall in the annual federal budget . role models for all of us . "If every- media. Federal debt held by federal The government must borrow money body joins together, we could do a government accounts (currently to make up the difference . The debt lot," Janisch told the Bellevue Leader . around $1 .2 trillion) includes suc h is an accumulation of all the money "Just the two of us, high school kids , government accounts holding federal the government owes from deficit- we've made an impact on our com- debt securities as civil service and financing over the years. • munity . If we got everybody in- volved, we could probably really g o somewhere with it ." • Tax Foundation Introduces Concept Thought for the Month of Profit Ability to Congressional Stafff

On October 5, 1993, in defending During the last week of August , opportunity to run an internationa l his proposed cuts in Medicare and the Tax Foundation promoted a dozen business and to gain a better under- Medicaid spending, President Clinto n congressional staff to the position of standing and appreciation for the finan- told the American Association of chief executive officer of major multi- cial operations of for-profit companies . Retired Persons : national corporations . Unfortunately Much of "Profit Ability's" usefulness for the staff (or perhaps fortunately) lies in helping participants understand "Today, Medicaid and Medicare are the promotions only lasted a few day s not only how market forces affect going up at three times the rate of — just long enough for them to partici- price, supply, and profit, but how pub- inflation. That is not a Medicare or pate in a three-day business simulation lic policies, including tax policy, affect a Medicaid cut . So when you hear called "Profit Ability." The exercise , the nature of running a business . all this business about cuts, let m e co-sponsored by the Tax Foundation The three-day program — whic h caution you that is not what is and George Mason University's (GMU) starting in January 1996 will be a re- going on . We are going to have Center for Market Processes, was held quirement for all new MBA students at increases in Medicare and Medic - August 21-23 at GMU School of Law i n Harvard University — was the first i n aid and a reduction in the rate o f Arlington, Va . what the Tax Foundation expects to b e growth." The simulation, developed by an on-going series of similar programs North Carolina-based Andromed a for congressional staff over the nex t When he's right, he's right . Training, Inc., provides participants an few years . •

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1995 Tax Foundation 58th National Conference and Annual Dinner Tax Reform at a Crossroads Thursday November 1.6, 1.995 The Waldo rf=Astoria 301 Park Avenue, New York, NY 1002 2

• Registration/Lunch/Keynote 12 noon Empire Roo m Tax Policy Service Award—Robert J. Bartley, Editor, Wall Street Journal • Keynote Address Kenneth' Kies, Chief of Staff; Joint Committee on Taxation • Conference Sessions 2 p.m . Empire Room • Dinner Reception 6 p.m . Hilton Roo m • Annual Dinner 7 p.m. Empire Roo m Distinguished Service Award--US . Senator Sam Nunn (D-Georgia) Distinguished Service Award—Alfred C. DeCrane, Jr., Chairman & CEO, Texaco Inc. • Post Dinner Reception 9:30 p .m. Hilton Room

• Reservation deadline for the block of rooms reserved by the Tax Foundation is November 1, 1995 . Call the Waldorf directly at (212) 872-4534 . • Conference and Dinner reservations should be received by November 6, 1995 . (Written cancellation for refunds accepted through this date only .) • Questions about the Conference and Dinner should be directed to Renée Nowland, tel .: (202) 942-7653 ; fax : (202) 942-7675 .

Conference Program

12 :30 p.m . Keynote Address Kenneth J . Kies, Chief of Staff, Joint Committee on Taxatio n 1 :30 Intermissio n 2 :00 Session One: "Paths of Fundamental 'lax Restructuring " Moderator: Rachelle Bernstein, Partner, Arthur Andersen & Compan y • "The Flat Tax," Andy Laperriere, Economic Policy Adviser, Office of Rep . Dick Arme y • "A National Sales Tax," Walt Lukken, Legislative Assistant, Office of Senator Richard Luga r • "The USA 'fax System," Denise Ramonas, Legislative Assistant, Office of Senator Pete Domenic i 3:15 Intermissio n 3 :30 Session Two : "The Effects of the Tax Reform Proposals on Specific Industries," Peter Merrill , Partner, Price Waterhouse 4:15 Session Three.' "The Kemp Commission on Tax Reform," Alan Reynolds, Research Director , National Commission on Economic Growth and Tax Refor m 5:00 Closing Remarks J.D . Foster, Executive Director and Chief Economist, 'fax Foundation

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Please return registration form with Registration Form payment to :

Name Tax Foundation 1250 H Street, NW, Suite 75 0 Titl e Washington, DC 2000 5 Attn : Renée Nowland Company Tel: (202) 942-765 3 Fax : (202) 942-767 5 Addres s Conference Fee : City State ZI P Donor-$100, Non-Donor-$15 0 Reception/Dinner Fee : $400/Person, $4,000/Table Telephone Fax

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30th Edition of FOUNDATION Facts & Figures MESSAGE Changing of the Guard

Available in October Little did we know . . . when the Tax Foundation gave its 1994 Public Sector Distinguished Service Award to Senator Roth (R-Del .) at its annual New York Dinner that within a year he would rise to chair the powerful Senate Fi- Looking to nance Committee . As he takes the reins of the committee from Senator Pack- compare the nation's wood, much of the tax policy community is speculating on what this chang e effective tax rate fo r means to a long list of absolutely critical policy issues, including welfare reform , the past half- the Contract with America, expiring tax provisions, estate tax relief, Socia l century? Need Security reform, and, of course, tax reform . to see a table of Senator Roth is generally thought more fiscally conservative than his prede- federal outlays b y cessor. As the co-author of the original Kemp-Roth tax plan in the late 1980s , selected Senator Roth's vision for tax policy was subsequently converted into new ta x function for the law as part of the Economic Recovery and Tax Act of 1981 . Further demonstrat- past century? O r ing that his long history of sensitivity towards tax incentives is undiminished, at state and local per capita the beginning of this Congress he reintroduced his Super IRA bill with lead co-spon- tax collections by state, from the sor, Senator John Breaux (D-La .) . In fact, to take a line '50s to the `90s? from Loretta Lynn, Senator Roth was pro-IRA when th e It could take hours to track down IRA wasn't cool. all that information, piece by piece . On other issues : But it only takes minutes with the Ta x • Chairman Roth has spoken out on the Senat e Foundation's soon-to-be-released 30th floor about the need to enact the tax cuts promise d edition of Facts & Figures o n in the budget resolution. Government Finance, a one-stop-guide • Chairman Roth is an original co-sponsor of the to government taxation and spendin g estate tax relief bill introduced by Senators Bob Dol e at the federal, state and local levels . (R-Kan.) and David Pryor (D-Ark.), which is movin g The price of the limited-edition faster than even its advocates had expected . book is 560, including postage and • He is a leader in the fight to reform the Earned handling. Book distributors and JD. Foster Income Tax Credit program, having introduced an im- wholesalers can purchase the book for Executive Director and portant bill with Senator Don Nickles (R-Okla .). As $40, a 33 percent discount . Chief Economist Chairman of the Government Affairs Committee, h e Facts and Figures has been pub- commissioned a study by the General Accounting Office lished regularly by the Tax Foundatio n that indicated taxpayers would lose as much as $37 billion over the next five years since 1941 . The latest edition of th e if changes weren't made . book contains over 225 tables, and is • He is firmly behind efforts to cut the capital gains tax, having introduce d divided into seven sections : Federal, a bill to cut the capital gains tax rate for individuals in half and to cap the corpo- State, and Local Governments ; Selected rate rate at 25 percent . Economic Series; Federal Government; • He has called for restructuring Medicare to control spending and to pro - State and Local Governments ; State vide better service . Governments; Local Governments; and On tax reform, Senator Roth has not yet committed to a particular refor m International Comparisons . The book plan. But he clearly recognizes the need for some kind of reform that will offe r combines materials from hundreds o f incentives for saving and investment, stimulate economic growth, and simplif y sources, including official government the tax system . At the least, tax reform guided by the principles espoused by th e documents and private sources, man y advocates of the leading reform plans has not suffered a setback . of which are inaccessible or out o f For today, however, Senator Roth has done more than take the chair of print. Virtually everything the Tax the Finance Committee; he has taken on one of the true hot seats in Congress . Foundation publishes on annual basis- Nearly all of the upcoming debates on tax cuts, tax loopholes, spending cuts , -such as Tax Freedom Day and the deficit reduction, and the debt limit, not to mention welfare reform, must pas s federal tax burden by state—can b e through the Finance Committee . The coming budget "train wreck" now seems found in the book . almost certain as both the Congress and the administration lay their contingency Individuals and companies plans, and the Finance Committee will be at the center of the wreck. In many ways, the upcoming few weeks will be a real test for the 24-year veteran of the com- interested in ordering the lates t mittee. Part of the measure of his success will be how well he is able to work wit h edition of Facts & Figures can writ e and yet remain independent of the Senate's presidential aspirants . But the ap- the Tax Foundation, and include either proach he's likely to take is revealed in his statement upon taking the Chair : a check or a money order mad e "Government must contain spending and provide an environment for payable to the Tax Foundation, o r growth in the private sector. This is done by keeping taxes low and limitin g include a Visa or Mastercard number government intervention . History has proven that when taxes are low, the with expiration date, and a daytime economy grows . It's that simple ." telephone number. • 8 Foundation Report Points to State Corporate Income Tax Crisis 'TAX FEA7'URES The state corporate income tax system as • State tax systems lack uniformity Tax Features (ISSN 0883 - , 1335) is published monthly a whole is seriously out of date and needs to including different tax reporting methods ; wide by the Tax Foundation, a n be redesigned to reflect the economic realities deviations in state income apportionment formu- independent 501(c)(5) organization chartered i n of a competitive worldwide economy, state s las that categorize business income earned i n the District of Columbia. a new Background Paper published jointly more than one state; and varying definitions o f Annual subscriptions to the by the Tax Foundation and the Committe e business and nonbusiness income . newsletter are $15. On State Taxation (COST) . The authors of • Numerous inconsistencies exist between Co-Chairman the paper conclude that the increasing likeli- state and federal corporate tax codes . Dominic A . Tarantin o hood of federal tax reform provides an • State tax "nexus" rules lack uniformity Co-Chairma n excellent opportunity to reexamin e and certainty. ("Nexus" refers to the minimu James C . Miller III m state corporate income ta x level of contacts necessary for a state to have Chairman, Program Committe e schemes and correct some jurisdiction to tax income of a taxpayer .) E. Noel Harwert h of the problems • State corporate tax codes lack neutrality. Distinguished Fello w that exist. Taxes on income differ depending on the typ e The Honorable Bill Frenze l or source, and taxes on businesses differ de- Executive Director and pending on the organization as a particular type Chief Economist J.D . Foste r of entity . Administrator and Director, The authors observe that, as a result of thes e Foundation Developmen t difficiencies in the state corporate tax structure , C . Gaye Bennett corporate income taxes at the state level are dif- Adjunct Fello w ficult and costly to comply with and to adminis- Charles E . McLure, Jr . ter. A federal consumption tax or reform of the Special Tax Counsel J . Dwight Evan s federal income tax base, however, could pave the way for resolution of these problems Tax Counsel . Such Lynda K . Walke r change at the federal level would force states t o Director, Corporate reexamine and adjust their business tax systems Developmen t accordingly. In turn, this widespread review o f Reneé Nowlan d federal and state tax systems would create a Editor an d Associate Director y unique opportunity to correct many of the defi- Communications Directo r The paper, titled "The Approaching Stat e ciencies in the state business tax system and t o Stephen Gol d Corporate Tax Crisis," was jointly produced by work towards greater interstate and federal-stat e Tax Foundatio n the Tax Foundation's J . Dwight Evans, Special conformity in the taxation of business. (202) 783-2760 Te l (202) 942-7675 Fax Tax Counsel, and J .D. Foster, Executive Direc- To this end, the authors of the pape r tor and Chief Economist ; and by COST's J . Will- suggest Congress establish a special bipartisan iam McArthur, Jr., President and Executive Di- joint commission or working group compose d rector, Kendall L . Houghton, General Counsel , of federal and state government and busines s and Douglas L . Lindholm, Legislative Director . representatives to study and report on both the The authors point to several major deficien- federal and state tax implications of proposed cies in the state corporate tax structure : federal business tax reform . •

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