Growth & Justice Blog

Tax cuts help just who you'd expect

A new study from the Institute on Taxation and Economic Policy breaks down who among "non-elderly households" is paying what taxes at the state and local level.

The report shows what we've been saying here for years — that when all forms of taxes (not just income taxes) are taken into account, the wealthiest taxpayers pay the lowest overall  effective rate.

The Minnesota report [PDF] reflects our state's more progressive tax system with a less stair-stepped chart, but it still shows the top-earning households paying a lower share of income in state and local taxes.

As Sam Pizzigati of the Campaign for America's Future writes:

Now you could argue that none of this [non-proportional taxpaying] matters. The Tax Revolters, after all, didn’t claim that their tax cutting and capping would have low- and middle-income people paying taxes at a lower rate than the rich. They claimed, instead, that massive tax cuts, taken as an amorphous whole, would help just about everybody get considerably richer.

That hasn’t happened, as Brookings Institution researchers Barry Bosworth and Rosanna Smart document in a paper just published by the Boston College Center for Retirement Research, with funding support from Social Security.

In fact, says Pizzigati,

[L]ow- and middle-income households under age 50 [...] have actually lost all the wealth they had gained since 1983, the first year with Federal Reserve family wealth data available.

Back then in 1983, the bottom third — by income — of U.S. families under age 50 had an average $24,000 in net worth to their names, as measured in year 2000 dollars. The housing bubble helped boost this bottom-third average net worth to $27,000 in 2007.

Today, in the wake of that bubble’s collapse, researchers Bosworth and Smart put average bottom-third net worth at just $17,000, in those same year 2000 dollars.

Middle-income households under age 50, meanwhile, held an average net worth of $50,000 in 1983. The current net worth of this middle third, after adjusting for inflation: $45,000.

Only the top third of households has greater net worth today than in 1983 — substantially greater, even after the market collapse.

In terms of wealth creation, tax cuts going back to the Reagan era have benefited those who pay a smaller proportion of their income in taxes.

— Charlie Quimby

Jousting with the King

(This is a response to the right honorable King Banaian, of SCSU Scholars blog, who has the coolest name in the Minnesota blogosphere, and who also is a fairly responsible adversary.)

Dear King,

You raise some fair points in your critique of our recent post, in which we demonstrate that Minnesota state and local governments actually are taking a smaller share of our income throughout this decade, and in which we further posit that this smaller government and lower tax rates have not delivered the economic boom that anti-tax conservatives promised. (More on this point today in the latest Capitol Report/Legal Ledger.)

As you point out, we do have a more volatile revenue system (bigger surpluses in expansions, bigger deficits in contractions) than most states, and this certainly is a factor in creating more severe budget shortages than in other states. And there is some random evidence, as you point out, that Minnesota's economy very recently is again doing better than the national average. (Big news this week was the #1 Twin Cities ranking in home value appreciation.)

Nevertheless, we don't see how you demonstrate that this volatility can be the main factor that permanently shrunk our revenues as a share of our income.

Revenues as a percentage of income are largely a function of tax rates. The shrinkage came from major and permanent income tax rate cuts, then a refusal to significantly raise state tax rates or impose new state taxes during the immediately ensuing shortfalls. Contrary to your argument, tax policies did make a major difference and Gov. Pawlenty himself takes credit for his policies shrinking government when he preaches to his conservative base. 

But we would also acknowledge that we would have had shortfalls even if we hadn't cut taxes, because the spending base would have been larger, and downturns always create shortages. That's a point you could have raised, but didn't. So give us points for fairness and good faith. 

Second, we think  there is a broad consensus that Minnesota's economic performance this decade, overall and relative to other states and the national averages, is not as impressive as it was in the three previous decades.  In the very same Budget Trends Commission document that you cite in making the point on volatility, this is the second main bullet point: "Despite continuing to rank high among many key social and economic indicators, Minnesota’s economy has underperformed recently relative to the nation."  

That's exactly what we said too, and there's a wealth of statistics in the commission report to back up that assertion.

Third, let me point our readers to G&J fellow Charlie Quimby's answer to your question: "Where has G&J been in the debate to reduce cyclicality of tax receipts?"

We specifically testified [before the governor's tax commission] in favor of reducing or eliminating the corporate franchise tax, of which the legislative report you quote said in the very next paragraph:

"Minnesota’s corporate franchise tax base, which constitutes 7 percent of general fund tax revenue and boasts the highest trend growth rate, is the most volatile of the three major revenue sources, extremely sensitive to economic cycles and thus subject to substantial uncertainty. In fact, the volatility of Minnesota’s corporate franchise tax base is almost four times greater than the volatility of the individual income tax base and nearly six times greater than the volatility of the general sales tax base."

This support was conditioned upon replacing revenue from other sources, including income and sales taxes, that would make the system less regressive as well as less volatile.

The other source you link to says that there are two ways to reduce fiscal distress from recessions. One is to reduce volatility, and the other is to "build savings during booms... (create and properly use a rainy day fund)."

Another measure we have supported.

Finally, the very funny promotional blurb on your blog that condemns your team as "self-absorbed moral cretins'' is really outrageous and unfair. You are among lots of very fine people who are just plain wrong about things once in awhile. 

— Dane Smith

Minnesota Poll's progressive majority on health care

As a former reporter for the Star Tribune who wrote scores of news stories based on the Minnesota Poll, I am very familiar with the science of polling and its limitations,  and the crucial importance of context.    Here's some important context for the poll results and the headline that declared "Obama's support declines sharply.''   

 A drop in 10 percentage points on job approval, after the "honeymoon" and late in a president's first year,  is typical, but especially if he's mounting the most sweeping social and economic reforms in decades during the most serious recession in a century.    The coroporate bailouts and continuing war in the Middle East have  angered the left, the bailouts and the expansion of a public role in health-care have infuriated the right, everybody's still worried about their personal finances, and still the president's approval rating is about 20 points higher than his predecessor's.

The concerns about health-care transformation undoubtedly are an overriding factor but it appears that the dissatisfaction with Obama's plan comes from many liberal folks who wish he'd gone further.   Although Minnesotans disapprove of his overall "handling" of health care (45 percent to 39 percent),  there is clear approval of the  "public option'' despised by the right-wing critics (51 percent to 37 percent).   Most in the poll  approve a law requiring coverage (54 percent to 37 percent) and a slight plurality (43 percent to 40 percent) actually favor the overall changes being supported by Obama and his congressional allies.   Most important,  perhaps, the poll showed that about 40 percent of Minnesotans are either worried about losing coverage or are currently uninsured.

We've often made the case that there is a sustained majority in Minnesota who favor the moderate-to-progressive position on key economic and tax-budget issues.   These key issues include support for public education, transportation, public health-care, environmental protection and most of the worthwhile vital investments that our governments provide.    This majority also favors  a fairer and reasonably larger tax burden on those at the top of the income scale,  and polls show it opooses an  inflexible "no new taxes'' orthodoxy.

Dane Smith

Minnesota compared: Colorado and the allure of limits

As the Minnesota Legislature struggles to close a gaping revenue shortfall, I'm in Colorado watching how another set of lawmakers attacks the same problem.

The two states are similar in size, ethnic makeup and per capita personal income. They are weathering the recession better than many others, but are dealing with the harsh fact that a contracting economy shrinks revenue at the same time it increases demand for government services.

So it’s not surprising some of their budget-balancing efforts look similar, too.

They’ve both searched out one-time infusions beyond federal stimulus dollars. (Colorado is testing whether it can draw upon reserves in the state-founded workers comp insurance company, and Minnesota has proposed borrowing backed by tobacco settlement revenues.) Lawmakers in both places consider rescinding hundreds of millions of dollars in tax credits and exemptions — called tax expenditures — that divert money that would otherwise flow into the tax system.

And, Democratic Gov. Bill Ritter, like Minnesota Gov. Pawlenty, has been raising fees, which may look like taxes but — like all these other measures — don’t constitutionally quack like them.

In fact, the greatest similarity may be this urgent pantomime of raising enough revenue without appearing to raise taxes. The main difference? Colorado is constrained by constitutional amendment; Minnesota, by a tax-averse governor.

Strict revenue limits and no-tax pledges were enabled by a growing economy that supplied sufficient public dollars without the states having to face severe consequences… until later.

Colorado went furthest in imposing what the state’s Bell Policy Center calls “the most restrictive tax and spending limitation in the country” — TABOR, the Taxpayer's Bill of Rights. Designed to hold down taxes and shrink government, TABOR requires voters to approve tax increases that exceed a certain formula of growth. About 90 percent of revenues are dedicated, leaving little room to deal with changing conditions. Fed up with how the state was shortchanging education and transportation, Coloradoans have twice voted to loosen TABOR’s revenue straightjacket.

An inflexible, rule-based approach appeals to those who want the pre-emptive accountability of a bathtub-sized limited government. But it has little to offer the majority who have a broader definition of accountable government. They want the overall tax burden to be distributed fairly and expect spending programs and tax breaks to deliver their promised benefits.

On paper, Minnesota’s more flexible accountability framework looks pretty good.

The Legislature enacted a law in 2008 to revive the Minnesota Milestones established by Gov. Arne Carlson in the 1990s that mark progress against long-term goals for the state, and now there’s an Accountability Minnesota website that reports on the milestones by category and agency. Many legislators from both parties also have initiated goal-setting and accountability initiatives in the Legislature.

But reporting on progress against long-term goals and high-level priorities is only part of holding government accountable for results. The real test of these principles comes at budget time when dollars are scarce and choices must be made.

The scrutiny forced by scarcity can be healthy. For example, both states are finally taking a serious look at whether tax expenditures actually achieve their intent, and how they tend to benefit businesses and higher-income taxpayers over those whose benefits must go through the appropriations process.

According to a recent Public Strategies Group report, “Minnesota’s Bottom Line,” [Download pdf] regular legislative review is already required to evaluate the cost, effectiveness and fairness of this $11 billion in “hidden spending.” Yet cost is the only aspect publicly reported by the Department of Revenue.

And that’s a general shortcoming. Measuring cost is relatively easy, since expenses are routinely captured in the system. Determining effectiveness is more difficult and costly, particularly when the greatest payoffs come from education, health care and transportation systems that deliver value over the long term.

Minnesota needs to know what works as well as what things cost. It’s the most fiscally responsible way to govern and the only way to ensure government can deliver what we expect. 

The apparent simplicity of rules that limit revenue and formulas that disperse money has some appeal in a complicated and changing world. But it’s not the way to manage for results. Maddening as it may be to muddle through this year and push some problems into the next, Minnesota is on a better path  — provided we continue to emphasize fairness and effectiveness, guided by facts and a long-term vision for Minnesota.

— Charlie Quimby 

Minnesota tax system is at its regressive worst

Jim Robins is a former Minnesota Senate Majority researcher assigned to taxes, metropolitan and local government, and transportation issues. He currently operates www.ScooterMaxi.com.

Minnesota's relatively progressive personal income tax masks the fact that the state is not a leader in progressive taxation, and the trend shows we are gradually getting more regressive over time.

Those are the unfortunate major conclusions we can draw from the 2009 Minnesota Tax Incidence Study. While we are not yet sure about the reasons, we know all major taxes are sliding toward greater regressivity (i.e. the poor and middle class paying a greater share of their income, the rich paying less). Addressing this worsening situation should be a high priority as we also look at tax policy to encourage business growth and replace declining revenues.  

With some drama, we can say the Minnesota system has arrived at its regressive worst in the two decades since we started studying tax incidence. In fact, we saw an unprecedented doubling in regressivity from 2004 to 2006 — the years represented in the 2007 and 2009 studies.

Those who dismiss disproportionate taxation as a concern will claim this widening unfairness is just a matter of business cycles. However, the falling trend lines clearly indicate that major tax policy shifts may be needed to nudge the tax system back toward proportionality.

An unexpected addition to the Tax Incidence Study was the use of an aging 50-state report by the Institute on Taxation and Economic Policy (ITEP) for comparison purposes. Based on 2002 ITEP data (when Minnesota regressivity was at a low point), the state's tax system ranked as 11^th most progressive in the nation. Low-tax Delaware has a progressive tax structure, and ranked first; high-tax Washington ranked 50^th, or most regressive.

The Revenue Department cautions against comparing the Suits numbers in the January 2003 ITEP study to the Suits numbers calculated in the 2009 Tax Incidence Study, and we don’t know what has happened in other states since 2002. The ITEP methodology is somewhat different, and we are left wondering if it is not entirely possible Minnesota has dropped to the middle of the pack. Almost certainly our dramatic four-year slide in regressivity — from -.018 to -.053 — would have us heading in the wrong direction in those rankings.

Unfortunately, it may be even worse than the indicated -.053 regressivity.

The 2009 study should have included in its 2006 data the highly regressive 75-cent cigarette and tobacco “Health Impact Fee” passed in 2005. Keep in mind, the HIF was declared by the Minnesota Supreme Court as a tax burden on users, not a health impact charge on tobacco companies and distributors.

Minnesota Revenue researchers, headed by Dr. Paul Wilson, have always conducted the study using the highest social scientific standards. So, it was not surprising at all to see the straight-shooting Wilson supply a House committee with testimony indicating that including the HIF bumps our regressivity factor even more steeply to -.059. We look forward to the day when the HIF is formally considered as tax revenue in the study.

Regardless where we might rank today, Minnesota's overall regressivity has tripled in the four years between 2002 and 2006, more than 25 percent worse than at any time previously measured. We have a lot of work to be done if we hope to achieve a proportional tax system — let alone the loftier goal of progressivity.

Take care in reading the Tax Incidence Report findings

Jim Robins is a former Minnesota Senate Majority researcher assigned to taxes, metropolitan and local government, and transportation issues. He currently operates www.ScooterMaxi.com.

Every two years, one of the most-impressive bureaucratic endeavors undertaken in Minnesota is carried out. This week we eagerly anticipate receiving the 2009 Tax Incidence Study. [The report will be available here this week.] This report has a sterling national reputation and should be celebrated by everyone who treasures the use of empirical data in developing fair and progressive tax policy.

However, it is a challenging document for the casual reader, and the potential is great for abusing one or two statistical estimates out of the tens of thousands reported. Take note that the Tax Incidence Study necessarily contains a four-year black hole between measured historical data and forecasting estimates. For 2009, that means we have no data reported for 2007-2011 — an important time frame considering the huge economic swing Minnesota and the nation are currently experiencing.

Although mine is only an educated guess, you can safely assume that the Minnesota tax system is more regressive (taxing the poor at a higher rate than the rich) right now than it will show in the boom-time 2006 results, or the 2011 estimates when at least some level of economic recovery is anticipated. In down times, the tax system is most regressive.

The volatility of progressive tax sources, particularly revenue from the income tax, is the key factor in determining changes in the Suits index — used as a summary measure of overall progressivity or  regressivity. Suits measures from +1 (100 percent progressive) to -1 (100 percent regressive). Minnesota had an essentially neutral system in 1990, but has trended somewhat more regressive ever since. 

We headed in the wrong direction throughout the 1990s, dipping to a hefty 4 percent overall regressivity in 1998. Boom times at the start of the current decade partially masked regressivity, but we have been heading downward again in recent years (1). It is particularly important to keep in mind these extended trend lines over many years rather than focus on just one or two new Suits index numbers unveiled in the 2009 study.

Finally, we should think about the Tax Incidence Study findings in the context of the current political discussions. We have the opportunity to enact substantial overall tax reform this year, and it appears that business taxes will be a key factor in debate. Although we intuitively assume state business taxes are progressive, the 2007 measurement (based on 2004 data) indicated that they are 16 percent regressive (2).

However, the much-maligned corporation franchise tax is 47 percent exported out of Minnesota as measured in both the 2007 and 2005 reports (3), and that means we would be giving nearly half the tax relief to non-residents. Perhaps we can find better ways to provide business tax breaks without sending so much of the relief to people who don’t live in Minnesota. As I have documented in a past posting, our state has done particularly poor job of generating outside revenue compared to other states. We shouldn’t make things even worse.

[According to a 2002 report by the Center on Budget and Policy Priorities, "only a handful of states systematically assess the impact of tax changes on families at different income levels [and] only three states (Maine, Minnesota, and Texas) now require such analyses of major state tax legislation by either the legislative or executive branch."]

Without sounding too wonkish, it will be exciting to get our hands on this year’s Tax Incidence Study. Let’s hope our state policy makers make the most of the data, and put together the kind of proposals that will result in tax fairness at a time when we need it most.

1) 2007 Minnesota Tax Incidence Study, p. 3 Download PDF

2) 2007 Minnesota Tax Incidence Study, p. 13

3) 2007 Minnesota Tax Incidence Study, p. 83; 2005 Minnesota Tax Incidence Study, p. 85 Download PDF

Tax Commission report is reasoned, but...

The Governor's business tax reduction commission — can we dispense with the "21st Century Tax Reform" bit and call a spade a spade? — released its report on Friday, with the lead recommendation of repealing the state corporate franchise (income) tax. Another recommendation would exempt from taxation 20 percent of "pass-through" business income to individuals.

Given the Republican and business tilt of the group, the panel's report [PDF] is not surprising — but predictable is not the same as wrong.

You won't hear complaints from this quarter about its assessment of Minnesota's economy, the need for investment in education and academic research and the importance of business in creating wealth and well-being in the region.

And you won't even get much argument with ending the corporate franchise tax, either. If you have to cut a tax, it's not a bad one to choose. It's regressive, volatile and has a negative — though over-dramatized, in our view — effect on some business decisions.

But as we must learn over and over, not everything that's good for business is unfailingly good for the public.

In good times, the corporate franchise tax contributes a lot of revenue to the state. The recommended cuts would cost the state about $1 billion a year. 

The glossed, the obscured and the skirted

The commission was originally charged to cover the costs of reform in its proposal, but the final report avoids a specific tally of how proposed taxes would counter the cuts — settling for recommendations to expand the sales tax base and increase the tax on cigarettes by up to $1 a pack.

The commission says Minnesota's high corporate income tax rate puts the state at a disadvantage. It seems to acknowledge that our poor business tax climate is more perception than reality, but believes we must address it. (Why the financial types who drive business decisions can't see the difference between a statutory tax rate and actual total tax burden is a subject for another day.)

In support of the competition argument, since 2002, the report says, six states have reduced corporate tax rates or replaced the corporate income tax. We looked up the most recent growth rates for those states and threw in other states with no corporate income tax, plus our business-friendly neighbor, South Dakota. The growth picture for those states is definitely mixed. 

 

To its credit, the commission did not try to oversell the stimulative benefits of its corporate tax cut and other reforms. We believe they are likely to help business. The open question is how much. And the unanswered question is how even revenue-neutral reforms will help address the state's revenue shortfall.

Another point, with which we agree, is Chairman Mike Vekich's "Businesses don't pay taxes. You and I do. Where we tax businesses, we are taxing our own wealth."

But on the other hand, the commission seems reluctant to tax that wealth. Where income flows from businesses to people, the Commission also wants to see a cut. It amounts to a backdoor personal income tax cut for higher earners.

Small businesses would get a special boost -- one-fifth of owners' profits would be exempt from taxation.

House Taxes Committee Chairwoman Ann Lenczewski, DFL-Bloomington, said she was "stunned" by that recommendation.

"What it means is a managing partner at a small law firm will pay a smaller top rate on income than the associate partner who makes less," Lenczewski said. "The boss gets a big tax break because he owns the business, but the secretary doesn't. I agree with some of the commission's recommendations, but this one just confounds me."

And this is really the most disappointing aspect of the report. The commission skirted the issue of fairness to individuals, only acknowledging that replacing a regressive business tax with regressive sales taxes probably wouldn't make the system more regressive.

Fair seems to mean fair for business. Indeed, the word "fairness" appears only three times in the report's 34 pages, always in a list of general principles. The commission's second principle for reform is:

Tied to benefits received. There should be a strong, direct relationship between the nature and level of business taxation in the state and the cost of benefits and services provided to businesses by state and local governments.

This so-called benefits principle is a particular favorite of conservative theorists, but the devil is in the details. It wasn't the commission's charter to think about business tax reform's impact on a single, unemployed mother with a child in public school, but the legislature will.

In all, the commission's report adds another useful, philosophical perspective to the budget discussions. Progressives — and the governor — should open their minds to what it has to say.

—Charlie Quimby

Forced choices about government services

Some recent stories illustrate some of the consequences of the pay for services model of government.

In Tonka Bay, the city has decided to charge fees to defray the costs of opening City Hall for public meetings that are not city-run. The council declined to waive the fee for a Republican Party caucus, and then decided it was consistent to also charge the League of Women Voters to stage its non-partisan candidate forum. The League objected.

In Medina, residents who thought taking over a county road would give them more control over traffic decided it was not such a good idea when they saw how taxes and assessments would climb in order to cover maintenance, repair and plowing. The traffic became more tolerable when more people were paying for the road.

A Minnetonka elementary school has envisioned adding a $550,000 "eco-lab" to enourage math and science learning.

The eco-lab committee has spent a year envisioning this hands-on science lab where teachers and students can study the environmental impact of the daily choices they make and methods for a more sustainable lifestyle.

What's needed to turn the blueprints into a reality is $550,000.

The committee is taking on the challenge of raising the money through grants and private donations.

It's a beautiful idea, and the community may very well have the capacity to fund it. But it raises the question — what about all the kids in the state's schools, where by fourth grade about half are not proficient in math when measured against national standards? And kids in less prosperous districts do even worse.

Do we know the lab will make a difference? In Minnetonka, perhaps parents can afford to give it a shot. But in other districts, it's a no-fly frill.

Bringing government costs down to a local level and to particular users does increase transparency and forces citizens to judge the value of government services. But are we liking the choices?

Business tax reform commission needs a balanced perspective

Last week, Growth & Justice sent a brief letter to the members of Gov. Pawlenty's new 21st Century Tax Reform Commission offering support and suggesting questions we hoped the business leaders on commission would consider:

• How will changes affect your current and future employees, customers and communities where you do business?
• How might reforms impact the adequacy and stability of state and local revenue? 
• Can changes that help business also make the system fairer and less regressive?
• What is the value to business of public investment in education, transportation and health care, and what should be its ongoing contribution to this investment?
• How should government and taxpayers measure the effectiveness of tax cuts, business incentives or other reforms? 

We also weighed in with a post about the relationship between business taxes and business loophole seeking.

This week, Katherine Blauvelt at Minnesota Budget Bites surfaced a 2006 Star Tribune Business Forum commentary in which Michael Vekich, the newly appointed chair of the commission, set forth five tax policy principles that track pretty well with our questions. That's encouraging.

But we still have concerns about what outcomes we can expect from a business-centric commission with a charter that starts from the assumption that tax reform is the key to increasing Minnesota's economic competitiveness.

While the individual appointees are all worthy, as a well-rounded team, the commission has some holes. For example, there's no representation from green industries or agriculture (unless you somehow count General Mills). Both are important to Minnesota's future and are subject to a variety of specific tax policies and investment considerations. Also missing are any advocates for consumers, education and labor. Employers aren't the only ones concerned about the economy, job climate and impact of business taxes on costs.

We hope the commission will find ways to fill in these missing perspectives.

— Charlie Quimby

It takes two to tangle a tax system

Last week, when Gov. Pawlenty announced his 21st Century Tax Reform Commission to reform business taxes, in Massachusetts

Governor Deval Patrick's quest to tighten corporate tax laws and reap hundreds of millions of dollars in new revenue might be undermined by a last-minute amendment providing new offshore tax breaks that was tacked onto the legislation by the House, according to state officials.

I'm not going to prejudge the outcome of the Minnesota Commission's work, but it will be interesting to see if this panel of business people will operate under any different mindset than their business lobbyists do, slipping in amendments that take money out the back door while reformers like Patrick are walking around closing the windows.

The issue hinges on a complex tax regulation called combined reporting, which is designed to prevent large, multistate corporations from shifting certain profits to other states that have lower tax rates. The House-approved corporate tax legislation would require companies in Massachusetts to combine all income and apportion the Massachusetts share.

Minnesota is gradually shifting its apportionment of corporate taxes toward a heavier weighting on sales versus property and payroll. This will benefit companies with headquarters or a major facility in Minnesota that sell products nationally or worldwide. Companies that sell in Minnesota but have relatively modest in-state operations may pay more with a sales-only formula.

Whenever there are differentials in tax rates, businesses will try to exploit them. While those favoring reduced state taxes focus on the threat of businesses leaving the state, uprooting operations carries its own costs and risks. It's usually more practical for a company to do the same thing any governor does — shift the money.

Instead of moving revenue between departments and programs, the business seeks ways to move sales and expenses to different states or countries with more favorable policies.

For example, this Wall Street Journal article described a Wal-Mart maneuver establishing an office in Florence, Italy, for the purpose of avoiding Illinois taxes.

The dispute with Wal-Mart is part of a wider effort by some states to crack down on what they believe is abusive use of so-called 80/20 companies. These companies are domestic subsidiaries that conduct at least 80% of their business overseas. States typically don't tax income from outside the U.S., and many companies have used 80/20 subsidiaries to legitimately shield foreign operations from state taxation.

The Commission's charter is to look for tax-related barriers to business investment and capital formation and for ways the business tax system can be simplified. So far, so good. But no government sets out to create a complicated tax system. It gets that way over time as individual and business taxpayers seek ways to pay less — and seek incentives that supposedly advance the public good.

Almost any change in the tax code contains potential for new mischief. If the Commission's recommendations can help state businesses without creating new losers and new loopholes, the members will have done great work indeed.

— Charlie Quimby