ARTICLE | October 20, 2023 | Authored by RSM US LLP
With Tax-tober quickly coming to a close, RSM US’s Washington National Tax state and local tax (SALT) practice decided to grab a wooden stake, puree some garlic, melt all the silver we could find, light a torch and see what could be unearthed from some of the scariest SALT proposals and scenarios we’ve seen or considered. Turn on a light, definitely do not answer the phone, and find out what keeps us up at a night.
Time is ticking toward another Halloween. However, this one holds a strange poignancy for me. My daughter has announced to everyone in the house that (in her words) America’s repressive “grow up fast and get a job” social construct will make this her last chance to trick-or-treat without the negative judgment and ill-will of candy givers neighborhood-wide. Why do we do this? Why do we feel the need to arbitrarily take away an environment where fear and joy can be safely experienced all at once?
For the sake of Tax-tober, it makes as little sense to me as all of the proposals states are floating to restrict or eliminate ballot measures.
Only about half the states allow citizens to get measures on the ballot, and, if you live in one of them, you are lucky. You can directly participate in your state’s governance based purely upon having an idea and the passion to see it through. And there’s no better place to focus than the manner in which a state or locality can exert its tax authority.
Some will seek to expand that authority. Some will seek to restrict it. Most of what is proposed will never make it to the ballot, or will not pass if it does. But there’s magic in the possibility; magic in one of the few forms of direct democracy we have available to us.
States, don’t limit it. Don’t take it away. While you’re at it, how about something that incentivizes everyone to get out there and trick-or-treat? Let’s prove my daughter wrong. Otherwise, someday she might just try to get enough support for a ballot measure mandating a tax-free Halloween for everyone.
Brian thinks the challenges to direct democracy are scary. I would tend to agree, but I am not sure initiatives and referendums are the avenue for developing all tax policy. Not all voters are as smart as his daughter. If you put single-sales factor on the ballot, most voters’ eyes will glaze over.
My colleague, Mo, takes a more lighthearted view below of what is scary in the SALT world. Sales tax exemptions are certainly frightful, particularly for vendors who must determine what is or is not subject to tax. There are literally hundreds of fun—and spooky—examples.
Remember, if vendors do not collect and remit tax on what is actually taxable, they are on the hook. In my experience—and I have been practicing throughout most of the ’Friday the 13th’ movies—many vendors will err on the side of taxability. Better to collect the tax on things not subject to tax, than to face a revenue department auditor. Now there’s a nightmare you can’t just wake up from.
But what I find most petrifying is that many states are still considering worldwide combined reporting. New Hampshire is thinking about it right now. Mandatory worldwide reporting is as terrifyingly anti-business as you can get. Companies are not going to stop doing business overseas. But they may stop doing business in a state with worldwide. Like the poor counselors at Camp Crystal Lake, you would hope state legislators would know better.
With the jack-o’-lantern lit, I always come back to the outright frightening example I’ve used to teach sales tax for over a decade. In Pennsylvania, decorative pumpkins are subject to sales tax, but pumpkins as food are not. No wonder sales tax compliance is hated more than Frankenstein’s monster.
Yes, I recognize there is a logic to the different tax treatment, but I’m not sure my mom would understand and she is much smarter than I am. It could be worse, we could discuss the taxability of frozen pizzas, or how many nuts it takes for a Snickers bar to no longer be taxed as candy (pitch forks and torches down, Streamline states).
What’s keeping me most on edge lately is a subject I know not to feed after midnight: the continued state tax cuts to corporate and individual income taxes.
I’m less concerned about corporate taxes due to the minor amount of revenue generated overall, but individual income taxes nationwide account for over 36% of most state tax collections. Through the second quarter of this year, we’ve experienced four quarters of no or negative individual income tax growth. And yet, states continue to slash individual income taxes. Adding on, state sales tax growth slowed to near zero in the second quarter.
My Elm Street nightmare wouldn’t be complete without a warning—the tax collection data is beginning to show a revenue crunch. Cutting individual income taxes without looking to the horizon is exactly how trolls turn to stone and vampires combust into dust.
While it is true states are some of the most prepared in history to weather a fiscal crisis thanks to boosted rainy-day funds, drastically cutting revenue drivers because revenue is good today ignores that it may not be good tomorrow. The economy is cyclical, just like a new Halloween movie every few years. I urge restraint and good fiscal policy during uncertain times.
Finally, with my new-found authority to trick-or-treat at age 41 thanks to Brian’s daughter, I’ll mostly skip the direct ballot debate this time. And although I’d rather not have voters directly decide tax policy, I think restricting ballot measures could be more akin to finding a strange plant during a total eclipse and naming it after your crush—that is to say, a questionable idea.
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This article was written by David Brunori, Brian Kirkell, Mo Bell-Jacobs and originally appeared on 2023-10-20.
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