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Unformatted text preview: in October 2001.
Congress is currently considering whether to extend the moratorium2 and whether the nexus standard should be
broadened. The current expectation is that Congress is likely to extend the moratorium but is unlikely to expand the
nexus standard during the next several years. The States are very concerned about their ability to collect taxes, and 42
governors recently sent a letter to Congress asking for action. The importance of Congress’ control over interstate
commerce and therefore state revenue means an increasingly centralized level of authority, even as states raise more of
The problem for state governments is exacerbated by the tax competition that exists between states. The competitive
forces make it difficult for states to impose production-based taxes on business. Recent changes forced by competitive
pressures include exemption of manufacturing equipment from the sales tax, reductions in taxes on telecommunications,
and adjustments in the formula used to determine the share of a multi-state firm’s profits that are taxed in a state3. Thus,
states need to rely more on consumption-based taxation, but Congress has not enabled states to collect the taxes
Each states’ constitution may impose additional limitations on state revenue authority. Specific state constitutions and
statutes generally determine local government revenue authority as well. Thus, the role of state versus local government
in raising revenue differs dramatically across states. The national constitution only limits local governments in the same
sense that states are controlled. 3.2. Revenue Sources by Level of Government
Historically, the different levels of government have tended to specialize in the primary revenue source they employ. The
federal government has relied on personal income taxes (Table 4), states on sales taxes (Table 5), and local
governments on property taxes (Table 6). Several significant changes in this pattern have been taking place. First, the
income elasticity of income taxes is greater than for sales taxes, causing the personal income tax to supplant the sales
tax as the largest state tax source .
Nonetheless, the federal share of total income tax collections is only slightly lower than in 1977, and has been stable
since 1987. States generate 43 percent of their revenues through personal or corporate income taxes. Personal income
taxes generally have very high income elasticities (see Dye and McGuire, 1991), resulting in rapid revenue growth5.
Rapidly rising revenues because of income tax structures have allowed many states to lower their maximum personal
income tax rate and still experience good growth. Corporate income taxes have evidenced lower income elasticities
during the 1990s, most likely because business tax planning has become more effective during the past decade. 2
4 5 The moratorium has indeed been extended until Novembre 1, 2003.
Most states use a formula that taxes on the basis of property, payroll, an...
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