Annette Nellen
Annette Nellen
Moving State Tax Systems Into the 21st Century

In the past year, a few states have released recommendations of tax commissions formed to study tax system modernization. What have they learned?

March 12, 2009
by Annette Nellen, CPA/Esq

It is not uncommon for governors or state legislatures to form commissions to study possible tax system improvements. Public hearings are held, people submit ideas and a report is issued. Sometimes the report is actively discussed by the legislature and other times it is ignored. In recent years, commissions have often been directed to find ways to bring the tax system into the modern era of global business and digital goods. This article looks at recent state tax commission activities.

Abundance of Reports

There are numerous reports of state-tax commissions. Some commissions were charged with looking at an entire tax system, while others at a particular area, such as telecommunications taxes. A 2002 report from the Washington State Tax Structure Study Committee included a summary of recent reports of nine other states. It found that most were prompted by either concern over high taxes or budget shortfalls (Appendix F (PDF)). A list of most state-tax reports can be found at the National Conference of State Legislatures Web site. The NCSL notes that a majority of states have issued reports since 2000.


State tax study work of recent years has often focused on changes needed to modernize a state's tax system. Recommendations vary from state to state depending on their current system and the nature of existing problems. For example, while several states have proposed reducing their corporate income tax, a Wyoming tax commission, proposed an income tax to help address budget deficits and an inequitable structure that relied too heavily on regressive taxes.

Following are summaries of recent tax commissions that focused on tax system modernization:

  • Building Wyoming's Tax Structure for the 21st Century (1999): To make the tax system more stable and equitable, the committee recommended adoption of corporate and personal income taxes, broadening the sales tax to include more services and creation of a real estate transfer tax.
  • California Commission on Tax Policy in the New Economy (2003): The commission's report recommended broadening the sales tax to include more services along with lowering the rate, studying a property tax shift to tax business property at market value and establishment of a state tax court.
  • Oregon Road User Fee Task Force (2007): Created in 2001, this group narrowly focused on one type of tax in Oregon. The group focused on addressing the need to maintain taxes for roads in light of a drop in gas tax revenues due to improved mileage of alternative-fuel vehicles. The group looked at several alternatives and piloted a mileage based approach as well as technological solutions to maintain funding for roads.
  • Massachusetts Study Commission on Corporate Taxation (2007): This Commission was charged with studying how to modernize and simplify the business tax structure and strengthen the state's global competitiveness. Recommendations (PDF) included combined reporting, a lower corporate income tax rate, application of the room occupancy tax to intermediary resellers and adoption of the Streamlined Sales-and-Use Tax Agreement.
  • Governor's 21st Century Tax Reform Commission (Minnesota, 2009): This Commission was formed due to Governor Tim Pawlenty's (R-MN) concerns that the state's tax system was based on the economy and demographics of the 1960s. It was charged with finding ways to make the tax system one that is "simple, more predictable and supports a strong economy and job climate" (Executive Order February 2008). The Commission's recommendations (PDF) include repeal of the corporate-income tax, an income tax exemption for 20 percent of active pass-through business income, extending the sales tax exemption on equipment to service providers, simplification of the property tax, improving the research tax credit including making it refundable and requiring a "benefits-received" report on business taxation. The reforms would be funded by extending the sales tax to more types of consumer goods and services and increasing the cigarette excise tax.
  • California Commission on the 21st Century Economy: This commission, formed in 2008 is to issue a report in April 2009. Goals include creating a "21st century tax structure that fits with [the] state's 21st century economy, a more stable and equitable tax structure and improving the state's "ability to successfully compete with other states and nations for jobs and investments" (Executive Order October 2008).
  • Telecommunications Tax Reform: Various studies have occurred such as by governmental and industry organizations (including the National Governors Association and the Council on State Taxation). (For example, see NGA testimony before the House Judiciary Committee, June 2006.)


Several recent state tax commissions have focused on ways to improve the competitiveness of the state's tax system in addition to the reports listed above. Examples include:

  • Pennsylvania Business Tax Reform Commission (2004): The charge of this Commission included finding ways to make Pennsylvania more competitive with other states. Recommendations included lowering the corporate tax rate, eliminating the $2 million annual cap on net-operating losses (NOLs) (see related story), using a market-based approach to source services and moving to a single sales factor for apportionment of business income.
  • Rhode Island Tax Policy Strategy Workgroup (2009): Governor Donald Carcieri (R.-RI) charged the group with finding "a long-term tax strategy designed to make Rhode Island's tax structure a competitive advantage in retaining jobs and recruiting businesses" (May 2008 press release). News reports in February 2009 indicated that the group proposed to repeal the corporate income tax and reduce income taxes for other business entities ("Small businesses would also get tax break under R.I. panel's plan," The Providence Journal, February 2008.)

Relevance of a 21st Century Focus

No doubt, today's economy is much different than what existed when most state tax systems were created decades ago. Businesses of all sizes are more likely to be global, borders and physical location are much less important to business operations, some tangible products can be delivered in digital form and capital and labor are more mobile. Some of the issues that exist in state tax systems that warrant review include the following:

Supporting businesses in a global economy: The Minnesota Tax Commission summarized the problem of outdated state tax systems as follows:

"State tax systems are not only failing to keep up with dramatic shifts in the U.S. and world economies, but are a drag on economic growth." (2009 Report (PDF)).

New inequities: Sales taxes in most states have also become outdated as they primarily only apply to tangible personal property despite increased personal consumption of services and digital goods. Inequities for consumers and providers can result from taxing some forms of consumption but exempting others despite similar outcomes (e.g., purchasing a song on a taxable DVD versus a nontaxable digital download).

Technological changes: Tax structures that may have made sense decades ago may no longer meet principles of sound tax policy due to changes in society, technology and the economy. For example, years ago when telecommunications involved regulated providers of land line services, telecom taxes may have made sense. However, today's practices of bundled services, billing based on time rather than distance and mobile users makes telecommunications taxes outdated and inefficient. Similarly, changes in energy sources for vehicles makes the gasoline excise tax for funding road maintenance outdated.


There is no shortage of studies on state tax systems. Many of the proposed changes are significant, such as repealing the corporate-income tax. Thus, despite strong reasons given for such bold reforms, change is unlikely to be enacted soon given today's state budget shortfalls.

Several of the tax commissions have included tax practitioners. In addition to that role, practitioners can play a role in the reform work by keeping abreast of the recommendations, helping clients to understand them and working with policymakers to modernize tax systems to better promote economic growth within the principles of good tax policy.

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Annette Nellen CPA, Esq., is a tax professor and Director of the MST Program at San José State University. Nellen is an active member of the tax sections of the ABA and AICPA. She serves on the AICPA's Individual Income Taxation Technical Resource Panel. She has several reports on tax reform and a blog.