State Net Capitol Journal – March 11, 2013

State Net Capitol Journal – March 11, 2013

Budget & Taxes

ONLINE SALES TAX PUSH CONTINUES DESPITE DISAPPOINTING RETURNS: State officials have viewed Internet commerce with dollar signs in their eyes for decades. The few that have managed to tap the spigot of online sales in a substantive way, however, aren't reaping the promised rewards. But that's not stopping Congress from trying to open up e-commerce as a potential revenue source for all states.

A 2009 University of Tennessee study estimated that states would lose $11.4 billion in revenue in 2012 if they failed to collect more taxes from online sales. California's loss alone, according to the study, widely cited by those pushing for the power to tax the Internet, would be $1.9 billion.The reality in the Golden State has fallen far short of that expectation. The state is one of the few in the nation that has passed affiliate nexus legislation - the so-called "Amazon tax" - requiring out-of-state retailers with in-state affiliates to collect and remit sales tax on online purchases made by state residents. Last month the state's Board of Equalization reported that in its first full quarter of collections, which included last year's busy holiday shopping season, it took in $96.4 million, a much-needed boost to the state's bottom line to be sure, but nowhere near the $457 million quarter implied by the Tennessee study.

In New York, another affiliate-nexus state, online retailers had remitted $360 million in sales taxes on over $4 billion in taxable online sales as of February 2012, according to the state's Department of Taxation and Finance. While that figure represents about 90 percent of all taxable online sales in the state, it is also well below the $2.5 billion the Tennessee study predicted.

"To the extent the estimates being used are overstating reality, and I think they are, it is not solving anyone's deficit problem," said Navigant Economics Managing Director and Principal Jeff Eisenach, who co-authored a study that pegged the national online sales tax potential at $3.9 billion, about a third of the Tennessee study's estimate.

Professor William Fox, the lead author of the Tennessee study, said one reason states have fallen short of his estimates may be that smaller online retailers are often exempt from collection. The National Conference of State Legislatures said major online retailers like and have also terminated their affiliate arrangements, not only making the out-of-state retailers exempt from the affiliate nexus laws but also reducing the income of the taxable in-state affiliates.

The moderating revenue outlook hasn't stopped the push for e-commerce taxation, however. In fact, last month 53 members of Congress reintroduced legislation that would give states the authority to require online retailers to collect sales tax, an idea that has languished on the Hill for years. Amazon, which has already agreed to collect sales taxes in nine states and is expected to do so in at least six more in the next few years (see Bird's eye view), also supports the federal bill, known as the Marketplace Fairness Act.

One reason for the continuing impetus on the issue is the lack of a level playing field between online retailers and brick-and-mortar stores.

"It's about states' rights, it's about fairness," said U.S. Sen. Mike Enzi (R-Wyoming), a lead sponsor of the bill.

U.S. Rep. Steve Womack (R-Arkansas), home to the country's largest brick-and-mortar retailer, Wal-Mart, said the lost local revenue resulting from that imbalance is hurting state and local governments.

"It affects everybody," he said at a news conference for the Marketplace Fairness Act. "It affects schools. It affects policemen, it affects firemen, it affects anybody engaged in public service."

E-commerce is also where the growth is. It has been growing at a faster rate than traditional retail for years, and Deloitte Consulting has estimated that by 2015, $175 billion a year will have shifted online from stores. (REUTERS, UNIVERSITY OF TENNESSEE, BUSINESSWEEK, NATIONAL CONFERENCE OF STATE LEGISLATURES, ARIZONA REPUBLIC, CNNMONEY, WALL STREET JOURNAL)

SEQUESTER FURLOUGH NOTICES SENT: Sequestration officially began on March 1. And the world did not end. The American economy didn't suddenly collapse. A Pew Research Center/Washington Post survey conducted just days before the federal spending cuts were scheduled to go into effect found that most Americans weren't even paying very close attention to the issue, likely due to financial crisis fatigue after all the "fiscal cliff" debate.

But the impact of the sequester was almost immediately felt by thousands of federal employees who began receiving furlough notices last week. The Federal Aviation Administration (FAA), for instance, sent out notices to most of its 47,000 air traffic controllers and other employees last Tuesday informing them the agency had approved a "save money" furlough of up to 11 work days between April 7 and Sept. 30, when its fiscal year ends.

"Please know that I sincerely regret the impact that even a single furlough day will have on you," said FAA Administrator Michael Huerta.

But a Republican Congressman has introduced legislation to try to avoid such furloughs. U.S. Rep. Blake Farenthold's (R-Texas) HR 950 would direct the Office of Management and Budget to report to Congress on how best to transfer funds within agencies this fiscal year to avert worker furloughs and layoffs.

"Our federal workforce needs to be operating at 100 percent," said Farenthold, who chairs the House Oversight and Government Reform federal workforce subcommittee. "They should not be punished because the president, [Senate Majority Leader] Harry Reid and the Senate Democrats failed to do their jobs and replace the sequester."


WA HIGH COURT STRIKES DOWN SUPERMAJORITY REQUIREMENT FOR TAX HIKES: For nearly 20 years, Washington state lawmakers have needed a two-thirds vote to pass a tax increase. That changed last month when the state Supreme Court ruled that supermajority requirement - approved by voters in the early 1990s and reapproved twice since - unconstitutional. In a 6-3 decision, the court said such a restriction could only be imposed by a constitutional amendment.

Ironically, Democrats in the state's Legislature have been trying for years to get the supermajority requirement overturned, but now that it's finally happened, they no longer control both chambers, having lost control of the Senate at the start of this year's session when Democratic Sens. Rodney Tom and Tim Sheldon opted to caucus with the GOP.

Senate Democratic Leader Ed Murray doubted there would be enough votes to raise taxes this session even if his party had held on to the Senate. But Chris Vance, a former chairman of the state's Republican Party, said it did move such an action into the realm of possibility.

"It's still going to be very hard to get the votes to raise taxes, but it just became much easier than it was," he said. "Before I would have said it was virtually impossible. Now it's at least possible." (SEATTLE TIMES, REUTERS)

MO RETURNS FIRE IN BORDER TAX WAR WITH KS: Hoping to keep pace with its tax-cutting neighbor Kansas, Missouri's Republican-controlled Senate gave preliminary approval last week for a major overhaul of the state's tax system. Among other things, the plan would gradually reduce the state's income tax for individuals and businesses by three-quarters of a percentage point over five years while gradually increasing its sales tax by one-half of a percentage point over the same period.

The plan's sponsor, Sen. Will Kraus (R), said it doesn't go as far as the one Kansas passed last year, cutting income taxes without increasing sales taxes, but he hoped it would at least make his state more competitive with its neighbor.

"I'm trying to stop the bleeding. I'm trying to stop the businesses from fleeing into Kansas," he said.

He also said that unlike Kansas' plan, which has opened up a projected $200 million hole in that state's budget for next fiscal year, his plan was "fiscally sound."

Senate Minority Leader Jolie Justus (D), however, wasn't convinced of that, warning that the tax cuts could make it even harder for the state to provide funding for education and healthcare.

"What good are all these businesses going to be if we have a bunch of uneducated, unhealthy citizens?" he said.

Sen. Jason Holsman (D), meanwhile, suggested Missouri should just wait and see what happens with Kansas' tax cuts.

"It may turn out that Kansas decides it wasn't such a good fiscal policy to decimate their revenue," he said. (ASSOCIATED PRESS, NEWS TRIBUNE [JEFFERSON CITY])

BUDGETS IN BRIEF: The sequester will delay the opening of Yellowstone National Park by two weeks. The $1.75 million that park managers have to trim from the park's $35 million annual budget as a result of the automatic funding cuts will force the postponement of the complex and costly process of clearing the mountain passes leading to the park's entrances (REUTERS). • An exhaustive study of a key natural-gas field in TEXAS and other research indicates that U.S. shale-rock formations will provide a source of moderately priced natural gas through 2040. The University of Texas study, funded by the nonpartisan Alfred P. Sloan Foundation, examined 15,000 wells drilled in northern TEXAS, mostly over the last decade (WALL STREET JOURNAL). • Despite improving fiscal conditions in much of the country, nine states ended fiscal 2012 with tax revenues 11 percent to 21 percent lower than their high points before the recession, according to the Nelson A. Rockefeller Institute of Government. Those states are: ARIZONA, LOUISIANA, NEW MEXICO, ALASKA, WYOMING, NEW JERSEY, FLORIDA, SOUTH CAROLINA and GEORGIA (STATELINE.ORG).

- Compiled by KOREY CLARK

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