21st Century Taxation Blog

VAT - Why do we avoid the word in tax reform debates?

Annette Nellen — Mon, 12 May 2008 21:48:00 -0400

A few days ago, the GAO released a report - Value-Added Taxes: Lessons Learned from Other Countries on Compliance Risks, Administrative Costs, Compliance Burden, and Transition.

Why? Doesn't the GAO know that the US doesn't like the VAT?

In the report, the GAO notes that tax reform includes discussion of a VAT and that it was asked to do this report by Congressmen Jim McCrery and Jim Ramstad of the House Ways & Means Committee. The countries reviewed by the GAO in this report are Australia, Canada, France, New Zealand and the UK.

A search of bills in the 110th Congress with the word VAT only produced H.R. 2600 dealing with the WTO and border adjustments. Of course, there are proposals that are VAT variations, but they do not use that word. For example, the Freedom Flat Tax (H.R. 1040) appears to be the Hall/Rabushka model that was also promoted for years by Congressman Armey. That tax is a modified subtraction method VAT for businesses. The key modification is that businesses get a deduction for wages (which they would not get under a VAT because wages are a key element of valued added - which is taxed). But, the wages are taxed at the employee level to allow for a large personal/dependency exemption designed to alleviate some of the regressivity of a VAT.

But H.R. 1040 doesn't use the term VAT. Former Congressman Armey took the same approach. Years ago, I tracked down a few quotes from him including that the VAT is "possibly the most insidious tax scheme ever devised." [See article by Armey, Caveat Emptor: The Case Against the National Sales Tax, Policy Review, Summer 1995, p 31 and Anne Reilly Dowd, Politics and Policy: Real Tax Reform Gathers Steam, Fortune, 3/16/95, p 14 quoting Congressman Armey as saying, "a VAT is an insidious hidden tax, which I will fight forever!"] Congressman Armey had a PhD in Economics so it is likely he knew the flat tax was a modified subtraction method VAT. Perhaps it was the simpler credit invoice method he thought was awful.

In 1996, Congressman Gibbons introduced H.R. 4050 which specifically used the term VAT. This bill called for a 20% subtraction method VAT. This proposal kept an income tax for high income individuals to help preserve the distributional neutrality of the current tax system.

The AICPA and ABA Tax Sections (among others) have issued reports (years ago) on the credit invoice VAT. People have talked about it and many businesses today deal with it.

The US is the only industrialized country that doesn't have a VAT. In the tax reform discussions in the mid-1990s, Australia was also without a VAT, but it added a goods and services tax (GST) in 2000; the GST is a VAT.

Almost all states use a sales tax and some use either as an addition to a sales tax or instead of a sales tax, a gross receipts tax (GRT). The sales tax and GRT have flaws that could be eliminated with a VAT - notably pyramiding where a tax is paid on a tax because of the continual payment of sales tax or GRT along the production and distribution chain (although states do not impose sales tax on good purchased for resale, there is still sales tax paid on other items by businesses).

So, it seems that lawmakers may have a notion that the public doesn't want a VAT. While a VAT (as well as any tax), can be designed to be simple, the addition of special rates and exemptions creates complexity. The GAO report helps explain where complexities exist and the experiences in other countries - we can learn from the many examples out there of how to create a simple VAT.

While I'm not necessarily advocating for a VAT, I would say that as states continue to struggle with a variety of sales tax issues and some consider GRTs, and the feds consider a flat tax, national retail sales tax and other forms of consumption taxes, a VAT should also be considered. It should not be left out of the debate under some notion that the public has VAT-phobia or that VATs are too complex. And if the public and perhaps lawmakers have VAT-phobia, then we need to help educate people on how a VAT works, the forms of VAT and its advantages and disadvantages compared to other types of taxes we are familiar with.

In addition to the GAO report, some additional background information can be found at:

A brief summary on consumption taxes with VAT examples (by me)
A report on tax reform by the AICPA (2005)
GAO, Understanding the Tax Reform Debate (2005)
Links to a variety of information on tax reform (my tax reform website)

What do you think about a VAT? What do you think about being more honest in tax reform debates as to which proposals are VAT variations?

Desperate for Tax Revenues

Annette Nellen — Sat, 03 May 2008 14:59:00 -0400

On April 16, 2008, Maine enacted a law that doubles its beer and wine excise taxes and creates a new tax on soda syrup (LD 2247, Chapter 629). The syrup tax is $4/gallon and 42 cents/gallon of bottled soft drinks and those made from powder (see 4/17/08 article in the Portland Press Herald). The revenues will be used for the state's health insurance program called Dirigo. One estimate is that the syrup tax will mean about $28K of new taxes for an average McDonald's.

The new law defines soft drink broadly as "any nonalcoholic beverage, whether naturally or artificially flavored, whether carbonated or noncarbonated, sold for human consumption, including, but not limited to, soda water, cola and other flavored drinks, any fruit or vegetable drink containing 10% or less of natural fruit juice or natural vegetable juice and all other drinks and beverages commonly referred to as soft drinks, but not including coffee or tea unless the coffee or tea is bottled as a liquid for sale." Unflavored water and milk are exempted.

"Syrup" means "the liquid mixture of basic ingredients used in making, mixing or compounding soft drinks by mixing the syrup with water, simple syrup, ice, fruits, vegetables, fruit juice, vegetable juice or any other product suitable to make a soft drink."

Was this a good idea? The legislators and governor appear to have needed funds for the health insurance plan. Despite wide consumption, alcohol and soft drinks are not viewed as necessities of life so taxing them migh be justified in the public's eye. But what about other things people consume that also are not necessities of life, such as bottled water, soft drinks with less than 100% natural juice, candy, pastries, and more?

Unfortunately, despwrate needs for revenue usually don't lead to the best tax system modifications. The new law in Maine also earmarks the new tax revenue rather than having it go to the general fund. Earmarking is not a good idea when there is no connection between the taxed item or activity and where the revenue goes. Also, should sales of beer, wine and soft drinks decline, the health plan will suffer.

There may be some tax gap issues with the tax as well because it will be easy for Maine residents living close to New Hampshire to purchase wine, beer and soft drinks in that state. Legal issues can also arise with new narrow taxes. For example, if a state prohibits taxation of food, an excise tax on soda might not be permited (depending on definitions and the nature of the tax).

What would be a better approach? When revenues are not sufficient to match state spending, spending should be reviewed to see if it can be reduced. If that doesn't work, the state should review its overall tax system to see if there has been erosion in any tax base. For example, perhaps its sales tax only applies to tangible personal property. If so, it has eroded because today, consumption of services and intangibles (such as digital goods) has increased while consumption of tangible personal property has declined. Adjustments to existing taxes tend to keep the overall system simpler by not creating new taxes to comply with.

Maine is not alone in being desperate for revenues. California has tried to impose a higher income tax on oil companies and increase the tax on beer to help address its significant budget shortfalls. Time spent on these endeavors would be better spent on looking for appropriate and feasible spending reductions and improvements to a state's overall tax structure. Singling out one industry or one product that might be viewed as sinful or bad as a way to solve budget problems is ill-advised as it can complicate the tax law, make the tax system inequitable, and most importantly, ignores the structural problems that are more difficult to solve, but need to be solved, rather than left for another day.

Repealing Tax Changes Before They Take Effect -- Is There a Better Way?

Annette Nellen — Tue, 22 Apr 2008 14:09:00 -0400

In the past year, we have seen both Michigan and Maryland enact new taxes, only to repeal them soon thereafter and before they became effective, due to complaints. That's a lot of work for no effect. What could have been done differently?

On 12/1/07, the day a use tax on specified services was to go into effect, Michigan repealed the law (see prior blog post). More recently, Maryland repealed its expansion of the sales tax to computer services. In November 2007, the legislature added computer services to a measure designed to address a budget shortfall (see Washington Post article of 12/9/07). The tax was to become effective on July 1, 2008. Fierce opposition by the business community led to its repeal in April 2008. The tax would have mostly applied to businesses since they purchase more computer services than do individual consumers.

Back in 1987, we saw Florida expand its sales tax to include specified services, only to repeal that tax 6 months later. In 1990, Massachusetts expanded its sales tax to services, but repealed it before the effective date.

This seems like a lot of wasted effort. In Maryland, the Comptroller's Office was struggling to write regulations to help businesses be ready to comply - a project now pulled.

What night have helped lead to more productive legislative efforts and more lasting tax changes? Here are a few suggestions:

Transition: In creating a new tax or expanding an existing tax to include new taxpayers, provide sufficient time for the tax agency to provide guidance and assistance and for taxpayers to get their computer and business systems ready to handle any new collection, reporting and payment procedures. In Michigan, the expanded sales tax was enacted in October to be effective on December 1. That's not enough time for businesses to get ready to collect the tax.
Use Prior Research: Many states have had commissions to study tax reform in their states. Typically, there are hearings and months of thought and discussion. Commission final reports tend to sit on shelves. Legislators should look for such reports to see what was suggestion as typically a lot of thought and research goes into these reports. NCSL keeps a list.
Avoid Sales Tax Pyramiding: Plans to expand sales tax to more types of services should stay away from services that are primarily purchased by businesses. This will avoid pyramiding in the sales tax.
Accompany Any Base Expansion with a Rate Reduction: If a tax base is to be expanded, the rate should be lowered. Typically, a tax with a broader base and lower rate is simpler (fewer rules needed to define what is not taxed or is treated specially), can have higher compliance rates (less interest in tax planning due to lower rate), and is more neutral (fewer special rules causing the tax law to influence decisions). Base expansion accompanied with a rate reduction is more likely to be accepted as tax system improvement by taxpayers than just a base expansion.
Educate Taxpayers: Use advertising to help taxpayers understand the current flaws in the tax system and why they need to be fixed.
Fix Tax Systems in Good Times: Tax law changes made during times of budget crisis are likely to be focused more on what raises the requisite revenue rather than what makes best sense for modernizing a tax system within the principles of good tax policy.

Modernizing the Tax Law for Small Businesses

Annette Nellen — Sun, 13 Apr 2008 16:59:00 -0400

On April 10, 2008, the House Small Business Committee held a hearing - “Modernizing the Tax Code: Updating the Internal Revenue Code to Help Small Businesses Stimulate the Economy." The Committee also issued its own report - “Seven Ways to Stimulate the Economy by Updating the Internal Revenue Code." In addition to having witness testimony online in written form, the Committee has videos on YouTube about the hearing. This can all be accessed at this summary of the hearing.

I think the ideas presented by witnesses and in the Committee's report fall into two categories:

Tweaks to the federal tax law to make compliance and doing business easier for small businesses.
Changes that reflect the fact that most of the federal tax law was written before we entered our global, interconnected, knowledge-based economy and society and thus is in need of modernization.

Examples of Category 1 suggestions:

Repeal the AMT
Make the 2001 and 2003 tax cuts permanent
Allow greater choice of tax year for non-corporate businesses
Increase meals deduction for small businesses

Examples of Category 2 suggestions:

Allow non-resident aliens to be shareholders in S corporations
Stop treating cell phones and PDAs as listed property for depreciation purposes since these are not luxury items, but necessities of operating a business; detailed recordkeeping of use is not productive
Create a simpler tax systems, even with less incentives, due to the significant compliance costs small businesses face
Simplify the home office deduction to be a standardized deduction
Shorten some depreciation lives to be more in line with today's technology

The focus of the hearing was improving tax rules for small business to stimulate the economy, not just to modernize the tax law. However, there were several good ideas that remind us how out-of-date the tax law is (such as treating cell phones as questionable business items and giving personal computers a 5-year depreciation life).

What are your ideas to modernize the tax law to better help small businesses succeed in today's economy?

Public Law 86-272 - Upcoming 50th Anniversary of Stopgap Legislation

Annette Nellen — Sun, 30 Mar 2008 17:48:00 -0400

In reaction to a US Supreme Court decision - Northwestern Cement v. Minn., 358 US 450 (1959), which many members of Congress thought would lead states to tax businesses beyond what they should under the commerce clause, Congress enacted Public Law 86-272 on September 14, 1959. Despite the lack of an expiration date in this legislation, it was described as a temporary measure while Congress further studied state taxation (a study established by PL 86-272). The report was completed in the mid-1960s (referred to as the Willis Commission report after the Congressman who chaired the subcommittee). However, PL 86-272 was not revised.

PL 86-272 explains when a state may impose income taxes on multistate businesses selling tangible personal property. Businesses selling services or intangibles, get no protection (or guidance) from the federal law. With more businesses selling services and intangibles today than in 1959, PL 86-272 is in need of updating. There have been various congressional proposals in the past few years, but no changes have been enacted and there are differences of opinion between state governments and businesses on what the reforms should be. Also, recent court decisions have held that "economic presence" is sufficient for a state to be able to impose income tax obligations on a business (businesses believe that "physical presence" should be the standard). The US Supreme Court has declined to hear any of these cases. Meanwhile, the 50th anniversary of this stopgap legislation is approaching.

For background on PL 86-272 and the case that led to its enactment, click here.

For links and related information on PL 86-272 and the current controversies in attempts to modernize this nexus rule - see this website.

Do you think temporary law PL 86-272 will be updated before its 50th anniversary on 9/14/09? If no, why not? If yes, what will the new version look like?

Taxes and the Modern Economy

Annette Nellen — Thu, 27 Mar 2008 17:22:00 -0400

Ideally, tax reforms, of any size, should follow the principles of good tax policy. There are many views of exactly what these principles are, dating back to at least Adam Smith in the late 1700s (and even back to Aristotle if considering "fairness" in general - "equals should be treated equally and unequals unequally"). Most of the lists are fairly similar (see this chart for an example).

A while back I came across a 1967 report of the Ohio Tax Study Commission that included a principle to follow in its work that we don't often see. It ties well to the point of the 21st Century Taxation Blog. The extra Ohio principle was:

"Relationship to the Modern Economy

Insofar as possible, a tax or tax structure should be capable of growing with the economy of the state and should be revised from time to time so as to correspond with the true makeup of that economy as it develops and changes. Some products, habits of consumption, and classes of enterprise decline, while others rise to take their place. Ideally, a tax structure should be reviewed and revised as necessary so as to bear a relationship to the way people are doing things, regardless of whether additional revenues are needed at a given time."

That's great ! Tax systems should be reviewed even when revenue isn't needed. Actually, that is likely the best time for reforms because in dire budget times, principles of good tax policy are often overlooked, which may put the state into a chronic state of budget problems.

btw - the other factors used by the 1967 Ohio Tax Study Commission to evaluate tax policy were:

Effect on economic growth
Neutrality
Equity, or Fairness
Administrative feasibility
Compliance costs

Unusual Taxes - Often Not Ideal for Tax Systems

Annette Nellen — Thu, 20 Mar 2008 11:36:00 -0400

In efforts to either raise new revenue or change behavior, or both, we sometimes see some unusual tax proposals from lawmakers. Here are a few recent examples, some of which were enacted:

New Mexico - 1% excise tax on the sales price of televisions, video games, and video game equipment. The revenues would go into the "leave no child inside fund" to be used for outdoor curriculum programs, transportation for children to have an outdoor experience, to provide "outdoor nature-oriented physical activity programs" for children and similar purposes. This bill, HB 583 was estimated to raise about $1.85 million each year. As the name for the proposed law suggests - Leave No Child Inside, the goal was primarily to change behavior - get kids away from TV and video games and outside. It's unlikely that it would have changed behavior, but it would have provided extra moneys for outdoor education and activities. One of the supporters of the bill was the Rio Grande Sierra Club. This bill died in committee in March 2008.
- Issues include:
  - Is there really a good reason for this new tax? If there is a need to increase funding for parks so they have more programming for kids, why not use general fund revenues?
  - Why single out video games and TV? Other things that keep kids inside include DVDs, games they can access on their computer (even for free), Girl Scout meetings, homework, chores, and much more.
  - What about the definitional problems? Issues would certainly arise as to how to exactly what is a video game, how to apply the tax if a video game is purchased online or from out-of-state, and more.
Chicago - a bottled water tax went into effect in 2008. See earlier blog post.
California - oil taxes. In March, a bill - ABX3 9 was proposed and died when it failed to get California's required 2/3 majority vote for a tax increase. This 2-part proposal included a severance tax on oil (not really unusual since many states already have them) and a 2% surtax on oil company taxable income over $10 million. Two unusual aspects - why single out oil companies for a higher income tax - why not other profitable companies? After all, California has a $15 billion budget shortfall. The other unusual item was that all revenue generated would go to the Superintendent of Public Instruction to alleviate budget cuts that are presently causing some K-12 teachers to get layoff notices.
- Issues include:
  - Earmarking taxes, particularly when there is not connection between oil and funding education. Also, when oil company income drops, so would education funding.
  - Singling out one industry for special treatment (here, higher taxes) adds complexity to the law because special definitions are needed to define that industry.
- (See op ed.)
New York City - a congestion tax was proposed in 2007 by Mayor Bloomberg (New York Times story, 4/22/07). This is not an original idea because it is used elsewhere, such as in London. It addresses the problem - if you want to reduce congestion, make it more expensive to enter a location during certain hours. It will encourage people to find other means, such as walking or public transportation - or just waiting to enter when the tax is lower or not imposed. It does raise some administrative challenges, but it doable. We'll see what happens.
European Union - a proposal to tax cars based on how much they pollute (Reuters story, 11/13/07).
- Issues include:
  - How to measure how much cars pollute? The easy ways, such as by adding the tax on at time of purchase based on the year and make of the car won't work because people drive different amounts annually. People are unlikely to keep good records of how much they drive annually.
  - Driving habits can affect pollution. Driving faster uses more gas as does driving with lots of stuff in the trunk.
  - Visitors (although most probably drive in from another EU country) cause pollution, but not be taxed (depending on the system for assessing the tax).
  - While a good idea, administrative difficulties probably make a tax at the pump a better approach.

There are certainly many others. One from a few years ago was a proposal in Detroit to tax fast food (CNNMoney.com article, 5/9/05). Significant issues include the rationale for such a tax (other than to raise revenue) and the many issues that would arise in trying to define fast food.

Often these unusual taxes arise when lawmakers are desparate for money, a situation that often doesn't lead to changes that are good for a tax system.

A Dynamic Tax System

Annette Nellen — Wed, 05 Mar 2008 22:07:00 -0500

Tax systems can get out of date. For example, an income tax designed with a rate structure to apply to specified income levels (some type of progressivity goal), will become out of date if the tax brackets are not adjusted for inflation. That is, if individuals with income between $30,000 and $40,000 are to have a 15% rate, they will start to creep into the next higher rate as their income increases with inflation (for example, a person gets a cost-of-living raise), even though their buying power has remained constant (they are really no richer). So, one way to keep the system current, is make an inflation adjustion to the income levels at which each tax rate bracket begins.

What about keeping a tax base current and relevant? That is, enabling a tax base to reflect current ways of doing business and how people live even as things change. That's harder than the rate adjustment which can just be built into the law by having a rule that tells the IRS to adjust the rate structure annually for inflation. Keeping a tax base current and relevant requires regular attention from legislators and making tough decisions. For example, perhaps decades ago it made sense to provide special tax breaks to a particular industry. Yet, if such breaks are not looked at regularly, they remain even when no longer needed. And, it is politically difficult to get a tax break removed once it has been there for a while.

One remedy to the need to regularly update the tax base is to have a broad tax base (with few special rules) and a lower rate. This should reduce the need for special rules. Another solution is to have a termination date on all special rules. What about drafting rules that can self-adjust?

Keeping a tax base relevant is challenged due to changes in technology, society and the ways of doing business. A significant example today is the sales tax base in many states. Most sales tax systems include tangible personal property and a few services in the base. Today, some things that traditionally were consumed in tangible form can be consumed in digital form, such as books, movies and music. These changes (assuming these digital items can't be called "tangible" under the state's law), cause the tax base to decline even though consumption levels are the same. The solution is to modify definitions of what goes into the tax base. Not doing so, can lead to drops in tax collections.

In California, the California Budget Project did the work to measure the drop in revenue that can result when a base has not kept up with changes in consumption and the meaning of "goods." The CBP estimates that if the same percentage of personal income were subject to sales tax today as was subject to the tax in 1966-1967, California would collect almost $16 billion more in sales tax today (source, pg 33) Of course, prices and income need to be considered as well, but clearly, the base has diminished to some degree just due to the change in the form of products people can consume today.

Given continued changes in technology, consideration should be given to use of language that will not be outdated in a few years (although not always an easy thing to do). One interesting example of trying to keep a tax base from getting outdated by technology (and being clear in describing what you're trying to tax) was a change Florida made a few years to ensure that "communications services" would be taxed despite the possibility that new ways to make a phone call would continue to arise. Here is their definition (emphasis added):

"Communications services” means the transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals, including cable services, to a point, or between or among points, by or through any electronic, radio, satellite, cable, optical, microwave, or other medium or method now in existence or hereafter devised, regardless of the protocol used for such transmission or conveyance."

Back in the 1930s when many states enacted sales tax laws, if they had considered the possibility that goods might someday be acquired in intangible or digital form, they would have most likely written their tax rules differently. To be clear that they wanted to tax certain types of consumption, they would have said the sales tax applied to "goods or products no matter how obtained, provided they are used for personal consumption/enjoyment."

As Congress and state legislatures continue to consider tax reforms, they should also think ahead and carefully chose the language for defining the tax base to enable the law to self-adjust as business practices and ways of living change. Where feasible to do this, it will possibly lead to a more certain tax law (the intent is more clear), eliminate delays in updating tax bases and keep tax revenues where expected.

How Do/Should We Tax? Tax Reform for California's New Economy

Annette Nellen — Tue, 26 Feb 2008 22:47:00 -0500

This is the title for a 2/27/08 New America Foundation and UC Center Sacramento workshop in Sacramento. It will look at a variety of California tax and budget issues and possible remedies that also bring California's depression-era, industrial-based tax system into the 21st century. This blog post serves as place for further discussion on the topic and the workshop presentations.

Here is a link to my presentation topic on broadening the California sales & use tax base and lowering the rate. If other workshop materials are posted on the web, I'll add a link to them at this blog entry.

I look forward to your comments and online discussion.

Minnesota Governor to Form 21st Century Tax Reform Commission

Annette Nellen — Tue, 19 Feb 2008 00:00:00 -0500

In his 2/13/08 State-of-the-State address, Minnesota Governor Tim Pawlenty announced that he would create a 21st Century Tax Reform Commission to recommend tax reforms for the 21st century economy. Related to this, he also noted:

the state has a serious deficit
tax policies, job climate and large government have harmed economic growth
there is a need to reduce taxes
Minnesota should join other states and cap property taxes
there is a need to move the tax system from the 1960s to the 21st century
tax reforms should "encourage job growth, income generation, investment, entrepreneurial activity, research and exports"

Well, as the title of this blog would suggest, I think this is a good move for Minnesota. But, it won't be easy -- change rarely is.

Many states have had tax reform commissions that travel the state holding hearings and receive many comments from businesses, individuals, academics, and various organizations with lots of complaints and ideas. The final report is delivered and then, usually sits on a shelf. The National Conference on State Legislatures (NCSL) maintains a website with links to many of these reports. I testified before California's last tax reform commisssion (California Commission on Tax Policy in the New Economy) three times. The Commission's 12/03 report has lots of useful information and ideas, but sits on a shelf while California faces a budget shortfall partially due to not moving its tax system into the 21st century ways of living and doing business.

Some ideas for success:

Get serious legislative buy-in. While a governor can establish his/her own tax reform commission, there is no guarantee that anyone will do anything with the recommendations. And, if the recommendations are politically unpopular, which might happen, perhaps no one will use the report. This happened in 2003 with the President's Advisory Panel on Federal Tax Reform. It delivered its report in 11/05 and almost no discussion occurred anywhere. While President Bush has pushed for tax reform in a variety of ways (the panel, recent Treasury studies, and various tax law changes such as a reduced dividend tax), the work of the panel hasn't led to anything.

Why not introduce legislation to establish the Commission, let the legislators select some of the commission members and require that there be X number of legislative hearings on the final report within 3 months of its issuance and that the tax-writing committees and governor propose a set of coordinated tax law changes in response to the report and result of legislative hearings by a specified date.
Start educating the public now on the problems with the Minnesota tax system and the adverse impacts it causes now and in the future on the economy and the lives of Minnesotans.
Read the reports of other state tax reform commission. A lot of work has already been done in other states and a decent amount of it is likely relevant to Minnesota. (See the NCSL website.)
Use research already done in Minnesota and by various tax policy organizations. For example, see the list at the end of this blog entry (*).
Review tax reform work done by various state government organizations such as the NGA and NCSL.
Use and follow the principles of good tax policy in analyzing the current structure and any proposals. Doing so should lead to better proposals and help make the case for them. The California Commission used a set of principles designed by the AICPA Tax Division (disclaimer -- I chaired the AICPA committee that produced that set of principles). A Silicon Valley policy group modified the principles into a workbook with examples. When the State of Washington did a recent study, it also included home ownership as a principle to follow. For more information on tax principles to consider and details and links: (1) summary chart I prepared; (2) 9/05 GAO Tax Reform report, see section on "criteria for a good tax system;" and (3) the various reports of state tax commissions (see earlier NCSL link).
Many states do have tax systems based on the economy and ways of living in the 1960s. Moving them into the 21st century will not be easy. It will likely involve broadening the sales tax base to include more services and digital goods; moving to combined reporting (Minnesota already does this); eliminating expensive, overly generous, out-dated tax expenditures (even if it increases non-conformity with federal tax rules); improving use tax collection; eliminating tax pyramiding; considering green taxes, such as a carbon tax designed in a progressive manner (such as taxing utilities with a higher rate for homes greater than the average size); considering a split roll for any property tax cap; and not harming local governments in the tax reform process.
Remember that the longer a state takes to update its tax systems, the harder it becomes. For example, for states that tax the purchase of a music CD, but not downloaded music, the longer it waits to do so, the harder it is to convince the public that the downloaded music is equivalent to the purchase of a taxable CD, and the greater the total loss of revenue from the eroding tax base.

Examples of information already in existence for the Minnesota Tax Reform Commission:

Minnesota House Research on the sales tax base (10/02).
Minnesota Sales Tax Gap study (11/02).
(there are likely many more reports and data sets from Minnesota government agencies).
The Center on Budget and Policy Priorities has done some analysis of Minnesota's tax system (search for "Minnesota" at their website).
The Tax Foundation has also analyzed various aspects of Minnesota's tax system and business climate (which it ranks in the bottom 10). A search for "Minnesota" at its website produces several hits.
Various other local, state and national organizations that have studied various aspects of Minnesota's tax and fiscal structure.

Let's see what happens.