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.

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?

State taxation

Desperate for Tax Revenues

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