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The State Fiscal Crisis: Where It Came From, How to Solve It


TAX ANALYSTS

THE STATE FISCAL CRISIS:
WHERE IT CAME FROM
HOW TO SOLVE IT

Washington, D.C.

Friday, October 30, 2009


PARTICIPANTS:

Moderator:

CHRISTOPHER BERGIN
President and Publisher, Tax Analysts

Speakers:

SCOTT PATTISON
Executive Director, National Association of State Budget
Officers

NICHOLAS JOHNSON
Director, State Fiscal Project, Center on Budget and Policy
Priorities

JOSEPH HENCHMAN
Tax Counsel and Director of State Projects, Tax Foundation

DOUG LINDHOLM
President and Executive Director, Council On State Taxation

* * * * *

PROCEEDINGS


MR. BERGIN: Good morning. How's everybody? Welcome to the latest in the Tax Analysts' series of discussions on key issues in tax policy and tax administration. The topic for today is the state of the states, which ain't pretty. We will discuss the current fiscal crisis in the states, where it came from, and how to solve it.
I'm Chris Bergin, the president of Tax Analysts, the nonprofit publisher of State Tax Notes, State Tax Today, Tax Notes, Tax Notes International, and many other fine print and online products on federal, state, and international taxation.

We also recently created tax.com, a Web site for the citizen taxpayer, which is informative and quite fun. I invite all of you to check it out.

This is our seventh year of conducting discussions on tax policy. If you are new to our discussions, let me say it's great to have you here.

Let me also just take a moment to explain our process today. I will open things up with some brief remarks to introduce our topic. I will then introduce our distinguished panel of speakers. Each of them will address aspects of our topic. After that, we will open up the discussion to all of you, and we encourage all of you to participate. Whether you are seated at the table or away from it, just wave and I'll find you. We are streaming audio of this event on our Web site, and obviously we are being televised as well, and we will post both the audiocast and a transcript there. For media purposes, we are on the record, so when I recognize you, please tell us who you are. Even if I know you, please state your name. Also, please speak into a microphone. For those at the table, I would recommend that you pull a microphone close to you when speaking, and for those of you away from the table, we have hand-held mikes that we will quickly get to you. I will moderate the discussion, and we will end by 11.

Now, onto our topic. In the interest of full disclosure, I must confess I'm a federal guy, which means I spend most of my time focused on federal tax policy. But I'm very interested in state tax policy. In fact, over the last several months, I've been fascinated with some of the measures that the states are considering to address their budget problems. I also find some of the proposals pretty amusing. Here are just a few examples.

The New York Times reported this Wednesday that in California the governor is open to a robust debate on a proposal lawmakers are considering that would legalize marijuana and then tax the heck out of it. While not supporting the idea, Governor Schwarzenegger has been fascinated with it for some time now.

In Oregon, lawmakers have also been interested for some time in taxing the heck and a half out of medical marijuana. In Georgia, lawmakers called a $5 fee that they wanted to charge customers at exotic dancer bars a pole tax -- p-o-l-e -- and you all ought to be ashamed of yourselves for knowing that.

Nevada lawmakers considered taxing the working girls at the infamous Bunny Ranch and other legal bordellos.

In Pennsylvania, lawmakers actually extended the sales tax to cultural performances venues, including museums and even zoos. They call it the ticket tax.

The city of Providence, Rhode Island -- and anybody who has a child in college will love this one -- wanted to charge the private colleges there -- most notably, Brown -- a student impact fee of $150 per student per semester.

Wisconsin lawmakers had the temerity to consider an increase in the beer tax, and the citizens basically threatened to burn Milwaukee to the ground.

Maine, Maryland, and the fiscal disaster known as Michigan have joined the fiscal disaster known as California in shutting down state offices a day at a time, and in my home state of Virginia you can drive by highway rest stops that are boarded up and wonder where the truckers sleep -- not behind the wheel I hope. And on top of all of this, the stimulus money that states have been relying on as their tax revenues dwindle is about to dry up.

As I said, it ain't pretty out there. So, let me turn to this wonderful panel that we have here today to identify the problems and, more importantly, to propose solutions. I will introduce them in the order in which they will speak.

Scott Pattison is the executive director of the National Association of State Budget Officers.

Nick Johnson is director of the State Fiscal Project at the Center on Budget and Policy Priorities.

Joseph Henchman is tax counsel and director of State Projects at the Tax Foundation.

Douglas Lindholm is president and executive director of the Council On State Taxation.

Scott, would you get us started, please.

MR. PATTISON: Certainly. Thanks, Chris, and I really appreciate Tax Analysts doing this today, because I must confess as a state person there are days when we feel like the stepchild not getting the attention that we deserve, and so it's nice to discuss these important issues.

I do have a personal note. I wanted to apologize ahead of time. I have to run out just a few minutes early for an urgent matter, but I didn't want anyone to think I was walking out in protest or anything like that, so -- so, it's just an urgent meeting.

But I want to give you just a quick overview of some of the data to give you a snapshot of what we're talking about at the state level to give you some context. I think a lot of people in this room probably are aware of how bad things are at the state level. But I want to also emphasize something that's so important that I think we all know but just needs to be underscored despite the fact that it's a well-known fact, and that is, states have to balance. They have to balance their budgets. It's a zero-sum game. It is so different than the federal government, and no matter how many times I meet with and talk with federal officials, I'm not sure that it's always as ingrained with them, because they have to understand we do not control our currency, we do not control interest rates, and we have to balance our budgets.

There are some exceptions to the use of debt, obviously, at the state level, particularly for capital. But I really want to emphasize it is a zero-sum game, so every dollar that has to be spent one place is a dollar less for another place. And of course you can try to raise revenue, but there are a lot of issues associated with that, too.

Now, let me just make a couple of comments, as I mentioned, to give you a feel for the situation and kind of give you a context. I think the most interesting thing is we've been collecting some fairly significant amounts of data from the states for decades now, and this downturn has shown us the absolute worst situation that we've ever seen in the states, at least since the '70s. Now -- since we've been collecting -- so, we have to assume this is indeed for the states the worst economic downturn situation they've faced since the great depression of the '30s.

One statistic I think is helpful is that year-over-year spending at the state level has been 6 percent for years. Again, that's an average over many years. It's now below the line. It's negative 5 percent, and it is negative for both this fiscal year 2010 and the prior fiscal year 2009, and I would expect it to be negative in 2011. That's the first time you've had two consecutive years of real declines in state spending. The only other time it happened was 1982. And, again, if we have three years, it'll be an unbelievable record.

Another good kind of data point or indicator of the health of the states is that we have a record number of states in the last fiscal year 2009 that cut their budgets after passage of the budget. You had 42 states go back and cut. The previous record was 37, just past -- that was FY 2002 -- that was just past the 9/11 downturn.

There are many other indicators that will show you how bad the fiscal state of the states is, but I'm not going to go over all those. I'll just give one, though, which I think is rather scary, and Chris mentioned -- Michigan -- and I just want to mention that unfortunately in the state of Michigan they are basically at their levels of spending that they were in 1997, and depending on different measures, you could even go back further. There are a lot of states in that vote, that they're not even at their '07 or '08 levels, and you can imagine how bad the situation is.

Now, I've used spending as a kind of data point, but it is a proxy for revenue, too. Obviously, revenue and spending kind of go hand-and-hand there, and it shows how bad things are.

Just a couple of other comments. Rainy day funds and balances have declined significantly. That's no surprise. There are only about 3 percent right now in the aggregate of general fund totals, but what's scary about that is 50 percent of the rainy day fund aggregate numbers in this country are just two states -- Texas and Alaska. If you take those out, we're down to less than 2 percent, which really shows that the reserves and rainy day funds are close to zero and drained in almost every state.

The other thing I want to mention is that there's a significant lag -- and there's a lot of data to show this, and I could go over, certainly, a lot of this with you but I won't, because I think you'll believe me in the sense that it takes a long time, sometimes years, sometimes months if you're lucky, between recovery and revenue improvement at the state level. We are seeing, for example, headlines that the recession is probably over. We're seeing some good gross domestic product numbers. We do not expect at the state level to see an improvement in revenue until possibly sometime next calendar year. It may even be into our fiscal year 2011. And there are a lot of reasons for this. A lot of it is, it takes a long time for us to recover in terms of both on the sales tax side, certainly the personal income tax side, and withholding, because unemployment has to improve before we see an improvement on the withholding taxes, for a lot of states. It's heavily based on capital gains and investment income, and it takes a long time for us at the state level to see a recovery of that revenue. So, that's kind of the bad news.

The interesting thing is, though, I think states have managed pretty well, at least by the analysis of the various bond rating agencies, because, frankly, bond ratings have stayed rather stable, and what they look at is how states have managed, not how bad their fiscal situation is. So, I think that's a positive. There are two states that did have bond ratings lowered. That was California and Illinois. But most of them have stayed stable. There were some on negative watch, but that's kind of a little bright spot that states have really managed the best they can in this very, very difficult downturn.

Now, a couple of other comments I want to make. One is that Chris alluded to -- we're very, very concerned because the stimulus has been beneficial. For every dollar we have received in stimulus funds, it's less of a dollar in many cases that we had to either cut or try to raise in revenue. So, whatever one thinks of the actual economic effects, it's really had an important impact at the state level. The problem is that ends, and we at the state level -- if you talk to a state fiscal officer, a governor, a legislator -- when you say the cliff they know exactly right now what you're talking about. They know you're talking about the Recovery Act funds ending in about a year depending on which fund you're talking about. So, that's kind of a significant concern that we're worried about at the state level.

And the other thing that I think is important to be aware of is if you break down state spending and you look at basically the various areas where states spend money, only about 45 percent is general fund. That's really their non-earmarked discretionary funds, and if you break that out, 63 percent of those funds are just Medicaid and education. So, states don't like to cut or they can't cut too much out of K-through-12 and Medicaid. It's a huge majority of their general funds, which is less than half of their total state budgets. When you think about those figures, you realize the incredible decline and lack of discretion that the states have to deal with a downturn.

So, let me finish up with a couple of comments about the kind of situation we've been talking about, that we shouldn't be just totally pessimistic and negative -- and I certainly want to be -- but we want to look at the solutions, and one of the solutions, I think, is that states have to step back and start to be as strategic as possible. Things just can't happen. We can't look back 10 years and say, well, why is public higher education seeing a significantly declining percentage of state money? We really want to make sure that states step back and say that was intentional, that we decided at the state level to focus on certain areas such as K through 12 and unfortunately other areas aren't getting the same amount of attention.

I think the other thing that a lot of state folks feel is going to happen is that all those kind of small areas of the budget will see a significant decline in attention and support. Again, it's a zero-sum game, and I've used the example in many presentations in parks and recreation.

And it's kind of funny. Jackie and I were just talking about that earlier today -- that you're already seeing -- to me it's the tip of the iceberg of what you're seeing. You're seeing parks and recreation become an off-budget type of activity, and I think what you're going to see over the next five to ten years is a either incremental or strategic decision to focus significantly on those big areas of the budget. It's really just corrections -- K through 12, Medicaid. And I think one of the areas that brings up the most interesting amount of debate is what do you do with public higher education?

I think every fiscal officer would say that it's extremely important, but when they look at the zero-sum game of where you spend money, it's a very difficult decision on how to deal with that big area of the budget. But there are many others, too. But it's hard to say. If you can't really cut Medicaid, if you're putting more into that and healthcare, you certainly aren't cutting K-through-12. It's hard to do much with things like corrections even if you make some policy changes to let nonviolent offenders out. So, there's not a lot of play in the zero-sum game and the limited discretion you have at the state level.

The final comment I'll make is addressed to the federal folks. It is so critical for the federal government to realize that the decisions they make have an increasingly significant impact at the state level. If we are expected to put more into Medicaid, that may be a good thing and involve more coverage of individuals. But again, we have to balance our budget, and that becomes a priority. There is less money for other areas of the budget, such as public higher ed, and that is a very important debate that needs to take place. There needs to be the understanding that the decisions made at the federal level are going to significantly impact, over the next few years and beyond, the priorities of the spending of the states. And, again, we at the state level can't afford everything. Something's got to give, and hopefully there's a strategic analysis and decision making about what gives and what gets the money.

Thank you very much.

MR. BERGIN: Great point. Thank you, Scott. Nick?

MR. JOHNSON: Thanks, Chris, and thanks to all of you. I really appreciate Tax Analysts for having this forum and for all the work that you do. State Tax Notes, I know, for many of us is one of our best resources for knowing what's going on around the country, and it's just an invaluable resource and really says a lot about your commitment to documenting and promoting clear thinking about state tax policy.

I want to talk briefly about what I think caused and didn't cause the current state we're in, picking up on some of the things that Scott said, talk a little bit about what states can and should do going forward; and then I also, like Scott, want to say a few words about the role of the federal government.

You know, it is, in fact a zero-sum game. There are a limited number of options that states can do to bring their budgets into balance. By the same token, that means there's really only a few things that we can look at to say what caused this state we're in.

So, obviously, the recession has pushed down wages, put a lot of people out of work, has caused a significant decline in personal consumption. This has a sharp negative effect on income taxes, on sales taxes -- which are the two main sources of state revenue. This is the short-term contributor to the gap in state budgets, the gap between spending obligations and available revenues that 48 out of 50 states have faced.

But if we step back a second, I've heard other possible explanations for well, what did states do to make it worse on themselves going into this crisis? I want to sort of address, in turn, three ideas that a lot of people put out about well, what might be the longer-term contributors to the current state fiscal crisis.

One is insufficient reserves. Should states have been expected to build up their rainy day funds, their reserves, to a greater extent than they did sufficient to get through this recession? And I'm of two minds on this. On the one hand, you know, yes, clearly, states did not put enough into their reserve funds, did not put as much as we would have liked. On the other hand, the scale of this recession was not foreseeable, and the scope of it was beyond what we could possibly expect states to have socked away in any kind of realistic way. I mean, for each of the years in this crisis, the current budget gaps for the current year equal approximately 26 percent of state general funds. For next year, we're probably looking at about the same proportion. That means that states would have had to sock away the equivalent of a half of a full year's worth of spending in the general fund to make it through this downturn. That's not realistic, and the reality is that states put more money into the reserve funds going into this recession than they ever had before. So, as we look beyond the recession, one of the things to think about is how do we help states put more money into the reserves, recognizing that a major recession like this is never going to be something the states can cover themselves from rainy day funds and the like.

Second question, is did states spend their way into this crisis? Certainly states have done some more things in the last 10, 12 years that have cost money. States cover more children in their health insurance programs responding to the lack of health insurance available for children in the employer-provided market. States have done some more things in education -- reducing class sizes, increasing teacher pay to draw more high-quality teachers into the workforce. But overall, when you look at the data, states are spending no more -- even before the current recession -- than they have been over the last 25 years or so, and in fact state spending as a share of the economy was less in 2006/2007 in the peak of the last expansion than it was in the peak of the previous expansion. So, state spending -- actually, in the last recovery, state spending never fully got back to its pre-2000 2001 levels.

And a third possibility is well, maybe states cut taxes too much. Maybe states went to war on their own revenue bases. And you know, it is true, particularly during the '94-2001 period, states enacted an awful lot of tax cuts, tax cuts that took, nationwide, about 8.2 percent out of their annual revenue stream. And, you know, there's a real temptation to draw a clear connection between these excessive tax cuts and the problems states are facing now.

The Kansas revenue commissioner gave a speech estimating that the tax cuts that his state enacted were costing the -- the tax cuts that his state had enacted since about 1995 -- had cost the state about a billion dollars a year, which, interestingly, is the exact same size as the current shortfall.

And it's certainly the case that it is reasonable for states to look at some of those tax measures that have been enacted over the last 10, 12 years and think about whether they continue to be affordable going forward.

But I think more than anything else, far more than anything else, it is the scale of the national recession that has put states in their current situation. A 17 percent revenue drop, quarter after quarter, such as what states faced in the second quarter of this year, really cannot be explained by state policy actions.

And if you look at which states are in the most trouble, the fiscal problems started in the states that were having the biggest -- where the housing foreclosure crisis was the worst, where unemployment was shooting up the fastest.

Now, the fiscal crisis, like the recession stress, spread to all the states. And even as we recover, there will be a lag in the ability of states to respond in terms of having additional revenue to start to close those gaps. The lag that Scott talked about is of real concern. So, this week's news that the economy may be able to recover is not entirely -- does not really change the story about what we're looking at in terms of ongoing fiscal problems at the state level.

So, what should states do going forward? Again, limited options. Do they cut spending? Do they raise revenues? Now that reserves are essentially gone, those are the two big challenges that states face. And make no mistake about it. The next fiscal year is going to be every bit as challenging as the current fiscal year. The current fiscal year shortfalls hit about $180 billion across all the states. We're looking probably at about the same level for fiscal year 2011, which is the fiscal year the first states begin next July 1st.

The spending cuts have already happened. That's going on everywhere. States have reduced the number of people -- states and local governments have reduced the number of people on their payrolls by a little over 200,000 from last September to this September.

Just about every area of state services has been cut. A couple dozen states have cut back on healthcare programs. A couple dozen states have cut services for seniors and people with disabilities. K-through-12 cuts have been enacted in about half the states. Higher ed has probably been cut in at least two-third states. And those states that haven't actually laid off workers are, as Chris said, furloughing workers, giving them unpaid days off, cutting back on wages and benefits and so on. Over 40 states have made constant -- have hit their workforces. So, the spending cuts are happening, and unfortunately they're hitting vulnerable families.

The cuts that I talked about are not just cuts that are a reduction in dollar amounts in a budget line item somewhere; they're actually scale-backs in services and the amount of services that family look to during times of need. And, believe me, these are times of need; these are times when more families are turning to Medicaid and to food stamp programs, turning to local shelters and food pantries as they face increasing poverty and deprivation. So, it's a tough year for families, and it's a tough year for states, and that makes it all the worse, because states and local governments don't have the resources to meet the needs of families to the extent that we would like them to.

The other option states have, and one that I think they're increasingly turning to is on the tax side, and since this is a Tax Analysts forum I want to say a couple words about opportunities for states to balance a part of their budget problems on the revenue side. I don't think anyone's talking about wiping away the entire scale of states' shortfall with tax measures. What we're talking about, I think, is a balanced approach, a mix of spending cuts, tax increases, and other measures to the extent that states still have reserve funds.

And while some of the tax measures that states enact undoubtedly will be sort of short-term, temporary measures in keeping with the fact that this is, we hope, a short-term and temporary crisis, it's also reasonable to hope that states will use this opportunity to make some of the changes in state tax systems that I think a lot of people have identified as flaws in these tax systems for a long time and that will actually make the tax systems broader, fairer, and more appropriate for a 21st-century economy.

Let me just mention four of those kinds of reforms.

One is broadening state sales tax bases. Sales tax bases were -- most sales taxes were designed in the 1930s, 1950s for a goods-oriented manufacturing economy. Most state sales taxes do not tax a large share of services. I think states have a real opportunity to look -- to raise more revenue by broadening their sales tax bases, which would not only help them with the current budget crisis but would, going forward, make the sales tax basis a better reflection of the actual consumption that's going on in their states.

Second is to make personal income taxes more progressive. Most state income taxes are flat or virtually flat. I think there's -- at a time where over the last couple of decades, and it may well continue into the future, when most of the income growth has been at the top of the income scale. This is, again, an opportunity to raise more revenue but also make a change that's probably badly needed in state tax systems.

Changes in the corporate income tax to scale back some of the exemptions and deductions and tax credits that have gotten a little bit out of control in corporate taxation, combined reporting -- an important reform that about half the states have now enacted that enables states to look at a corporation's -- all the corporations' operations nationwide when it's computing its state income tax.

And, finally, decoupling from some of the things that the federal government has done in the federal corporate income tax. Most states piggyback their own income tax codes on the federal income tax code, so when the federal government narrows the taxable income base, a lot of states, either by convention or automatically, conform to that change as well. A great example is the domestic production deduction. That's cost states a lot of money that at this point they cannot afford, and states can easily consider requiring taxpayers to add that back into their income for tax purposes.

Just a couple of words about the role of the federal government in this downturn. The aid to states came in two main forms in the stimulus package. One was an enhanced Medicaid-matching rate, so it enhanced the Federal Medical Assistance Percentage. The other was the State Fiscal Stabilization Fund, which was a new program set up. It runs through the Department of Education, but it helps states balance their budgets more broadly, totaling about $135 billion - 140 billion over two years. And, as a number of people have observed, this is really -- at the current time really offsetting a lot of the loss of revenues that states have experienced. So, as the revenues have gone down, the federal aid has picked up to alleviate some of the pressures on state budgets and a lot of the need for both spending cuts and tax increases.

In 2010 we estimate that of the $180 billion shortfall, about 70 billion of that is being offset by state fiscal relief. The challenge, as Scott said, is that that is coming to an end, and while officially the end is a number of months in the future, you can be sure that governors and agencies, and soon legislators when they come into session in just a couple of months, are going to have to start taking that into account as they enact spending plans for the year beginning in July. The remaining state fiscal relief -- the FMAP enhancement ends December 2010; the State Fiscal Stabilization Fund doesn't have -- has to be spent over a longer period of time but most states by now have drawn down most of the funds or are planning to draw it down in the course of this year. So, there will not be a whole lot of that left to next year either.

The result is that for 2011 states, if state budget shortfalls are to be expected are again in the 180 billion range, this time states will only have maybe 30 billion to offset that gap, and that means an increased level of spending cuts and tax increases. This is bad if you're concerned about tax increases. It's very bad if you're concerned about spending cuts in healthcare and education and human services and the environment and all the other things that states do. It's also bad if you're concerned about the state of the economy and the strength of the economic recovery. It'll have a direct -- all the spending cuts and increases that states are going to have to enact in response to these budget gaps will have a direct and negative effect on aggregate demand starting next July when the new fiscal year begins, which is an exact time when I think the economy will, hopefully, be in a recovery, but it is likely to be a somewhat fragile recovery, and the strength of that recovery could be significantly undermined as this federal aid ends.

The opportunity that exists, I think, is for the federal government to extend the fiscal relief just long enough to create a bridge to the time in the hopefully not too distant future when revenues will truly start to recover and states can again begin to manage on their own.

So, again, thanks so much for the opportunity to speak with you all, and I'm really looking forward to this conversation.

MR. BERGIN: Thank you, Nick. Joe?

MR. HENCHMAN: Thank you. First I want to apologize for my voice. I'm just getting over being sick, so you'll have to bear with me. I also want to thank again, along with everyone else, Tax Analysts for putting this on and for all of you for being here. It's certainly a big issue right now. We're always pleased to see a lot of public discussion about it going on. We at the Tax Foundation are happy subscribers of many Tax Analysts publications, and they are invaluable resources.

I want to start out by echoing three things that Scott and Nick have already said, and I'm going to say them again just to reiterate. They're important in their areas of agreement between us.

First is that state budgets recover generally. Historically they recover after the general economical recovery, that lag that Scott and Nick talked about. So, even if the economy is recovering right now, we're not going to see that recovery in state budgets for some time, so the state budget crisis that we are currently going through we will continue to go through it for the foreseeable future.

The second thing is that because every state has to either constitutionally or statutorily balance its budget, the options are that they must raise revenue, cut spending, or some combination. States can't print money, as Scott said, California IOUs notwithstanding, and so those are the options they have to face. And I think this was worth repeating. I mean, it sounds like common sense, but so many politicians, so many state legislatures try their hardest to find some other option than that, other than raising revenue, cutting spending, or some combination, and we've seen any number of sort of absurd examples. Chris mentioned a few of them in his opening of some of the ways, and I'm sure Doug from COST will be going over some other ways that states are trying to find other options to solve their budget shortfalls. But ultimately, that what it comes down to, and ultimately those are the decisions that need to be made.

The third point that I think bears reiterating is that the stimulus money bought time, and that's really all it bought, and it's running out. It was a finite pot of money, and it basically tided over the states. Some states took that opportunity to use the money for one-time purposes, put their fiscal house in order and move ahead; some states just put it right in their budget and kicked the can down the road. Regardless of what they did with it, it's running out and states are going to be back facing the hard decisions again.

So, we're talking about causes, and we're talking about what states should do. A point I would want to make is that not all state tax revenue is created equal. Different states are of course in different stages of state fiscal crisis. California, of course, is the poster child for everything that's gone wrong. I'm originally from California, so I'm not terribly proud of it.

The really first time I really remember a state budget issue, reading in the newspaper in California, was back in 2000 when there was extended debate about what to do with the enormous state budget surplus -- multi-billions of dollars generated from capital gains revenues from the dot-com boom. I was in college at the time, so it was sort of a firsthand experience out of college in Silicon Valley in the Bay Area, and since then, of course, California has probably not balanced its budget legitimately once since then.

And so the question is, why are states like California different from other states? Why is it so much worse there than for others?

A lot of it has to do with volatile revenue sources. Some revenue sources are exaggerated by the boom-bust cycle more than other revenue sources. The research seems to indicate that some revenue sources like taxes on high-income earners, taxes on corporate profits, taxes on capital gains or revenues -- these tend to soar very highly in boom times and then plummet to almost nothing in bust times, and we've seen that reflected in state budgets by revenue sources in the current situation. Those states that depended very heavily on taxes on high-income earners, taxes on corporate profits, taxes on capital gains -- they got a whole lot of revenue in the boom times, and as states want to do, they spent it. And, unfortunately, a lot of them spent it on -- not on one-time things but, rather, on ratcheting up their base of ongoing year-to-year operations. So now when those revenue sources have disappeared or plummeted, we're left with this overhang, and that's where these budget shortfalls have come from.

I certainly won't disagree with Nick that the recession is no mere coincidence in the severity of this, but I think we have to recognize that revenue volatility and dependence on volatile revenue sources is a major contributing factor and something I think that even in California they'd recognize with the current reform commission. They're debating about the current -- the appropriate approach for dealing with volatile revenue sources, but everyone seems to agree that it's a big contributing factor.

So, with the boom-bust cycle, it's a question of what do we do going forward, and of course there's a lot of solutions out there, so I'm just going to talk about a few of the tax trends we've seen in state budgets this year so far.

One note on the stimulus, which I don't think was brought up that much, was the stimulus had a lot of strings attached to it. I mean, a lot of people kind of snickered at [Texas] Governor [Rick] Perry and [South Carolina] Governor [Mark] Sanford for taking -- not taking the stimulus money, but the strings attached to it were quite substantial, sort of cordoning off whole areas of state budgets from reductions -- probably one of the largest moves of state budgeting power from state capitals to Washington we've seen in decades as part of the stimulus package. And that sort of precluded a lot of cuts from happening to some core governmental services, which might need some reevaluation.

I mean, in times of recession, it is true there is increased demand for some governmental services -- unemployment insurance, Medicaid, shelters, some of the things Nick mentioned. But that also means that it's a time to start reevaluating some other things the government is spending money on that maybe it's not a priority for right now. I mean, I can come up with a few absurd examples. There's longer ones in the report that we have out in front. But I think it was Tax Analysts that recently did look at the Michigan job creation program. There's also the Michigan film tax credits. They have a program giving iPods to school children. I mean, there's a lot of things that maybe it sounded -- I don't know if it would have been a good idea even in good times, but it's certainly not -- it's something we could probably do without in bad times right now.

There are some other trends going on right now. Millionaire's taxes, half-millionaire taxes, quarter-millionaire's taxes are things that we're seeing at the state level. These are a bad idea, because they essentially create a short-term gain for long-term harm. It is true that if you impose one of these high-income tax surcharges on high-income earners, you know, they're usually for a temporary period to -- if you impose them, you'll likely see a revenue increase, but what you see is your long-term ability to generate income in the state drop off, because people see that as a sign that that's how you view people that create jobs, the entrepreneurs in your state, so people are less likely to move into your state, people are less likely to create jobs in your state. That's the message that that sends.

We unfortunately see a lot of states doing more and more job creation credits and incentive programs. These usually don't work. A lot of business location decisions are made for reasons other than a giveaway package negotiated. It's usually an added plus that a business will be all too happy to take, but it's not one that usually drives decisions. It just sort of uses up a lot of politicians' and bureaucrats' time, as well as taxpayer money in order to pursue these programs.

And recently in North Carolina there was a package, a sort of long bitter argument at the state level over -- to get Dell there. It went all the way up to the state Supreme Court. We were working with a group there on fighting this incentive package. But it made its way through. The politicians ushered it through. Everybody was glad-handing and shaking hands, and earlier this month Dell announced that they're closing the plant. I certainly can't be celebratory in a moment like that, because there are real people that are losing their jobs, and it's going to be very hard for their economy there.

But ultimately that just shows the futility of this approach of economic development. The better approach is to sort of lay out a welcome mat for all businesses, not picking and choosing winners and losers to bestow on certain favors. And if your state's tax code and your state's economy is so bad that you basically have to bribe people to move into the state to create jobs, that's a sign that that's what you need to fix. You need to fix your state's tax code and your economy, not just create exemptions to it for particular individuals.

Another trend we're seeing is these Amazon-style -- so-called Amazon taxes. Amazon.com itself really dislikes having a tax named after them, but that's the name, unfortunately, that stuck. We've seen these now in North Carolina, Rhode Island, and New York, where it's currently under constitutional challenge. It went through the trial-level court in New York, which upheld it, and it's now on appeal to the Court of Appeals in New York, and I think it was being argued yesterday or today or sometime, but the trial-level court upheld it, and fortunately for those who watch Law and Order, like I do, you know that the trial-level court in New York is called the Supreme Court of New York. So, we saw a lot of news headlines that said Supreme Court of [the state of] New York upholds Amazon law, and a lot of state legislators read that and they took it to view that the highest court and the state court has sort of blessed this tax law, which certainly isn't the case.

This is just another example of states continuing to push to tax beyond their borders, to reach out and grab tax revenue from other states. I mean, ultimately it's the residents of a state that get the benefit of public services, and they're the ones that should be paying for those public services. To the extent that states try to export their tax burden to other states and to companies, out-of-state companies and so forth, it's just a way of allowing their state residents to buy more government than they're willing to pay for, and that's sets up problems down the line when that revenue source runs out.

We're seeing a lot of excise tax proposals not only on the good old tobacco and alcohol -- except beer, never beer -- but also now new categories -- plastic bags, and soda and fatty foods. We're seeing a lot of those proposals. Historically, excise taxes are taxes on things that the majority finds distasteful for some reason. They don't usually tend to be big money raisers, but you can have a whole multitude of them and they can raise up certain amounts of money, and usually it's entirely random what they choose. A lot of economists like to point to excise taxes as being a way of paying for government externalities, but I can assure you that no government official, no legislator ever looks at it in terms of that question. It's just a question of how much money will it raise.

And then the last point I would want to raise, at the risk of -- the last trend I want to refer to at the risk of stepping on Doug's toes -- is tax amnesties, which we're seeing in quite a few states. These raise one-time amounts of money -- cash in hand for states -- which is what they're after right now. They're problematic, because they're essentially an exemption from the state's tax code to people that have broken it, and it sends the signal that, hey, you know, next time around you don't really need to pay anything because we'll set aside a time in which you can just cough it up and we'll call it even. There's also a lot of penalties associated with them. So, if you miss the tax amnesty and then you're caught later on, you have to pay not only the back taxes plus the interest plus the fine but the new post-amnesty penalty for not having taken advantage of the amnesty.

I think Virginia had one of those previously, but they're now having another amnesty, so in this amnesty they're waiving the previous amnesty penalty, but if you miss this one, you will have to pay another amnesty penalty on top of the previous one. It gets kind of absurd, but it shows the problem associated with not just having a simple, neutral, transparent tax system and instead having to constantly be giving exemptions and waivers and, you know, one-person-only deals for it.

So in some we see a lot of big problems out there. Unfortunately, there's not a lot of effort going on to tackle some of these big issues. There are a lot of possibilities out there -- possibility for fundamental tax form, pension reform. I mean, probably one of the biggest drains on state finances right now is bloated, defined benefit government pensions, which are out of control. A lot of them were indexed to grow at almost absurd levels -- 8, 9, 10, 11 percent a year. A lot of them crashed pretty hard when the stock market dropped, and there, I mean, state budgets are expecting the tax revenue to backfill that. There's a lot of opportunities in spending restraints. There's a few on the ballot this year. Corrections and school choice and so forth. But unfortunately, these are not the things that are being debated yet, and state legislators, and we hope that will be, because that's where salvation will lie in some of these spending and tax reform ideas.

Thank you.

MR. BERGIN: Thanks, Joe. Doug?

MR. LINDHOLM: Thank you, Chris. I, too, want to thank Tax Analysts for the opportunity to be here. I have been practicing in state local tax for nearly 20 years, and I can remember when State Tax Notes was not here, and I think we still have a copy of the initial issue of State Tax Notes, and I want to give a shout-out to Doug Sheppard and Carol Douglas. They really do a fine job with that publication, and it has become truly one of the publications that those of us in state tax must read every week. And actually, I'm pleased to see -- what was it, about a year ago? -- you guys started putting color pictures on a tax publication. It's a little risqué, isn't it?

Last week we had our annual meeting -- our COST annual meeting -- and for those of you not familiar with COST, we represent about 600 of the nation's largest corporations. This is our 40th year in existence. We reformed in 1969 largely in response to the formation of the Multistate Tax Commission, and I'll get a little bit more into that relationship in a bit, but our mission is to ensure equitable and nondiscriminatory state taxation of multi-state companies. We're not concerned with level of tax. And that's an important distinction. Level of tax is an issue that we feel legislators should decide. But we are very strong advocates for improved administration and for making sure that there's no double taxation and that discrimination is not prevalent in state statutes.

So we advocate before state legislatures, before Congress, obviously before the courts; and we're very involved with groups that operate on the multi-state stage, such as the streamline sales tax project; the MTC and their issues, their efforts to seek uniformity; groups like the Uniform Law Commission, which is the group that sought recently to revise UDITPA; and, of course, the Federation of Tax Administrators.

At our annual meeting last week -- one of the things we do that is perhaps the most interesting feature of that meeting is that we bring the tax person from every state chamber of commerce together and we put them on panels and have them talk about their front-line experiences in that state. Now, these are the guys that are in the capitols of those states every day on a daily basis, and I have to say the prognosis was very bleak, and hearing from Scott and Nick and Joe you get a sense of what they were saying. But what struck me was that there was a sense that they're waiting for the other shoe to drop, that as bad as 2010 is, or 2010 will be this upcoming, 2011 may be even worse.

So, as stimulus funds dry up, states will really be facing some hard choices. And I think the fiscal crisis is so bad that there's a consensus that it won't be closed without severe spending cuts, tax increases, and a lot of what I call gimmickry, and you heard Chris give a recitation we're seeing already, but I'll talk a little bit more about that later.

But the bad news is that states will probably have to resort to all three of those.

The good news is that it's so bad that it may make it easier for policymakers to confront hard choices. When the public realizes how bad it is, then policymakers can step back and say we've got to make some significant changes.

I want to touch on each of those -- spending side, tax increases, and then gimmickry -- very quickly.

Spending side is not my expertise, but one thing caught my eye a while back. The approximate cause of this crisis is obviously the recession. But I think there are underlying factors, and as long as I've been in this business watching state budgets, there's been a sense that states are operating on a structural deficit, and one example of that -- there was an article in USA Today that quoted the Bureau of Labor Statistics about average salaries, cost and -- or salaries and benefits of public-sector versus private-sector wages. And it really -- it caught me by surprise, but the average hourly rate for a private-sector worker is $26.09 an hour. The average hourly rate for a public-sector worker is $39.50 an hour. Now, that includes the value of salary and benefits. And reflecting on this, you can see how this happens. I mean, those of us that work for state governments or have worked for state government realize that you take a state government job not for the initial salary; you take a lower salary, you work for 20 years, you retire with a full pension and full benefits. I mean, it's a great opportunity if you can stick out the 20 years. But what's happened is that those are commitments that the states are now locked into that they cannot get out of.

The private sector, in response to competitiveness concerns, has cut back on pensions, has eliminated defined benefit plans, is essentially -- now it's defined contribution, and has asked their workers to take on a greater share of medical benefits. That's not happening on the state side, and that's one of those structural -- one of those drivers of the structural deficit that I see that would make -- it would be a difficult choice for lawmakers to make, but that may have to happen during this recession.

Talking about tax increases, I think that these may be inevitable but that begs the question of where do you raise the taxes? On consumers? That's not going to make anybody happy. On businesses? Businesses are struggling to survive, even to a greater extent in this recession. Tax increases may put some of them under, and it certainly would prolong any pain for consumers, workers and might prolong the recession itself.

Let me -- I'll get back to some of the tax issues I want to touch on a little bit later, but Chris at the outset talked about some of the gimmickry, and one that really struck me that I just learned last week is that apparently Arizona, which has the greatest deficit of all 50 states, has now sold its capitol building and is leasing it back over a period of years, which obviously is just one way to avoid the balanced budget requirement, but it strikes me as a bit odd.

Some of these gimmicks -- essentially what they're doing is they're deferring expenses like selling the capitol building. They're accelerating revenues and collections, and one example of that is California's 20 percent underpayment penalty, which really visited some hardships on companies trying to estimate just what that future liability may be when in many cases there's absolutely no way to predict.

The one that really resonates with me is when states try to close loopholes, and I've heard various items characterized as loopholes. Combined reporting is classified as a loophole or lack of combined reporting; and then operating losses, which clearly try to account for the difference between the business cycle and the reporting cycle, are classified as loopholes. North Carolina reported that sale-for-resale exemption was a loophole that ought to be looked at.

Any time a state seeks to export their tax burden, I think that is a gimmick that I think we ought to be taking a careful look at.

The reason I talk about these gimmicks is that the more these are used, the greater the burden of our sub-national tax system becomes with respect to a U.S. industry operating on a global basis. And it begs the question of how high can these taxes go and is there any way to address this issue, without raising taxes by making state taxes or our sub-national tax system, to include state and local, more efficient -- more efficiently operated? And that begs the question of uniformity in state taxes.

And let me talk about that for three to five minutes. I think a history lesson here is very informative. There have been a number of efforts to try and seek uniformity in state taxes as a way to minimize compliance burdens primarily and to make sure the free flow of commerce that is required for our national common market.

Back in 1959 and '60, Congress passed Public Law 86-272, and that, as many of you know, restricts states' ability to tax certain companies with a certain presence. Now, as part of that bill, a commission called the Willis Commission was formed to study what to do about state taxes, and for five years they took this charge very seriously. They traveled throughout the country. They held hearings in all aspects of the country, and they were primarily looking at the corporate income tax, how best to apportion the corporate income tax when you've got 50 states all operating under separate government.

After five years they released their report, and although there's a lot more, two items caught my eye. One of them was they recommended that states should apportion using a two-factor formula -- property and payroll -- and, secondly -- and this is probably most key here is that they recommended that the Treasury Department collect, administer, and then remit state taxes back to the states based on some indicia -- population.

MR. SHELDON COHEN [former IRS commissioner]: It was enacted in '68 and nobody bought it.

MR. LINDHOLM: Yeah. No, I agree. Now, I think that states were horrified at this suggestion, because obviously it created huge inroads on their sovereignty and thus they came back and said let's form the Multistate Tax Commission. We can address this issue ourselves. And two years later, in response to the MTC, a group of companies got together and formed COST, and initially there were efforts to work with the MTC to try and resolve this issue.

But in 1978 -- oh, actually, at that time states were operating under a perception that there was a constitutional obligation to have uniformity among their state systems, because otherwise they wouldn't buy that commerce clause. Well, in 1978 -- actually in '65 the Supreme Court shot down the District of Columbis when it sought to go to single sales factor. But in '78, the Mormon case came down out of Iowa and said that Iowa's single sales factor formula was okay, and the reasoning was that the court did not want to get involved in too much judicial lawmaking. They thought that Congress -- and this is key -- Congress should be the appropriate body to address these issues.

Well, after Mormon, sort of, the horse was out and the barn door was open, and states felt really no constraint with respect to uniformity of their tax systems, and as much of the -- despite the valiant efforts of the MTC, who puts together model legislation and regulations and then sends them out to the states for their adoption or their consideration, we're no closer to any type of uniform statute. In fact, we're farther away now than we were when the MTC was formed. And what's happening, with respect to apportionment, is that states are using the apportionment factor as an economic development tool.

Now, it's certainly understandable, because they -- you go to single sales factor and it benefits those companies in your state. It is a logical response to -- you know, it's a way to try and benefit. But it wreaks havoc on sort of the complexities that companies nationwide have to address when they're filing their tax obligations. Of course the difficulty is when you have an economic development statute that by its very nature seeks to differentiate. States want to differentiate from their neighboring states to get that advantage.

So, what we have now, in my mind, is a bit of a stalemate. There's an inherent tension between what's good for each state and what's good for the common market. State legislators and state tax administrators are elected and appointed to look after the parochial interests of their state, not necessarily the interests of -- the competitiveness interests of our national market and our national economy.

So, whose job is that? In my mind, it's Congress's job, but unfortunately -- and actually, you know, the Supreme Court feels the same way. Those of you who've read [the] Quill [decision] realize that the reason that they sort of punted on Quill was because they said Congress is the more appropriate body to deal with these issues. Well, the difficulty there is that the tax issues tend to be so complex that -- and I've spoken to legislators on the Hill about this -- their first reaction is to defer back to those self-same tax administrators and legislators who are looking after their own parochial interests. So, there's a real difficulty to get a tax person to pull back and look at what the impact of this complexity of our sub-national tax system is having on our global competitiveness, that is, the ability of our companies to deal with, you know, the European Union or the Pacific Rim that have a lot smaller burdens or a lot less compliance burdens with respect to their sub-national tax systems. So, what I would like to see is states partnering with the federal government a little more about addressing some of these issues, about coming up with some uniformity.

David Wildasin at the University of Kentucky has written a very interesting series of papers about when a federal preemption is needed in state taxation. And he concludes that it is certainly appropriate for the feds to intervene in certain areas. Coordination issues -- when states are having difficulty or are not achieving uniformity through a voluntary process, such as the MTCs or such as would have happened under the Uniform Law Commission's revision of the Uniform Division of Income for Tax Purposes Act. And when state laws have externalities, that is, when they have consequences beyond their borders, it is a time for the feds to step in.

Now, I think the states should -- I think part of the reason the MTC was formed was to forestall any further federal preemptive legislation on states. And so there's a bit of a knee-jerk reaction in my mind whenever there's federal legislation, and I think the states ought to look at this as an opportunity to come up with a win-win, to reduce the burdens on companies, to get some uniformity, to put in some common-sense solutions to state taxation that otherwise would not be possible with 50 states acting separately or on their own.

You know, I want to respond briefly to Nick's comments about sales taxes on services as, you know, I think he cited sales tax on services, combined reporting, and one or two others as things that ought to be changed. Well, sales tax on service is an interesting issue, because -- I would agree, there is no compelling policy reason why states should not tax consumer services.

The difficulty is that the money is in business services, and when you try and tax business services, there's a bit of a triple whammy. The first is that business services -- there's the pyramiding issue. You end up getting a tax on the tax, because that tax then ultimately goes into the final price of that product or service.

The second whammy is that a taxation of services -- business services -- tends to impact small businesses much greater than large businesses. Small businesses -- well, you know, you've got a tax on accounting and legal and data processing. Small businesses are the ones that outsource all of those. Large businesses have in-house capabilities for accounting legal and tend not to outsource as much as small businesses.

And, finally, the sourcing issues with respect to business services, as anybody from Florida or Massachusetts or Michigan can attest, are almost insurmountable. It is very difficult to determine where a service is actually performed and then to source it to that appropriate location, though there are valid policy reasons why states have tried to tax business services but have as yet been unsuccessful in doing so.

And, finally, combined reporting -- I think that there are better solutions than combined reporting. Combined reporting -- the difficulty that we have with it is that it is essentially a judicial doctrine. It is something that was handed down by the Supreme Court and is driven by very vague definitions -- functional integration, flow of value. As a result, it gives the opportunity for both state -- state auditors -- and for taxpayers to cherry-pick when and who is in the unitary group. It is an invitation to litigation, and it is litigation that does not transfer well from one taxpayer to another. In effect, every unitary determination is so tax-specific that it must be litigated in and of itself. So, I think there are other opportunities. An election for states or for companies to file in states based on their federal consolidated return, for example, that might get to the same issues that states are looking for. In addition, when states have already enacted add-back statutes, I think the effort to put combined reporting on top of that and then say that it's going to raise significant additional revenue is a bit misleading, but.

Chris, that's all I had. I'll turn it back over.

MR. BERGIN: Thank you, Doug. As I said, it ain't pretty out there, which is why we think this conference is so very important. I'm going to open it up to questions. Just to remind everybody, if you're in the audience we'll get a mike to you. If you're at the table, just grab a mike and bring it forward towards you.

I'm going to exercise prerogative here if you'll allow me and let the first question go to David Brunori of Tax Analysts.

MR. BRUNORI: Thank you, Chris. David Brunori, State Tax Notes. I actually had -- I have a lot of questions, but I have two brief questions, one for Doug and one for Nick. I'd like Nick to respond to Joe's assertion that higher marginal rates will result in economic harm to the states that adopt them, and I'd like to get your take on that and then perhaps Joe would like to respond; but I also would like to ask Doug if he agrees with the following statement: Without combined reporting, the state corporate income tax cannot work. It is almost impossible to effectively tax corporate income at the state level without combined reporting.

MR. BERGIN: Simple questions.

MR. BRUNORI: Just two very simple questions.

MR. JOHNSON: Thanks, David. So, California has a relatively high marginal tax rate on high-income families, and it was increased a couple of years ago by voter initiative. But California has a lot of other problems, too. It has a super-majority requirement to raise taxes or a super majority requirement to balance the budget. It's got Proposition 13, which wreaks all kinds of trouble. Very polarized state legislature. You know, it's hard to imagine how the high -- the marginal tax rate in California could be anything more than at most a very incidental contributor to its fiscal problems given the layers of issues that California faces. And then on the other side of the spectrum you have states with no income taxes at all, or flat income taxes like Florida, Arizona, Washington, and Nevada that are facing major fiscal problems of their own. So, you know, there's certainly a range of different tax structures around the different states, and they're all in trouble.

The question, the approximate question, though, that a lot of legislatures face is well, if I raise taxes on rich people, aren't they all going to flee? And the problem is that the data just doesn't support that idea. It's very hard to prove and I can't sit here and say there is not a single person in the state of Maryland that has departed because their income tax -- their marginal income tax rate went up by a single percentage point. But if you think about it and if you look at the migration data, if there are any doing that, it's very few, and the number that are leaving are not costing the state nearly as much as the state is realizing in the form of additional revenue. I mean, I don't think anyone thinks, who's actually looked at -- who's really thought about it, looked at the data, that millionaire's taxes are net negatives. They clearly raise a lot of revenue, even if there are some -- you know, somewhere between zero and an extremely small number of people who respond to that.

I think the other question about millionaire's taxes is the volatility issue, which I actually think is a big concern, although it's broader than just millionaire's taxes; it's all the sources of volatility in the tax code if in fact in a state economy -- I mean, you have states like Florida and Arizona, which clearly were riding high on the housing boom. There were a number of other things in the good times and now have crashed, and states do need to do a better job of managing that volatility of looking at well, aren't we in a time period where this is not sustainable revenue growth and controlling both spending and tax cuts. A lot of what the boom-time revenues were spent on was tax cuts, which later turned out to be unaffordable.

So, you know, I think when it comes to a high-end income tax, it's something -- it's a way for states to respond to this growing problem of extreme income inequality in their states. It doesn't seem to create any big long-term economic problems. That said, it's only one of the solutions the states are going to have to look at over time.

MR. HENCHMAN: Could I say a few words?

MR. JOHNSON: Sure.

MR. HENCHMAN: Thanks. First I'll just note that I'm one of the people who moved from Maryland to Virginia for tax reasons a few years ago.

MR. JOHNSON: Do you earn over $250,000 a year?

MR. HENCHMAN: I wish, so.

MR. JOHNSON: Okay. It wasn't the local tax rate; it was something else.

MR. HENCHMAN: It was probably the tax rate though, the higher taxes in Maryland as opposed to --

MR. JOHNSON: Just hoping there -- it's going to be aspirational.

MR. HENCHMAN: The sales tax increase also and -- but anyways.

And -- but you are right in that those examples are few and far between -- the [New York billionaire] Tom Galisanos, people you know who -- I'm leaving as soon as the tax goes up -- those are very few.

And something we did look at is the New Jersey millionaire's tax, which has been around a few years -- a lot of the new ones were just enacted this year, like Maryland and Oregon and so forth, but the New Jersey one, it does bear out. Interestingly, I know Dave's trying to pick a fight between us, but it kind of bears out what both of us are saying. When New Jersey raised its millionaire's tax, it did increase state revenues in the short term over the study period, but what it did do is that the income earned by those people dropped. So, what that's suggesting is that you are going to have fewer of those that subset group of people earning less money, but the state will get more tax revenue out of it. So, it's a short-term revenue gain but it hurts you long term.

Beyond that, I'll just point you to some of the research we've put out. Our state business tax climate index, which is on our Web site, has a lot of the economic research associated with how taxes impact behavior and the incentives to earn and work and produce jobs.

MR. BERGIN: Doug, do you want to take on the corporate questions?

MR. LINDHOLM: Sure, I'd be happy to. You know, seriously, David and I had -- when was that, last year, David, we spent a very enjoyable half-day debating the merits of the combined reporting -- and I thought I'd convinced him back them, but let me give it a try.

First point on combined reporting: Can the corporate income tax exist without combined reporting? And I think that those of us that are in the state and local tax profession tend to live in a bit of a bubble -- and I worked for GE for a year, and let me assure you that tax decisions do not drive business decisions at GE. If there is an opportunity to plan for a merger or an issue, then that is certainly undertaken. That is the job of the tax professionals at GE -- to minimize tax liabilities. But tax does not drive any business decision over there. If it does, in my mind it's a very foolish way to run a business.

Secondly, combined reporting creates its own distortions, and let me give you just an example of this. What combined reporting does is it assumes that every company that is combined has the same profit level. Let's say there's a -- it's a vertical -- a vertically integrated industry like an oil company that has gas stations, has distribution facilities, has wholesale facilities, refinery operations, and an exploration extraction. Each one of those has -- one company operates on each level, let's say, and each of those different levels has a different competitive climate, so the margins may be smaller in some, and it depends on demographics. If the oil company hits some very solid leases, if the price of oil goes very high, then they'll make a killing on their extraction. But if they're in a market where there's a lot of gas stations, the margin at the gas-station level is going to be very thin. So, let's say we got stations in Massachusetts and all of sudden you combine and you bring in that big gain from their extraction, which has nothing to do with Massachusetts, then they feel, rightly so, that what Massachusetts is taxing is distortive when you look at the way they operate their business. And their response is well, heck, let's just close those gas stations and get out of there, so that's one of the problems with combined reporting.

The second thing is there are winners and losers in combined reporting, and this is an issue that's somewhat troubling for us, because some of our members say, hey, we like combined reporting in this state, because it lets us pull in some of our loss companies, and we realize that that's the case. States realize that that's the case. There will always be winners and losers, because it's just a different way to measure your liability.

The difficulty is that when a state adopts combined reporting, because the definitions are so vague and because, you know, the things like you look at functional integration and economies of scale and centralized management, which are very difficult to -- and in some cases are not even in the statute -- they're not even in the California statute. It's all case-driven. There's an opportunity to pick and choose what companies you want in and out. So, the state has to come in and audit. Those companies that tend to be losers will try and arrange their affairs so that they don't have to file combined reporting. Those that are winners will immediately go to combined reporting. So, I think the impact on state revenues is not nearly what some commentators think, particularly when they have passed an add-back statute that addresses the issue that seems to be prodding everybody, and that is the issue of the Delaware holding company and the location of intangibles.

Finally, and this is probably the key issue, is that it's still an income tax. By its very nature, the corporate income tax will be volatile. If you've got no income, you're not going to get any tax. You won't get revenues. Unitary or combined reporting does not change that at all.

Does that convince you, David?

MR. BRUNORI: We'll have that --

MR. BERGIN: We can continue that after. Who else wants to jump in here?

MR. GLECKMAN: I'm Howard Gleckman, editor of TaxVox at the Tax Policy Center. You know, I have this sort of sense of déjà vu. Every time the economy gets bad, people sit around a table and they have the same discussion about how we have to do something about state tax systems; they're dysfunctional; what are we going to do? And then the economy gets better and money flows in and nobody does anything and then the economy gets bad and nobody does anything, because they're in a panic about just getting through this fiscal year. You know, we've had this discussion, and it didn't take long before we got into an argument about what to do about the corporate tax and what to about the individual tax, and there's obviously no consensus. So, my question is how do we break through this cycle? Does anybody have any ideas for how we can get people to sit down and say once and for all the state tax systems that we have are utterly dysfunctional and we got to fix them? We can't go through this crisis every 10 years, every time there's a recession.

MR. BERGIN: Anybody want to address it?

MR. LINDHOLM: I think we need to bring back the Willis Commission and take another look at it.

MR. JOHNSON: I share your frustration. I think we all share the frustration. I mean -- and it's that kind of frustration that led, you know, over the last decades to a number of tax commissions and these high-minded tax commissions that generate a lot of research reports and a lot of healthy debate at the commission level, and then, shockingly, enough policymakers, state legislators, and governors didn't immediately take the brilliant work of these tax commissions and immediately implement it all into law. I guess I nonetheless think or nonetheless hold out hope that an incremental approach to some of the reforms that we're talking about is taking place, can take place. It doesn't happen as fast as we would like, but one step at a time. There's a couple of examples. To the extent that you agree that combined reporting is a good policy, the number of states that have adopted it has been slowing growing over the course of this decade. To the extent that you think that sales tax on services is beneficial, states are -- every time we go through this, there's a downturn and a few more states bring a few more services into their tax base. To the extent that you think progressive income taxes might be a good thing, the number of states that have enacted new top rates over the last few years has increased.

So, I have no hope for big sweeping tax commission-type-driven changes. I have moderate hope for sort of a package of incremental changes, about half of which are reform and about half of which are just plugging the gap. I have a fair amount of hope that over time the kinds of changes that there is a little bit of consensus on incrementally will become increasingly common at the state level. And sometimes it takes second-best options.

Amazon laws, for instance. I don't think anyone would disagree that the optimal solution to the very real problem -- that Internet retailers enjoy a big advantage over in-state bricks-and-mortar retailers on the sales tax, that the optimal solution is for a federal response. The federal government should be, as the Supreme Court gave it the latitude to do, should be giving states the authority to tax -- not go out of state to tax but just tax the transactions that out-of-state retailers are making with their in-state customers.

In the absence of that, though, a second-best and the incremental approach, such as the Amazon laws, that allows states to take a stab on their own behalf to capture some of those transactions, you know, is moving forward, and states are experimenting with that. Hopefully, that will actually pave the way towards -- you know, what we all think is that probably the better solution, which will be a genuine federal solution.

So, you know, the depth of this fiscal crisis we would like to see accelerate the pace of reform, but I'm not sure where we're all going to sort of sit down around a table like this, much as we would like to, and hammer out the optimal solution.

MR. BERGIN: Scott, you want to take a crack at this?

MR. PATTISON: Well, I agree with Nick. I mean, you know, it's frustrating, and I've lived through downturns and upturns like a lot of us, and we really hope for major change, and I think a lot of it will be incremental. Although I will say this is about the worst downturn that just about anyone in their career has seen, and one would hope that what we're getting to is at least a little-more-specific proposals. I mean, a good example is Massachusetts has that -- I think it's called the Capital Gains Holding Fund to try to get at more specific proposals about how do you capture that volatility that we've been seeing with the big booms and the big busts that we're seeing and try to ameliorate some of that pain.

The other thing I'll say -- and I think we ought think about this opportunity -- I think groups -- I think, frankly, there should be articles in State Tax Notes -- we've got to reach the policymakers who'll becoming into office in 2011. About half the nation's governors will turn over by then -- in January 2011 -- so, there's that one little window of opportunity that you would hope -- again, I think it will still be incremental. I agree with Nick, you're not going to see this big, dramatic, huge overhaul of the state tax system. But there is an opportunity for these people to come in and say look, this has been an awful period and we've got to make some specific proposals to deal with the volatility of revenue, which I don't think will change. I think we have to accept that and think about how do we manage it and deal with it, particularly in states like California where the pain has been so deep.

MR. BERGIN: More questions? Go ahead, Jim.

MR. KEIGHTLEY: Let me introduce myself. I'm Jim Keightley, partner with Keightley & Ashner, and our focus is to find benefit pension plans for everybody. We actually did represent or went out and advised the governor of California in 2005 when he decided he was going to try and address the increasing liability of the state of California for the current -- for what was -- well, I guess it still is -- their current defined benefit. He got run over badly and backed off of that.

MR. LINDHOLM: I understand.

MR. KEIGHTLEY: My question to the panel, particularly I think Doug, is -- because he sort of mentioned the problem -- is, do you see any realistic ability -- politically or realistically -- to really curtail those pension liabilities and do you see any activity that is currently going on to address those liabilities, because they are a major sort of commitment that the states have?

MR. LINDHOLM: And again, let me reiterate, this is not my area of expertise, but what I have heard is that -- I mean, I think it would be very difficult to take it away once it's been given, but there ought to be some effort to perhaps establish a two-tier system for employees coming in now.

MR. KEIGHTLEY: The federal government did change its system in the early '80s from, you know, the old traditional, very generous defined benefit pension plan to a mix, and that was one of the things we advised California on, said that is a possibility.

MR. LINDHOLM: Right.

MR. KEIGHTLEY: So, there are other options available, but I don't -- I personally haven't seen the political will to go at it, and of course the people who would change it are the people who get the pensions, so you've got a problem there.

MR. LINDHOLM: I would agree, yeah. It's a thorny issue.

MR. JOHNSON: I would just say -- I mean, there's two. It's not my area of expertise either, but let me suggest two things that are changing or that hopefully are changing in this area.

One is that the accounting changes that have happened where states are increasingly having to report on this but having to report on the implication of the benefit packages is drawing some more attention to this issue among policymakers and causing them to look pretty hard at benefits and wages. I mean, it's important to remember that people in that state governments' employ are not the same as the people that the private sector on average employs. People in the public sector make more because they tend to be either people with specialized training -- school teachers and college professors and so on -- or they tend to be people in high-risk professions, like firefighting and corrections guards. So they do make more in wages and benefits. But nonetheless I think, I've got a feeling that budget officials and legislators are paying a little more attention to these long-term implications.

And the other thing is healthcare. I mean, this is -- you know, this is not a bookkeeping issue, and this is not about wages. This is largely about healthcare costs. So, to the extent that we're getting or can be getting over the next few years changes in the underlying healthcare system that will start to change the increasing share of GDP that we spend on healthcare that will to the benefit of state budgets as we sort of bend the curve, to use the phrase, on healthcare benefits. That will be a good thing for state budgets.

MR. BERGIN: Question over here.

MS. HARRIS: Yes. Christine Harris, Tax Analysts and Tax.com. My question's to the panel. What message would you have for the Obama administration and Congress regarding the timing of the recovery funds. So, that's to say how much longer exactly would you say the states would require recovery funding in order to reach stability or to at least get beyond anxiety that you say they're experiencing about the funds ending in a year?

MR. BERGIN: Who wants that one?

MR. JOHNSON: I'll start. I mean, I think --

MR. BERGIN: Go ahead, Nick.

MR. JOHNSON: I think that the first message is that the stimulus funds have had an incredibly important effect so far, and so stimulus funds are paying to keep probably hundreds of thousands of schoolteachers, of people in colleges and universities on the jobs. The stimulus funds have enabled states to avoid throwing hundreds of thousands of people off of the health insurance roles. And so, you know, I think -- I agree that the stimulus funds have bought us time. I think they bought us more than time; they bought us a lot of jobs and they bought us a lot of services that are benefiting families. I think the message going forward is that the end of the fund -- it's a mirror, that the end of the funds means the end of all that protection, and I think there's -- as we think about what are the policies that will get us fully out of the recession, fully into a recovery, state fiscal relief, which a lot of economists of all political stripes have agreed is one of the most effective ways that the federal government can protect and create jobs, should be on the table along with all of the other ideas that are out there. And I think it should actually be one of the -- along with perhaps unemployment insurance exemptions -- should be one of the things that the administration is lifting up the most.

MR. BERGIN: We have another one in the audience? One back here? Sorry. Speak into a microphone.

MS. SETZE: Karen Setze, also with State Tax Notes. I've seen two governors -- Ted Kulongoski out of Oregon and I think Mitch Daniels out of Indiana -- talking about the need to look at what states provide in the way of services and kind of look at maybe redefining what states provide. Do you see any more of that going on as another way out of this situation and start saying maybe we don't supply so much?

MR. PATTISON: I'm just going to say I think it's going to have to happen, and I think it's a shame in the states where it doesn't, because as I mentioned in the beginning, we are looking at extremely scarce resources. Even though revenue will improve at some point, we're still looking at the expense side, and some of that driven by the federal government is so huge there's not going to be enough for the states to afford what they need to afford and certainly what they want to afford, and that being said, you have to look at what are the core roles of government that have to be funded. And, again, I think -- I love the parks and recreations example, because a lot of people in polls say those are very important. But when you prioritize on a funding scale, things like healthcare and feeding children and that type of thing always get a higher priority, and as a result you have to rethink those other functions of government. And I think you're also seeing it in corrections. There's a kind of going back on the original, maybe 20, 25 years ago, policy of let's just lock as many people up for as long as possible. Realization: That's very costly. Healthcare for inmates is very costly. So I think you're almost going to have states forced into that.

And the final thing I'll say is it would really be great if we could figure out mechanisms where all levels of government are participating in that, because if states are just doing that, localities are doing that, that's fine, it's great, they need to think strategically. But without the federal government and others kind of being part of that discussion and saying we're going to handle more of X, say healthcare, while you deal with inmates and their expenses and that type of thing, I think that's just a much better solution. I'm just not optimistic that will happen to the degree we need it to.

MS. GORDON: Tracy Gordon, University of Maryland and ex-Californian, so I'm tempted to try to defend my home state a little bit. Well, there are certain features of California that I think are universal, and one thing that I remember about my experience there was that the corporate income tax really didn't change very much as a percentage of income, even during the boom of the 1990s because of things like exemptions and manufacturer's tax credits and that sort of thing, and I think you see the same thing at the federal level, that the effective tax rate really hasn't changed very much over time. So, I wanted to invite you all to talk about the effective tax rate, not the marginal tax rate, in terms of the rate and the base. And if we're not raising very much money from it and it has huge compliance costs, why not just get rid of it?

MR. BERGIN: Who wants that?

MR. HENCHMAN: I agree with you.

MR. LINDHOLM: Give it to Sheldon.

MR. BRUNORI: Let's just get rid of it.

MR. HENCHMAN: And replace it with what?

MS. GORDON: That's my question.

UNIDENTIFIED: It's my question. I mean, what about the business receipts?

MR. LINDHOLM: I'll comment on that. You know, the corporate income tax -- I know David in the past has been a fan of getting rid of it, but I think states need to recognize what it is and how it operates, and I think it would be great if they would get rid of it altogether, but, as Joe asks, I think businesses would be very fearful about what replaces it, and I don't think a gross receipts tax is a better alternative, because it's largely a hidden tax. It tends to be levied on a base that is three or four times larger than the economy upon which it's levied because of the pyramiding involved, and so from that standpoint that's a concern.

Now, with respect to my initial comment about how states view this, the corporate income tax has become, rightly or wrongly, one of the ways that states use to attract businesses. So, if it is left to that opportunity, and recognize that when there's an economic downturn, it is not going to provide so much -- so much with respect to revenues, then stop worrying about the tax as a stable contributor but use it more as a way to increase economic activity, which then contributes to higher sales -- you know, more purchases, higher sales taxes, property taxes, and rising-tide-floats-all-boats type of approach.

MR. BERGIN: You going to go here and then it'll go there.

MS. GORDON: Are you saying you want to keep the tax in order to have -- get rid of it?

MR. LINDHOLM: I'm saying that policymakers should be very careful about getting rid of it until they know what it's going to be replaced with, and right now I don't think there is an alternative that is better.

MR. BERGIN: All right, I'll introduce the next person with a question, because he's supported these conferences from the very beginning -- Sheldon Cohen.

MR. COHEN: Wells, I'm sorry I blurted out before but --

MR. BERGIN: I didn't scold you.

MR. COHEN: I need to expound on that for a moment. In the late 1960s, we were concerned about the multiple filings of tax returns. I mean, I don't know how many of you file in multiple tax returns, but I file seven or eight states because of a real estate partnership or this kind of investment or whatever it is, and you file for relatively minor amounts, but you file seven or eight or ten tax returns. My stack was like that.

So, Larry Woodward and I sat down, just the two of us and a couple -- in a room with a couple of technicians and said can we have unified filing? That is, everybody supplies this information to the feds. Can we say to the states you get -- and we'll have to have an arbitrary allocation, we understand that, and you know, win some, lose some, but on average the cost of tax administration disappears. It was half of 1 percent or less. So, we enacted a statute and said that the state could pay the cost of administration only. They had to elect. The statute sat on the books for 8 or 10 years [and was] repealed, never elected by a single state. There were 12 states at the time that had no income tax, and several of those states enacted the tax. We figured that no present administration was going to give up, but perhaps when New Jersey or something like that went into an income tax for the first time, all this economy they could buy for nothing -- no, nobody would do it. So, I despair of this, because of the parochialism of the states.

MS. REUBEN: I am Kim Reuben, Tax Policy Center. I have two questions that are somewhat related and might be a little jaded. The first is -- is part of the reason states aren't willing to allow the federal government to have a bigger role in what they're doing the fact that they're afraid that the federal government is basically going to give in to lobbyists that say, oh, you can't do this activity at all? There is the sense that when you start talking about things like Nexus and what's going on with the interstate commerce clause, a lot of it looks like it's taking away an ability of states to raise money and what's going to happen if the federal government is putting something in place, that that might get pushed down. Now, a cynical idea, but if you look at the role between the feds and the states, it's not necessarily crazy, especially when you think about what's going on in Medicaid, which is kind of why I think it didn't work.

My other question is, suppose we got to a world where everybody was doing corporate income tax on a single sales tax apportionment. That's kind of where we're going, as everybody's kind of beggaring thy neighbor and wanting to get the businesses to stay there. What does that do to the corporate system with what is simple enough for businesses to say okay, we're not actually going to get any money based on what's going on outside of the country, because if you have a single sales tax apportionment, I'm not quite sure how you get any revenues from, you know, out of the country sales. But is that where we're going, and what does that mean?

And, finally, a last cynical thought, maybe having amnesties and having it be complicating the corporate tax is exactly what we want, because it's a volatile tax and that's a way of getting the money when we actually need it.

MR. LINDHOLM: Want me to hit those?

MR. BERGIN: Doug, sure.

MR. LINDHOLM: What was your first one again?

MS. REUBEN: The first one -- if you entered the single sales tax stuff -- the first one is just that I think states are --

MR. LINDHOLM: Oh, you mentioned the lobbyists, the fear of federal legislation. And let me -- I mean, I presume when you mean the lobbyists you mean the people that are exercising their democratic process -- is that participating in the democratic process, which the states have every right to do and in many cases are much better situated to do.

There is certainly -- as the democratic process unfolds, you're going to have -- I mean, that's part of it. Businesses might take some things that they might not otherwise take; states may not -- may get some things that they might otherwise take. But we have a lot of problems that are unresolved because of a lack of congressional participation, like a Nexus standard. There needs to be a national Nexus standard. This hodgepodge of what we've got now is just -- it's just not working, and it creates incredible uncertainties for businesses who are trying to plan.

Second question was, what, singles sales factor?

MS. REUBEN: Yeah.

MR. LINDHOLM: Where does that take us? What the single sales factor is it essential exports the tax burden. It puts the burden on the taxpayer who is not in your state but who is selling into your state. Again, you know, if Congress wanted to mandate that the single sales factor would be the apportionment formula, that is certainly something that they could do. It's something that would increase uniformity. I'm not sure what that does from a logical perspective with respect to apportionment. I mean, what apportionment does is try and measure the amount of presence that a business has in a state, and I think that the initial three factors -- you know, the property, payroll, and sales -- is a pretty good proxy. You know, you've got a recognition that -- and actually a double-weighted sales factor might be a better proxy, because you've got two market factors and two production factors -- property and payroll. But, again, I don't think states will ever get there on their own, and that -- this is the problem with voluntary uniformity. It's just not going to happen when the legislators and administrators are, as Mr. Cohen pointed out, elected and appointed to look after the parochialism of their own states.

Your third question --

MS. REUBEN: Was about maybe amnesties and complications of that.

MR. LINDHOLM: Oh, here's the trouble with the amnesties. You know, and amnesties -- I think it's great -- bring money, but I fear that taxpayers might say, let's just wait for the next one, and that's clearly not a way to run any type of state tax policy.

MR. BERGIN: Question over here.

MR. WEINTRAUB: Thank you, Chris. My name is Stewart Weintraub, and I'm a state tax partner at Schnader, Harrison, Segal & Lewis in Philadelphia. I'm also currently the chair of the [American Bar Association] Tax Section, State and Local Tax Committee. I guess I ought to put a disclaimer on my question in that it's not on behalf of the ABA.

I think, you know, we've heard a lot of discussion this morning about the various aspects of tax reform. One thing that I have heard nothing about is enforcement of existing laws. I mean, we can all agree that the states leave tax money on the table whether it's due to inept or inadequate enforcement, and they talk about it a whole lot as part of their programs to help fund the problems that they're having. But then they turn around and lay off auditors. I mean, to me, that's the violation of what I would call the stupid rule.

What can be done about convincing -- and this may heresy, I don't know -- convincing the state and local governments to do what they're supposed to be doing in the first instance.

MR. BERGIN: Go ahead.

MR. PATTISON: Yeah, it's interesting you say that, because I'll tell you no one agrees with you more than budget and finance people. The problem is the political problem, which you can imagine, because I go into a lot of state capitols and they shake their head, because they know that a line item, particularly on the legislative side, is decreased money for whatever the equivalent of the IRS at the state is, but then they say, you know, it's really hard to put money into that when you're cutting healthcare or some other program people like, even the yards. So, I don't how you get around that particular political issue, but I can tell you the budget people really agree.

MR. WEINTRAUB: Just to tell you on the arts, Chris mentioned the Pennsylvania initiative earlier. Fortunately, the common sense was it was rejected. They didn't impose the sales tax on the arts.

MR. PATTISON: Well, let me make one more comment. I apologize again to everyone, but I have an urgent meeting to leave for, but I also want to throw out something that I think's so critical, and that's kind of not forgetting the totality. I think too often that we get into the silos of various taxation and tax policy, and what states are very aware of but have a hard time getting the mechanisms to look at the big picture is the fact that they are competing with each other -- particularly on economic development. But it has to be looked at in terms of the totality of taxation but also on the spending side, because if you -- and I'm not advocating one or the other, but if you are spending in such a way or decreasing things where services and education quality is so low that the quality of life is affected, then that side of the equation needs to be looked at. On the other hand, if taxation is so high, vis-á-vis neighbors, that might be an issue. So, I'd just make kind of an urgent request on the part of everyone, and particularly policymakers and hopefully those new governors in 2011, to try to figure out mechanisms that create incentive and incentive for elected officials to look at the big picture.

MR. BERGIN: Thanks, Scott. And trust me, Scott has a really, really good reason to leave early. Thank you very much. Okay, who's next? We've got time for a couple more. David?

MR. BRUNORI: David Brunori, State Tax Notes. Before we leave, I'd really love to hear Doug and Nick and Joe's views on the Parsky Commission's recommendation in California -- the Tax Reform Commission -- specifically with respect to the business net receipts tax angle of it and see what their general reaction is.

MR. BERGIN: Okay, Joe's going to go first.

MR. HENCHMAN: It's been a struggle for me, because I've actually been sitting there writing a report on it, and I've been staring at the computer screen trying to -- there's so many intertwined and different issues associated with it. And if you're not familiar, the California Tax Fund Commission submitted a report signed by a majority but not all of its commissioners recommending quite a few tax reductions and then to pay for a big giant question mark in the form of a tax that they are calling the Business Net Receipt Tax, which is a VAT-like base, although not a VAT tax. It's a tax paid by businesses using the value-added as the base for that tax. It's never been done before, unless you sort of count Michigan's previous experiment with a similar type of tax, which should tell you a lot.

So, I think that's part of the big problem with it -- is the uncertainty associated with it. It's gotten a very frosty reception in Sacramento and in California. Only some of the commissioners seem to be, really, the only enthusiastic ones for it, and I'm sure some of the other panels will talk about some of the problems with that uncertainty. But I will be sort of the one quasi-booster of the reform effort in California. I feel like they sat down, they found a lot of problems associated with the state's tax system. Other than this proposal, they I think came up with some solid ideas and really stood behind them. And for this one, it really is -- I don't know, I feel like they just kind of had a revenue number and they came up with a proposal to fill it. There might have been better ones out that they could have gone with though.

MR. JOHNSON: Well, it has gotten a frosty reception, and, you know, I think we should be distrustful of things that have big question marks. I think -- and you know, there's others who know more about the California tax system and this proposal than me.

My concern is that it doesn't get at the real problems in California, which I think are at least as much in terms of the structure of the budget process and the political process -- the limitations on various forms of taxes, the limitations on various budget measures, and the super-majority requirements to do just about anything, which essentially freeze the entire state's political process at times of crisis. I don't think it's an accident that some of the most dysfunctional states in this budget crisis have been those that have had super-majority requirements. I don't think -- and so I think clear and away the structural impediments to reform are probably more important than coming up with any particular set of recommendations, which -- you know, in the state of California my sense is that these -- that this proposal is essentially done on arrival.

MR. LINDHOLM: Let me echo Joe's comments, and I think that he was spot-on when he says that the biggest qualifier out there is the fear of the unknown. I mean, I think businesses -- I think the proposal was a 4 1/2 percent rate and repeal of the sales tax, at least the state sales tax, which means that local sales tax would stay and repeal the corporate income tax and franchise tax, and while that is all well and good, it remains to see if it does -- and I agree with Nick, because I think it is dead, but it remains to see what would have come out of the legislative process. The rate is critical. What it replaces is also critical. And unless there's some assurance that, yes, this won't get passed unless this is repealed, that is, you take the whole thing as a package, then there's really no way for a business to evaluate how it might impact them in California. And that's problematic, and that, I think has been the response of a lot of the business organizations to that proposal.

MR. BERGIN: I think we've got time for one more question. Oh, we got -- okay. Well, we can go --

MS. REUBEN: Can I -- I was going to ask you --

MR. BERGIN: Yeah.

MS. REUBEN: I was just going to say that what may have been a bigger flaw with the whole revenue commission in the first place in California is it was set up to be revenue-neutral, right? So, if you're talking about a structural problem with -- California has a huge structural deficit in place, and they were reforming the budget to raise the same amount of taxes that they're currently raising. So, by definition, they would have to have gone back at some point and raised some taxes if you think that they're ever going to come to a solution to what their bigger issues are. So, irrespective of whatever they pass, they started out almost with their hands tied behind their back.

MR. BERGIN: Over here?

MR. CURRY: Oh, yeah, thank you. My name is Clint Curry with the Washington Research Group, and I'm here about transportation and infrastructure spending, and there's been more of an effort, I think, in Washington to push more of that on the states, so if you can just address that.

MR. HENCHMAN: It'll have to be Nick, I think.

MR. BERGIN: Nick.

MR. JOHNSON: I'll pass. I mean, you know, I think transportation is important. I think we do have a lot of states that are very concerned about the state of their crumbling roads and bridges. There hasn't been as much investment as probably there should have been. I think that's a longer-term issue than just this fiscal crisis. I think rebuilding the country's infrastructure is going to go beyond the next couple of years. It's going to take a long time to address. I think a lot of states are looking at their transportation trust funds and trying to trade off, looking at the gaps there, and, you know, as far as the tax side of the budget goes, again, thinking about how do we finance infrastructure going forward and looking at some new revenue sources. And we've mostly been talking about general fund budget gaps so far, and we haven't really talked about the gaps that exist in state transportation trust funds. But that's clearly another issue that's on policymakers' minds and will be over the summer longer term.

MR. BERGIN: Okay, I think we have one last question over here.

MR. DUBIN: Yes, Elliott Dubin, Multistate Tax Commission. I don't have a question, I have comments.

MR. BERGIN: Okay, we'll close on that then.

MR. DUBIN: Well, again, very good conference. What I would guess from an economist's point of view is that it is about two years too late, because this happened December 2007 when you started the recession, not that you could have foreseen it, but that's when it started.

Okay, and I'm not here necessarily to defend the MTC, though I will. There have been academic studies that show that the MTC has increased the uniformity of the corporate income tax over the period of time, not just the last few years. It's true there's no enforcement power, so they do what they want.

Address one question, the single sales fact. If all the states went to it, it's fine. What you've done is you've taken out location decisions from the decision-making process. From an economist's point of view, that's good. Taxes no longer affect the location of production. Not that it's necessarily a good thing to do, that's one fact that makes it good.

MR. BERGIN: Okay.

MR. DUBIN: And, second, what do we do about this? This is a political problem, and I think we all have to agree with that. There's no way that you're going to stop the business cycle. But there's also no way that you're going to get governors and mayors and account executives to put enough away to cover it when it comes. So, the thing is the only one that can do this is the federal government. And maybe they ought to have the grant -- like Canada has -- is these just general revenue-sharing grants, like this country had a while ago, that basically could be ramped up in times of recession and ramped down in times -- you know, good times. Not necessarily the same general revenue-sharing program that we had in the '80s. That obviously went away, because that's another political problem: Is Congress going to raise taxes for which they're never going to get any credit for? I don't know why Canadian legislators are able to do it and U.S. legislators can't. But I think that's the only thing that would actually be the balance wheel in this whole thing. The states will always be pro-cyclical. And there's nothing you can do to stop that.

MR. BERGIN: All right, let me close with three thank-yous.

First of all, let me thank this wonderful panel of speakers. Secondly, I thank the audience for your participation and kindness. And I always like to close by thanking our staff. I may be biased, but I think our state tax products are terrific. I think all our products are terrific, because I think our staff is terrific. Thank you, everybody.

(Whereupon, the PROCEEDINGS were adjourned.)

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