New Report Says State Tax Systems Need Revamping

A new report, "The Way We Tax: A 50-State Report," produced by the staff of Governing magazine, points out weaknesses in state tax systems across the country. "The vast majority of state tax systems are inadequate for the task of funding a 21st century government," the authors begin. "Many of those tax systems are also unfair."

The report claims that tax policies among the states, which vary greatly from state to state, are based on decisions made during the depression era. While economic conditions have changed, taxes, for the most part, have not kept up with the change.

Much of the problem, according to the report authors, stems from the fact that the sales tax charged in most states is primarily based on the sale of tangible items. Nearly 60 percent of U.S. consumption spending is now directed toward services, and most of this spending is not taxed. Only three states, Hawaii, New Mexico, and South Dakota, tax a significant portion of spending on services.

Although the report doesn't provide a complete ranking of all states, states are judged and graded within particular categories. A chart is provided to show how the states stack up in three main categories. The categories that were considered by the report include adequacy of revenue (reliable revenues and balanced revenue sources), fairness to taxpayers (equitable treatment of taxpayers), and management of system (facilitation of taxpayer compliance and fair administration). The following states take top honors in the three categories:

  • Adequacy of Revenue: Delaware, New Mexico, North Dakota, Wyoming
  • Fairness to Taxpayers: Hawaii
  • Management of System: Delaware, Florida, Michigan, Minnesota, Missouri, Washington

You can read the complete report online at Governing.com or pick up the February issue of Governing magazine.

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