Summary

States are modernizing their tax systems to reflect America's 21^st century economy. Existing tax systems, based largely on a manufacturing-based economy of the 1940's and 50's, are changing to address the needs of a service-based economy, enabled by technology, in which companies may compete for customers globally from a single location.

Although the U.S. Constitution grants Congress broad authority to regulate interstate commerce, historically it has been reluctant to interfere with states' ability to raise and regulate their own revenues. State tax sovereignty is a basic tenet of our federalist system and is fundamental to the inherent political independence and viability of states. As Governors work to improve their state tax systems, they hold to the principle that state officials are best suited for making decisions about state revenues.

H.R. 1956, the "Business Activity Tax Simplification Act," introduced by Representatives Goodlatte (R-VA) and Boucher (D-VA), defies this basic principle by imposing a federal standard for determining when a state may tax a company that earns income within its borders. Portrayed as a bright-line test that will cure the inequities of state business activity tax systems, Governors strongly oppose the bill because it is neither clear nor fair and its real legacy would be to encourage tax sheltering and discriminate against smaller and locally owned businesses, and cost states approximately $6.6 billion annually.

More on this topic:

• Impact of H.R. 1956, Business Activity Tax Simplification Act of 2005, on States - pdf

NGA Position

Policy Reference:
EC-09. Federal Tax Policy

Committee Letters:

• Letter
  June 1, 2006 letter (from Governor Huckabee and Governor Napolitano) to Senate Finance Committee Chairman Grassley and Ranking Member Baucus expressing the Governors’ strong opposition to the Business Activity Tax Simplification Act of 2006 (S. 2721).