Plenary Session Transcripts

Governors Attending:

Guests:

Discussion Subjects:

• Economic Development and Commerce (EDC) – roundtable discussion on transportation trust funds and ISTEA [Intermodal Surface Transportation Efficiency Act]; using information technology in the state; and state responsibilities in information technology deployment
• Human Resources (HR) – strategies for encouraging and promoting positive involvement by fathers in the lives of their children
• Natural Resources (NR) – roundtable discussion on reform of the Endangered Species Act; and roundtable discussion of regulatory reinvention
• Plenary Session Discussion Subjects - Federal budget; Internet taxes; tax reform; early childhood development; and state management

Points of Interest:

Robert Reischauer of the Brookings Institution reported that both the Congressional Budget Office (CBO) and the Office of Management and Budget (OMB) predicted achievement of a budget surplus within the next two years. However, he emphasized that the surplus was dependent on modest economic growth and moderate inflation, that it would require cuts in domestic discretionary spending, and that in fact the surplus was due by and large to the growing Social Security trust fund, which during the current fiscal year was projected to take in about $100 billion more in payroll taxes and interest earnings than would be expended in benefits and administrative costs.

Walter Hellerstein, Professor of Law at the University of Georgia, addressed the issue of taxation of electronic commerce. He began by telling Governors that about $20 billion worth of business-to-business transactions and $1 billion worth of business-to-customer transactions were currently being accomplished via electronic commerce. That total was expected to more than double in the next year and reach upwards of $100 billion by the year 2000.

Hellerstein went on to say that electronic commerce could present a problem for states in that it would not be considered "tangible property," which was a defining characteristic of state sales and use taxes. He suggested the following guiding principles with respect to Internet taxation:

• The solution must extend beyond electronic commerce to catalog sales
• Rules must require vendors to collect sales tax. (The Supreme Court's decision in Quill v. North Dakota barred taxation of remote sales, but Hellerstein said that the ruling could be overridden through congressional legislation.)
• There needed to be a uniform national definition of electronic commerce and a uniform sales tax to ease the burden on business. At the same time, states would have to be empowered to decide what items to tax or not tax.

Charles McLure, a Senior Fellow with the Hoover Institution, offered Governors scenarios for radical tax reform and the ways in which it would affect states. If, for example, the federal government were to eliminate income tax in favor of sales tax, states would be hard-pressed to continue taxing income themselves without having the federal infrastructure to support their administration of the tax. Assuming that states maintained sales taxes under this scenario, there would almost have to be state-federal uniformity, and a likely doubling of sales tax rates to as much as 40 percent—an unsustainable percentage.

Although a federal flat tax might appear to be more workable, again states would probably have to adopt it as well.

One other option was something currently being recommended called the USA Tax, which would replace federal income tax with two separate consumption taxes—one on households and the other on corporations. But with the likely negative effect on corporate taxation, states would have to continue imposing income tax to make ends meet.

Governor George Voinovich of Ohio opened a discussion of early childhood development by presenting Governors with a brochure just produced by NGA's Center for Best Practices titled "Investing in America's Future: Indicators of Family and Child Well Being," which identified three goals: healthy children, children ready for school, and strong families, and also listed indicators that states could adopt to measure progress toward reaching these goals.

One year earlier Governors had focused on why investment in young children was necessary. The focus of discussion at this meeting was on how to create a system of early care and education that would improve results for young children. Dr. Sharon Kagan, who had recently completed a four-year study on how to reform America's early childhood education system, told Governors that despite increasing financial investments, the supports that made early childhood development programs function well were still underfunded. Those supports included training of early care and education workers, incorporating accountability into the system, and establishing governance mechanisms.

Kagan referred to a report titled "Not by Chance" that suggested building on the best examples of childhood development programs with focus in the following five areas.

• Programs: Ongoing assessments were needed, as were proven program strategies.
• Parents: Parenting education was essential.
• Professionals: The United States was the only country among competing westernized nations that did not require quality assurance or licensing for personnel working with young children. "Not by Chance" therefore suggested that all who worked with small children be licensed by the year 2010.
• Places: Kagan told Governors that in all likelihood, 50 percent of programs serving young children in the states were legally exempt from regulations or were subject to overlapping and redundant state and local regulations. "Not by Chance" recommended that existing licenses be streamlined.
• Purpose: "Not by Chance" recommended that 10 percent of new funding be set aside for infrastructure supports.

Former Governor and now U.S. Senator Kit Bond from Missouri talked with Governors about legislation that he had cosponsored with Democratic Senator John Kerry of Massachusetts, containing the components of early childhood development, child care, and Head Start. The bill sought to authorize $3.75 billion in the form of block grants to states for expanding child care, and a more than $3.5 billion increase for Head Start.

Bruce Reed, President Clinton's Domestic Policy Advisor, then addressed Governors regarding the Democratic vision of what the federal government could do to improve early child care and education. He reminded Governors first that the President had stood with them across party lines to insist that Congress add $4 billion for states to improve child care in order to help people transition from welfare to work. Reed went on to say that the President's current child care plan made the largest national commitment to child care ever made by a President, providing sufficient funding in the form of block grants ($7.5 billion over five years) to double the number of poor children receiving child care. The block grants would provide states with the flexibility to handle child care program development as they chose. The President's plan also sought $5 billion in tax credits to help millions more families pay for child care.

Reed went on to say that Clinton's early childhood plan would provide $500 million to states over five years for Governors to use in enforcing their own state standards. It would also include a $3 billion early learning fund similar to that proposed in the Bond-Kerry bill to enable states to develop new ideas for early childhood development.

During a question and answer session, Governor Tommy Thompson of Wisconsin expressed concern that the Clinton proposal for $7.5 billion in child care block grants required states to come up with a 20-percent match, to be taken from the states' share of their settlement with the tobacco companies. [The settlement was pursuant to a lawsuit seeking damages from the tobacco industry for the costs incurred by states in providing health care to smokers.]

John Kasich, Speaker of the U.S. House of Representatives, emphasized in his address to the Governors that there would be essentially no increase in discretionary spending over the next four years. He expressed support for school choice and for voluntary privatization of Social Security earnings.

Kasich made clear that he was not in full agreement with the Governors' position on the division of gasoline taxes between the federal government and state governments. He said that between 1957 and 1997, the federal government had taken in $341 billion at the gas pump, which in turn accumulated $21 billion in interest payments, bringing the total to $362 billion. But $27 billion more than that total had been spent on highway and other infrastructure programs. Kasich advocated dividing gas tax receipts to provide enough for the federal government to maintain interstate highways, leaving the rest with the states for construction and maintenance of their own highways. During the question and answer session following Kasich's address, Governor Ed Schafer of North Dakota noted that the federal government's proportion of highway expenditures had declined one-third in the previous 10 years, and that he would prefer better balance between federal and state spending for highway construction and maintenance.

Franklin Raines, Director of the Office of Management and Budget, delivered the news that the Consumer Price Index had remained unchanged for the past month, and that consumer confidence had risen 10 points during the same period, making it the highest in a decade. In addition, as a result of deficit reduction efforts that had been ongoing since 1993, $4 trillion of expected debt had been saved. Finally, the percent of the nation's gross domestic product being spent on the federal government was falling, with the number of federal personnel at its smallest in 35 years. In short, Raines said, the era of big government was over.

At the same time, Raines gave Governors figures on some of the President's proposed expenditures, including: the funding and tax credits already referred to by Bruce Reed for child care and development; additional funding for those afflicted with AIDS and for drug programs; $10 billion in tax incentives over 10 years to fund school construction and renovation; and $1.5 billion for dislocated-worker training. And because of concern about the financial crisis in Asia, the Administration was asking Congress to provide $18 billion more to the International Monetary Fund (IMF) to help ensure that the problems in Asia would not spill over to the rest of the world and slow U.S. economic growth.

During consideration of policy positions, Governors were divided over the issue of Internet commerce taxation. Some Governors favored giving states the option of taxation, while others were concerned about the effect that such taxation would have on commerce.

Memorable Quotes:

U.S. House Budget Committee Chairman John Kasich said: "…Teddy Roosevelt, who was a different kind of Republican, rode into this century with the idea of breaking the monopolies and the trusts of the largest corporations in the world. He argued that if, in fact, we could break the trust of the huge businesses, every American could share in greater prosperity. Well, it is interesting because as we ride into the next century, I think we ought to be about breaking the trusts and monopolies of the federal government; to set people free; to return power, money, and influence to people where they live, and to let people in their communities solve problems as they see fit."

Governor Michael Leavitt of Utah said the following with respect to an NGA policy position that opposed any new taxes being levied against electronic commerce and endorsed developing one sales-tax rate per state (or no sales tax at all, if a state so chose): "…we currently have a rather Industrial-Age system of collecting sales taxes. We need to form an Information-Age system. There are two dilemmas that we are dealing with today. The first is how can we protect the Internet and electronic commerce from discriminatory or multiple taxes? The second is how can we create a system in which those who sell over the Internet have the capacity to deal with 6,000 taxing jurisdictions that are currently in the United States alone?...It is the nation's Governors that need to lead on this. If we do not, ultimately it will result in a historic shift of tax capacity away from…state and local governments."

In contrast to Governor Leavitt's remarks regarding Internet taxation, Governor James Gilmore of Virginia said: "…[electronic] industry is very important to Virginia…Our policy is not to stifle any growth of commerce or with use of the Internet. It is important to our state particularly because we have major online companies located in Virginia, including America Online, I believe the nation's largest Internet connector…we are sitting in this room within a ten-mile radius of about 1,300 information technology companies located in northern Virginia…they are a major portion of our economy…So, I am concerned about what this policy might do…"

Selected Policy Positions Adopted:
(1) Proposing federal legislation to prohibit new federal, state, and local laws that would tax charges to individual consumers for Internet access, to call on each state to establish a single statewide sales tax rate on all electronic commerce and mail order purchases, to require a simplified state sales tax structure and administration, and to reward states achieving one rate, uniform definitions, and simplified administration of the sales tax by authorizing those states to require certain remote sellers to collect the appropriate sales/use tax on goods and services sold into the state; (2) asserting that there should be a state portion of total funds from the settlement of tobacco claims [in 1998, tobacco companies reached settlement with 46 states, the five territories, and the District of Columbia with respect to costs incurred by those jurisdictions for the health care of smokers]; (3) urging Congress to ratify the treaty expanding the North Atlantic Treaty Organization (NATO) to include the Czech Republic, the Republic of Hungary, and the Republic of Poland; (4) recognizing the fiftieth anniversary of the establishment of the state of Israel; (5) supporting the Administration's efforts to open new, and maintain existing, markets for U.S. agricultural products; (6) calling on the federal government to continue providing financial assistance and technical support to help communities develop and implement long-term economic recovery strategies in the face of natural disasters; (7) underscoring the Governors' strong belief that the Secretary of the U.S. Department of the Interior was without authority to intervene in disputes over compacts between Indian tribes and states regarding casino gambling on Indian lands; and (8) outlining state and federal roles with respect to postsecondary education—for example, states held responsibility for the measurement of quality education, full access to federal assistance should be afforded students in distance learning programs, and the federal government should work not just with public educational institutions but also in partnership with state government.