Preserving state sovereignty in the information age.

• Position: The States' Advocate

The United States is now in its seventh year of economic expansion. Unemployment is at 4.3 percent, the lowest since 1973. The revenue picture for states is bright. Nevertheless, the long-term threats and immediate challenges to the existing state tax system are very serious, according to author Tom Bonnett, who addressed the April meeting of NCSL's Assembly on Federal Issues.

The rapid shift from a manufacturing economy to a knowledge-based service economy has profound implications for state sales tax systems that largely tax goods, not services. State and local property tax systems place a disproportionate burden on goods-producing and capital-intensive industries, Bonnett says. Moreover, commerce is increasingly global in nature, as well as being conducted electronically at long distances using advanced telecommunications and computer technology.

Employment Growth (in millions) 1979 1992 2005 Manufacturing 21 18.4 17.5 Services 16.8 28.4 41.8 Source: Monthly Labor Review (November 1991), Bureau of Labor Statistics As if these rapidly changing market conditions did not pose enough of a challenge, there is a growing threat of federal preemption of state and local tax authority. The Clinton administration is recommending that Internet transactions not be burdened by new state or local taxes. There is, says Bonnett, strong congressional interest in passing legislation, which could preempt certain elements of state and local authority to tax the Internet.

The debate over various versions of the Internet Tax Freedom Act, now pending before Congress, reflects the dilemma about how to balance a commitment to regulatory and tax relief for business with a commitment to federalism. By what means can states be assured of a stable tax base that protects their fiscal and political autonomy, while at the same time reducing the burden on business and encouraging new, job-creating technological enterprises? How, in short, can an arguably outdated state revenue system (and state sales tax systems in particular) be reformed to meet the needs of both states...