[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
 STATE TAXATION: THE IMPACT OF CONGRESSIONAL LEGISLATION ON STATE AND 
                       LOCAL GOVERNMENT REVENUES 

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   COMMERCIAL AND ADMINISTRATIVE LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 15, 2010

                               __________

                           Serial No. 111-90

                               __________

         Printed for the use of the Committee on the Judiciary

      Available via the World Wide Web: http://judiciary.house.gov

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                       COMMITTEE ON THE JUDICIARY

                 JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California         LAMAR SMITH, Texas
RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr., 
JERROLD NADLER, New York                 Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
ZOE LOFGREN, California              BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas            DANIEL E. LUNGREN, California
MAXINE WATERS, California            DARRELL E. ISSA, California
WILLIAM D. DELAHUNT, Massachusetts   J. RANDY FORBES, Virginia
STEVE COHEN, Tennessee               STEVE KING, Iowa
HENRY C. ``HANK'' JOHNSON, Jr.,      TRENT FRANKS, Arizona
  Georgia                            LOUIE GOHMERT, Texas
PEDRO PIERLUISI, Puerto Rico         JIM JORDAN, Ohio
MIKE QUIGLEY, Illinois               TED POE, Texas
JUDY CHU, California                 JASON CHAFFETZ, Utah
LUIS V. GUTIERREZ, Illinois          TOM ROONEY, Florida
TAMMY BALDWIN, Wisconsin             GREGG HARPER, Mississippi
CHARLES A. GONZALEZ, Texas
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SANCHEZ, California
DEBBIE WASSERMAN SCHULTZ, Florida
DANIEL MAFFEI, New York
[Vacant]

       Perry Apelbaum, Majority Staff Director and Chief Counsel
      Sean McLaughlin, Minority Chief of Staff and General Counsel
                                 ------                                

           Subcommittee on Commercial and Administrative Law

                    STEVE COHEN, Tennessee, Chairman

WILLIAM D. DELAHUNT, Massachusetts   TRENT FRANKS, Arizona
MELVIN L. WATT, North Carolina       JIM JORDAN, Ohio
DANIEL MAFFEI, New York              HOWARD COBLE, North Carolina
ZOE LOFGREN, California              DARRELL E. ISSA, California
HENRY C. ``HANK'' JOHNSON, Jr.,      J. RANDY FORBES, Virginia
  Georgia                            STEVE KING, Iowa
ROBERT C. ``BOBBY'' SCOTT, Virginia
JOHN CONYERS, Jr., Michigan
JUDY CHU, California

                     Michone Johnson, Chief Counsel

                    Daniel Flores, Minority Counsel






















                            C O N T E N T S

                              ----------                              

                             APRIL 15, 2010

                                                                   Page

                           OPENING STATEMENTS

The Honorable Steve Cohen, a Representative in Congress from the 
  State of Tennessee, and Chairman, Subcommittee on Commercial 
  and Administrative Law.........................................     1
The Honorable Trent Franks, a Representative in Congress from the 
  State of Arizona, and Ranking Member, Subcommittee on 
  Commercial and Administrative Law..............................     2
The Honorable Henry. C. ``Hank'' Johnson, Jr., a Representative 
  in Congress from the State of Georgia, and Member, Subcommittee 
  on Commercial and Administrative Law...........................     3
The Honorable Judy Chu, a Representative in Congress from the 
  State of California, and Member, Subcommittee on Commercial and 
  Administrative Law.............................................     3

                               WITNESSES

The Honorable Jim Douglas, Governor, State of Vermont, on behalf 
  of the National Governors Association
  Oral Testimony.................................................     5
  Prepared Statement.............................................     7
The Honorable B. Glen Whitley, County Judge, Tarrant County, TX, 
  on behalf of the National Association of Counties
  Oral Testimony.................................................    14
  Prepared Statement.............................................    16
Mr. Robert B. Ward, Deputy Director, Nelson A. Rockefeller 
  Institute of Government
  Oral Testimony.................................................    33
  Prepared Statement.............................................    35
Mr. Joseph Henchman, Tax Counsel and Director of State Projects, 
  Tax Foundation
  Oral Testimony.................................................    43
  Prepared Statement.............................................    45
Ms. Kerry Korpi, Director of Research and Collective Bargaining 
  Services, American Federation of State, County and Municipal 
  Employees
  Oral Testimony.................................................    54
  Prepared Statement.............................................    56
Mr. Scott D. Pattison, Executive Director, National Association 
  of State Budget Officers
  Oral Testimony.................................................    60
  Prepared Statement.............................................    62

                                APPENDIX
               Material Submitted for the Hearing Record

Prepared Statement of the Honorable John Conyers, Jr., a 
  Representative in Congress from the State of Michigan, 
  Chairman, Committee on the Judiciary, and Member, Subcommittee 
  on Commercial and Administrative Law...........................    71
Prepared Statement of the Honorable Henry C. ``Hank'' Johnson, 
  Jr., a Representative in Congress from the State of Georgia, 
  and Member, Subcommittee on Commercial and Administrative Law..    73
Response to Post-Hearing Questions from the Honorable Jim 
  Douglas, Governor, State of Vermont, on behalf of the National 
  Governors Association..........................................    74
Response to Post-Hearing Questions from the Honorable B. Glen 
  Whitley, County Judge, Tarrant County, TX, on behalf of the 
  National Association of Counties...............................    78
Post-Hearing Questions submitted to Robert B. Ward, Deputy 
  Director, Nelson A. Rockefeller Institute of Government........    83
Response to Post-Hearing Questions from Joseph Henchman, Tax 
  Counsel and Director of State Projects, Tax Foundation.........    84
Response to Post-Hearing Questions from Kerry Korpi, Director of 
  Research and Collective Bargaining Services, American 
  Federation of State, County and Municipal Employees............    87
Response to Post-Hearing Questions from Scott D. Pattison, 
  Executive Director, National Association of State Budget 
  Officers.......................................................    91
Prepared Statement of the Direct Marketing Association...........    93
Prepared Statement of the Honorable Ronald O. Loveridge, 
  President, National League of Cities, and Mayor, Riverside, CA.    99


 STATE TAXATION: THE IMPACT OF CONGRESSIONAL LEGISLATION ON STATE AND 
                       LOCAL GOVERNMENT REVENUES

                              ----------                              


                        THURSDAY, APRIL 15, 2010

              House of Representatives,    
                     Subcommittee on Commercial    
                            and Administrative Law,
                                Committee on the Judiciary,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 11:04 a.m., in 
room 2141, Rayburn House Office Building, the Honorable Steve 
Cohen (Chairman of the Subcommittee) presiding.
    Present: Representatives Cohen, Watt, Maffei, Johnson, 
Scott, Chu, Franks, Coble, Jordan, and Issa.
    Staff present: (Majority) Norberto Salinas, Counsel; Adam 
Russell, Professional Staff Member; and Stewart Jeffries, 
Minority Counsel.
    Mr. Cohen. This hearing of the Committee on the Judiciary, 
Subcommittee on Commercial and Administrative Law will now come 
to order.
    Without objection, the Chair will be authorized to declare 
a recess of the hearing.
    I will now recognize myself for a short statement.
    Today's hearing focuses both on the current fiscal 
situation of state and local governments, what impact tax 
legislation for this Subcommittee would have on state and local 
revenues. The effect of the current economic climate has been 
widespread.
    Consumers have closed their pocketbooks and cut back on 
non-essential spending. Businesses have delayed investments in 
new technologies, or have resorted to laying off their 
employees. And with declining tax receipts due to lower 
payrolls, real estate, property values, and consumer spending, 
state and local governments have had to consider cutting 
spending, raising taxes, or a combination of both to balance 
their budgets.
    Yet, the economy is improving. We see great support in the 
economy from the ARRA and other areas, which shows that the 
economy is making a turn. And the Dow, of course, has gone over 
11,000. So, happy days will be here again.
    While governors and mayors and city councils must make 
difficult decisions to stay in the black, a discussion on the 
current fiscal plight of state and local governments is not 
complete without discussing what role, if any, Congress has in 
the affairs of state and local governments.
    Obviously, we have had a role in the last year or 2, for we 
have kept all state and local governments afloat with the ARRA. 
Congress has a responsibility to review state tax policies and 
determine whether those policies burden interstate commerce--
specifically, we must examine the legislative proposals that 
have been introduced, and consider whether they would either 
restrict or expand the ability of states to tax certain 
activities or taxpayers. There must be a balance between 
protecting the authority of state and local governments to tax, 
while providing taxpayers with certainty and fair tax policies.
    I thank the witnesses for appearing today, and I look 
forward to their testimony.
    I now recognize my colleague from Arizona, Mr. Franks, the 
distinguished Ranking Member of the Subcommittee, for his 
opening remarks.
    Mr. Franks. Well, thank you, Mr. Chairman. Thank you for 
calling this third general-oversight hearing on state taxation.
    You know, in February, this Subcommittee held a hearing on 
when states can constitutionally impose taxes on businesses, 
individuals, and transactions. And, last month, the 
Subcommittee was supposed to learn how those states divided up 
that tax authority. And I know that a hearing had to be 
postponed because of conflicts on the floor. And I am hoping 
that that can be rescheduled in the near future.
    As witnesses may be aware, I am a cosponsor of several 
state-tax related measures. And I encourage the Chairman of 
this Subcommittee to move the markup on those bills as soon as 
it is possible or practical. But that said, I am a bit of a 
reluctant cosponsor of state-tax related measures, because I am 
such a strong believer in the 10th Amendment, and in states' 
rights.
    That amendment reads, ``The power is not delegated to the 
United States by the Constitution, nor prohibited to it by 
the--nor prohibited by it to the states, are reserved to the 
states respectively, or to the people.''
    I remember that the founders created a Federal Government 
with limited powers. However, I also believe that some of those 
tax bills are necessary to ensure the flow of interstate 
commerce. And that, of course, is definitely one of the powers 
that the Constitution granted to Congress.
    So, for my friends in state government, I have a 
straightforward question: When is it a good time for Congress 
to regulate in this area? Time and again, states and localities 
have come to Congress saying that they cannot afford for 
Congress to cut their revenues. And I understand that. I mean, 
when--this is said when states have coffers that are full, and 
certainly now, when they are empty.
    Given that we know that we cannot tax our way to 
prosperity--or at least we pretend to know that--I want to know 
when it is a good time for Congress to assist states in making 
some much-needed tax reforms. Perhaps, just as importantly, 
what are the key principles that Congress should keep in mind 
when legislating in this area.
    And so I look forward to hearing from our witnesses on 
these and other questions. And with that, Mr. Chairman, I yield 
back the balance of my time.
    Mr. Cohen. Thank you, Mr. Franks.
    We are going to recognize two of our Members here, who have 
particular desires. And we are going to ask them to limit their 
remarks to 2 minutes, so that we can get concluded before the 
Holocaust Memorial service in the Rotunda begins.
    First, I would like to recognize the gentleman from 
Georgia, Chairman of the Subcommittee on the Anti-Trust, Mr. 
Johnson.
    Mr. Johnson. Thank you, Mr. Chairman, for holding this 
important hearing on state taxation today. Today, it takes me 
back probably about 45, 50 years ago--and I would watch as my 
daddy would come home on April 15th. And he would lay all these 
receipts and things like that out on the table. And he would 
leave the house around a quarter to 12 to go to the post office 
to file the tax return. And so this is the anniversary of the 
time to do that. And I guess it is only fitting that we hold a 
hearing on state taxation today.
    Today, we will examine the impact of congressional 
legislation on state and local governments. This hearing will 
give us the opportunity to examine the pending legislative 
proposals before this Subcommittee regarding state taxation.
    The recession has severely affected state and local 
governments and their residents. State and local governments 
are forced to make tough decisions regarding their budgets. 
They are faced with laying off worker, making cuts to 
education, police and fire departments. We need to provide a 
solution for our constituents. That is why I have introduced 
H.R. 2010, the Mobile Workforce State Income Tax Fairness and 
Simplification Act.
    This legislation provides for a uniform, fair, and easily 
administered law that would ensure that the correct amount of 
taxes are withheld and paid to the states, without the undue 
burden that the current system places on employees and 
employers. The Mobile Workforce Bill does not relieve any 
employee from paying state income taxes imposed by his or her 
state of residence. Therefore, the resident state of the short-
term traveling employee will not be affected by this 
legislation.
    From a national perspective, the Mobile Workforce Bill will 
vastly simplify the patchwork of existing inconsistent and 
confusing state rules. It would also reduce administrative 
costs to states, and lessen compliance burdens on consumers.
    I thank the Chairman for holding this hearing, and I look 
forward to hearing from our witnesses today. And like Ranking 
Member Franks, I would love to bring H.R. 2010 to our 
Subcommittee as soon as possible, as practical, as Mr. Franks 
said.
    Mr. Cohen. Thank you, Mr. Johnson.
    Now, I would like to recognize Ms. Chu from California, who 
has a long history in state government.
    Ms. Chu. Thank you, Mr. Chair.
    I would like to thank the state and local government 
officials who have taken time to speak with us today about this 
very important issue.
    Before becoming a member of the California Congressional 
Delegation, I was a chair of the California Board of 
Equalization, which is the elected taxation board for the 
state. And as such, I know how devastating the loss of tax 
revenue can be to local and state government.
    I am particularly concerned about the damaging effects of 
the recent economic downturn on state and local government 
budgets. Over the past few years, these entities have been 
squeezed from both directions by shrinking tax rolls and 
increasing demands for public services.
    As the testimony today demonstrates, the crisis is far from 
over. And as Members of Congress, we must do everything we can 
to help our state and local governments weather this storm, and 
must not be tempted to cut off the vital revenue streams that 
keep these government entities afloat.
    I look forward to your testimony, and to working together 
with you on solutions for the future.
    Mr. Cohen. Thank you, Ms. Chu. I appreciate your and Mr. 
Johnson's accepting the brevity of our remarks.
    Now, I would like to thank our witnesses for appearing 
today, and any other Members of the Committee that want to make 
a statement can have it included in the record.
    I would like to introduce our first panel. And thank you 
for participating in today's hearing. Without objection, your 
written statements will be placed in the record. And we would 
ask that you limit your oral remarks to 5 minutes.
    We have got a little system there of lights. And when it 
gets yellow, it means you have got a minute to go. Green means 
you are in the first four. It doesn't stand for Vermont. It 
just means green, 4 minutes; yellow doesn't mean cheese--it 
means you have got 1 minute to go; and red--you are over it. It 
has nothing to do with red states. So that is where we go.
    After each witness has made his testimony, each 
Subcommittee Member will be permitted to ask a question. We get 
5-minute limits as well.
    Our first witness is Governor James H. Douglas. Governor 
Douglas was elected to the Vermont House of Representatives in 
1972. He spent his entire life in government, an admirable 
thing to have done. He became assistant majority leader in his 
second term and majority leader in his third term, at the 
tender age of 25.
    Governor Douglas retired from the legislature in 1979, and 
became a top aide to then-Governor Richard Snelling. 1980, he 
was elected secretary of state. He held that post until 1993. 
His service to the people of Vermont continued with his 
election to state treasurer in 1994. And, then, in 2002, he 
successfully was a candidate for governor; reelected on 2-year 
terms through the current time, which would be 8 years of four 
terms.
    He served as president of the Council of State Governments, 
and he is the new chairman of the National Governor's 
Association. We thank you for appearing here, Mr. Governor, and 
look forward to your testimony.

  TESTIMONY OF THE HONORABLE JIM DOUGLAS, GOVERNOR, STATE OF 
    VERMONT, ON BEHALF OF THE NATIONAL GOVERNORS ASSOCIATION

    Governor Douglas. Thank you very much, Mr. Chairman. I, 
first of all, should say that Judge Whitley is a CPA. And he 
would be happy to file an extension for any member who needs 
it, before the end of the day.
    I am honored to be here on behalf of the Nation's 
governors. And I want to thank you for the opportunity to 
address the Subcommittee. I appreciate the fact you are taking 
time to examine how the state's fiscal situation relates to 
legislation before your Subcommittee and the full Committee.
    As you know, economists have declared the national 
recession over, but for those who are still unemployed, or who 
have lost their homes, it is clear that, as a Nation, we have a 
long way to go. The situation remains poor for states. As 
governors, we are working with our legislatures to set budgets 
for 2011 and, in some cases, 2012.
    What we are finding is that, from a state-fiscal 
standpoint, the worst is yet to come. To put it in perspective, 
it is important to review what states have been through, and 
examine what lies ahead. As you know, states must balance their 
budgets. So when revenues fall, states must cut services or 
increase revenues to make up the difference. Both actions can 
slow recovery.
    Beginning with the last calendar quarter of 2008, state tax 
revenues plummeted for five consecutive quarters. Because of 
those declines, 43 states cut $31 billion from state budgets in 
2009, and 36 states cut another $55 billion for the current 
year. These are cuts made after budgets were approved--budgets 
that were conservative to begin with. They also involve cuts to 
programs governors fight hard to preserve, like K through 12 
education and public safety. In other words, everything is on 
the table.
    In my own state, revenues are $25 million below their 2006 
levels, and a staggering $113 million below where they were at 
the height of the economic bubble 2 years ago. We face a fiscal 
year 2011 shortfall of about $154 million. That is 14 percent 
of our general fund budget.
    With revenues not expected to return to their pre-recession 
levels until 2013, our fiscal crisis extends far beyond today. 
Without sustainable reductions, the shortfall for fiscal 2012 
will balloon to over $250 million. That is more than we spend 
on economic development, environmental protection, public 
safety and higher education combined.
    Unfortunately, the road ahead doesn't look much better. NGA 
and the National Association of State Budget Officers recently 
surveyed states for information on their fiscal situations. 
They found that for fiscal 2010, states closed $90 billion in 
budget gaps, and have $19 billion more to close. And even after 
reducing revenue estimates, states' 2011 budget gaps stand at 
more than $55 billion, followed by another $61 billion the 
following year. So the total budget gaps over a 3-fiscal-year 
period--about $136 billion.
    The reason these facts are important for the Subcommittee 
is that your jurisdiction over state tax issues provides you 
with unique authority to impact the speed of states' 
recoveries. Simply put, governors ask that the Committee take 
no action that would undermine the ability or authority of 
states to develop and manage our fiscal systems. Governors 
steadfastly believe that decisions about state revenue systems 
and state taxation should be made by elected officials in the 
states, and Federal action should favor the preservation of 
states' sovereignty over that of preemption.
    As the Committee considers whether to take up legislation 
regarding state taxation, governors encourage you to review all 
proposals in light of these principles. First, do no harm. 
Legislation dealing with state taxing authority shouldn't 
undermine existing state revenue streams. Second, preserve 
flexibility. State fiscal crisis is forcing all governors and 
legislators to ask fundamental questions about the role of 
government. These will lead to changes at the state level that 
could have long-term positive effects on the delivery of 
services, modernizing revenue systems and holding government 
accountable. State reform efforts should not be hurt by Federal 
legislation that restricts states' authority to act.
    Third, be clear. Federal legislation should be clear to 
limit the need for expensive and time-consuming legislation. 
Finally, find the win-win. The goal of all legislation should 
be to find a balance that improves the standing of all 
stakeholders.
    Congress, through its authority under the Commerce Clause, 
has brought authority to regulate state taxation. The key 
question, though, is not whether Congress can regulate state 
taxation, but whether and when Congress should.
    For governors, the answer stems from the basic principles 
of federalism. We believe that the ability of states to develop 
and manage our fiscal systems is a core element of sovereignty; 
one that should not be interfered with unless absolutely 
necessary to preserve interstate commerce.
    So I thank you for the opportunity to be here and testify 
on behalf of the Nation's governors. And I look forward to 
working with the Subcommittee as you consider these important 
questions for the people we serve.
    [The prepared statement of Mr. Douglas follows:]
            Prepared Statement of the Honorable Jim Douglas

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
                               __________

    Mr. Cohen. Thank you, Governor Douglas. I appreciate your 
remarks and finishing before the red light came. You are the 
first person, I think, in the entire time I have been in 
Congress, that has ever done that--particularly, members.
    Our second witness is Judge B. Glen Whitley. He is a judge 
in Tarrant County, Texas--aka, Fort Worth, I guess--of course, 
selected to the--Tarrant County commissioner in 1996, and 
elected to the chief executive position as county judge in 
2006; presides over the commissioner's court in the county of 
1.8 million residents in the heart of the Nation's fourth 
largest metropolitan center, with great art museums.
    Judge Whitley was elected first vice president of the 
National Association of Counties, NACo, of which I was a member 
in 1978 to 1980, on July 28, 2009, and became president-elect 
in this year, 2010.
    Thank you, Judge Whitley. Begin your testimony.

   TESTIMONY OF THE HONORABLE B. GLEN WHITLEY, COUNTY JUDGE, 
 TARRANT COUNTY, TX, ON BEHALF OF THE NATIONAL ASSOCIATION OF 
                            COUNTIES

    Judge Whitley. Thank you, Mr. Chairman, and Ranking Members 
of the Committee--and Members of the Committee. I am pleased to 
provide testimony today on behalf of America's 3,068 counties; 
and thank you for holding this hearing to discuss the impact of 
Federal legislation on local government revenues.
    While Federal legislation can have a positive impact on 
local government revenue streams, it can also cause just the 
opposite. Unlike the Federal Government, local governments must 
balance their budgets, which is not an easy thing to do in 
today's financial climate. According to an October 2009 NACo 
survey, 56 percent of the counties report that they will start 
their fiscal year with budget shortfalls of up to $10 million; 
47 percent of the counties report that those shortfalls will 
increase after the start of the fiscal year. And a whopping 82 
percent of the counties state that the anticipated shortfalls 
are even greater into the next fiscal year.
    This is why the imposition of unfunded mandates and the 
preemption of local taxing authority can have such a negative 
impact on local government. We strongly urge Congress, as it 
takes further action to spur our economy and create badly 
needed jobs, that it carefully considers the role of local 
governments play in our economic rebirth, and not take actions 
that would adversely affect county budgets and revenue streams.
    Traditionally, counties perform state-mandated duties, 
which include assessment of property, record-keeping, 
maintenance of rural roads, administration of election and 
judicial functions, and safety-net services. Today, counties 
are moving rapidly into other areas, undertaking programs 
related to child welfare, consumer protection, economic 
development, employment training, planning and zoning, water 
quality--just to name a few.
    It is important that Congress recognize that not all 
counties tax and spend in identical fashions, and that Congress 
creates a slippery slope when it removes the linkage between 
tax flexibility and services delivered.
    Preemption of local taxing authority is a major concern of 
local governments. Preemption dictates policy implementation of 
traditional county responsibilities and functions; undermines 
the concept of federalism; and is contrary to the 
constitutional framework underlying Federal, state, and local 
relations. Federal preemption of local taxing authority should 
not be initiated unless there is an overriding issue of 
national importance.
    Further preemption must not be undertaken if its fiscal 
impact on local governments has not been evaluated closely and 
openly in a public forum. For example, hotel taxing authority 
is under attack by online hotel operators such as Expedia and 
Travelocity. Local governments use hotel taxes in various ways. 
In some locales, the revenues are funneled to the general fund 
to help provide badly needed community services to the 
residents. Some locales use revenues to promote tourism, while 
others use these funds to pay for voter-approved convention 
centers, sports arenas and other public buildings.
    It would be unconscionable during our current financial 
crisis for Congress to even consider the possibility of 
granting online travel companies preferential tax treatment at 
the expense of county budgets. State and local governments lose 
billions of dollars annually because of the inability of taxing 
authorities to collect from remote sellers.
    Federal legislation which would permit the collection of 
these taxes has not been introduced in the 111th Congress. 
Although NACo supports efforts to reduce the complexity of 
state and local sales-and-use-tax laws, tax simplification 
should not be used by the Federal Government to undermine 
county-government taxing authority and revenue streams.
    NACo has long supported communication, tax reform, and 
simplification. But any changed must treat like services alike, 
and must allow for an increase in tax revenues as the service 
or industry grows. Tax simplification vehicles such as any 
legislation that would implement the streamlined sales-and-use-
tax agreement should not be used as a means to undermine local-
government finances, while at the same time, granting 
preferential treatment to special interests.
    This is why NACo is concerned with Sale Tax Fairness Act, 
which would impose a 5-year moratorium on new discriminatory 
taxes on mobile-service providers and property. Moratoriums 
harm local governments' ability to reform their tax systems, 
and are especially troubling for local jurisdictions that rely 
on wireless taxes. It is inescapable that Federal legislation 
have both a positive and negative impact on local-government 
revenues.
    County governments urge Congress, when it considers tax and 
revenue-related legislation, to avoid preempting local tax 
authority, preserve local budgeting flexibility, and resist 
imposing unfunded Federal mandates.
    On behalf of NACo and the Nation's counties, I would like 
to thank you for the opportunity to testify before you, and 
look forward to working with you, and would be happy to answer 
any questions.
    [The prepared statement of Judge Whitley follows:]
          Prepared Statement of the Honorable B. Glen Whitley

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                               __________

    Mr. Cohen. Thank you. That was perfect. The red light just 
went on. I appreciate it.
    We will now begin questioning. And I will start.
    One of the issues that has been raised for many industries 
is that industries have asked Congress to give them protections 
from state and local taxes. We have heard from the hotel 
industry. We have heard from the car-rental industry. We have 
heard from satellite-television groups, Internet-access 
providers, and others.
    Many of them have stories, charts, and whatever, on how 
this affects their business. And they argue that they are 
Federal concerns because of interstate commerce. You know, I 
know, in my state, that we have used car-rental taxes to help 
fund sports arenas. And we have used hotel taxes to do it.
    And I know when I go out of state and I rent a car, and 
they charge me high taxes to pay for their stadiums and arenas, 
it bothers me. I am not too upset when we do ours, but I am 
upset 
when they do theirs--``Don't tax me. Do tax that guy behind the 
tree--''
    And, Governor, first, I would like your thoughts. Is it 
really fair to gore your tourists to fund your facilities?
    Governor Douglas. Well, first of all, we use our car-rental 
tax receipts to maintain and improve our roads and bridges so 
that folks can drive those rental cars on them--an appropriate 
use, I would suggest, of--of that source of revenue. Tourism is 
the second biggest part of our GDP. We welcome people to 
Vermont. We encourage people to come. Some of our ski areas are 
still open, by the way, and we hope that you will take 
advantage of that.
    So we don't want to do anything that would give tourists a 
bad experience, or discourage them from coming again. But it 
seems to me that states ought to make those decisions for 
themselves. And if a tourist is disappointed in the use of a 
tax revenue for a particular purpose, then perhaps that tourist 
might choose to go somewhere else in the future.
    The question is----
    Mr. Cohen. Where are they going to see foliage like that?
    Governor Douglas. Well, that is why we are using car-rental 
revenues for the right purpose.
    You are our best cheerleader, Mr. Chairman. Thank you.
    I think, in the context of the fiscal crisis that states 
are facing, we--we have to maintain the flexibility to solve 
their problems as states see fit. The decisions that governors 
and legislators are making all across this country are 
profound. The 14 percent budget gap that we are working to fill 
in Vermont now is prodigious. We have negotiated a pay cut with 
our state employees. We have negotiated pension cuts for our 
public-school teachers. We have closed welcome centers--well, 
maybe that is not good for tourists.
    We have limited some of the--corrections to population, 
which is obviously controversial. But we have to make tough 
decisions in order to stay within those budgetary parameters. 
So what we are asking for is to maintain that flexibility.
    As I indicated in my remarks, we respect and recognize the 
role of the Congress to tax where it affects interstate 
commerce, but we ought to be able to work together and find a 
win-win outcome so that we can do what is right for the people 
we represent.
    Mr. Cohen. And Governor, let me ask you this--and I am just 
kind of guessing. I may be wrong. But you are kind of, I think, 
a moderate, and kind of tend to be kind of more pro-business, 
maybe, in some areas. Do you think arguments that businesses 
make about the undue burden on interstate commerce to have any 
merit?
    Governor Douglas. Well, I understand he interest in 
uniformity; the ease with compliance, when it is on a national 
basis. But I come back to Congressman Franks' eloquent 
quotation of the 10th Amendment, and would urge the Congress to 
respect the prerogative of the state to determine their own 
destiny from a budgeting and tax standpoint.
    I think that is critical as we wrestle with the challenges 
I have mentioned. We have got one city in our state, Mr. 
Chairman, that is literally having a debate about whether to 
maintain its police department or its fire department. It is 
that serious, because of the fiscal crisis that that community 
is facing, and that many are, across the country.
    So I am suggesting that the Congress ought not to tie the 
hands of state and local government, but work with us to find a 
system that benefits us all.
    Mr. Cohen. Thank you, Governor. Knowing the wonderful state 
that you are from, I would think they would--probably the fire 
department--police themselves, I think.
    Governor Douglas. We do have a low crime rate. Thank you.
    Mr. Cohen. Judge Whitley, you have seen benefits, I 
imagine, to your county, from the American Recovery and 
Reinvestment Act. If that act weren't passed, what would have 
happened to your county in terms of the personnel that you 
employ, and programs?
    Judge Whitley. You know, we have some summer training funds 
that we did--that was a very successful program. We have been 
fairly fortunate in my particular county, from a county's 
perspective, because of some--our recent gas finds. The Barnett 
Shale have helped us tremendously.
    But I will tell you that the city of Fort Worth laid off 
close to 100 folks last year. And their budget deficit this 
year is far worse than it was last year--the same with the city 
of Arlington. So they are looking at some real problems. And at 
the same time, they did get some benefit.
    A lot of the local budgets within Texas are pretty much 
arrived at locally. We get very little benefit from the state, 
when it comes back to taking care of our budgets; so most of 
our budgets come through sales-and-use tax or through property 
tax. And that is why it is very important that, as we try to 
figure out how we are going to put that budget together--that 
we have as many, and as flexible of options as possible.
    Mr. Cohen. Thank you, Judge.
    My time has expired. I will recognize Mr. Jordan, from the 
state of Ohio.
    Mr. Jordan. Thank you, Mr. Chairman.
    Let me start with just some kind of broad concepts and 
questions, if I could.
    Do you, as a governor and a county official--do you think 
that taxes can get so high that--I mean, I guess I would ask: 
Do you agree that the--with the idea that taxing can get so 
high that we actually hurt economic growth, don't foster job 
creation and, thereby, actually decrease revenues that come in, 
and--to provide the services and goods and things that you want 
to do?
    Governor Douglas. I agreeing completely.
    In fact, last year, our legislature imposed some tax 
increases over my veto. And lo and behold, greater revenues 
haven't been realized because of it, for the reason that you 
cited, Congressman.
    Mr. Jordan. Governor----
    Judge Whitley. I guess I would say that, yes, most 
definitely, it can get too high. But I will absolutely 
guarantee you, before I look at any tax increase or any 
additional fee, or anything along that line--I know that I am 
going to have to go back to my voters and respond and answer, 
and be held accountable for that.
    The problem that we have so often is that we get unfunded 
mandates, both from you----
    Mr. Jordan. I agree with that.
    Judge Whitley [continuing]. And from the state.
    And so once you begin trying to limit what we can do from a 
revenue-generation--without limiting what we have to do to be--
for the most part, county government is the implementer of 
Federal and state----
    Mr. Jordan. No, well said. Well said.
    Let me ask you two other broad questions. I never thought I 
would see this day, but it is being talked about a lot here in 
Congress and across the country--a value-added tax. You know, 
in America--I mean, I can't believe it is being considered, on 
top of all the other taxes we currently have, and on top of all 
the taxes that have been put in place, frankly, over the last 
year--many of them impacting the middle class.
    Your thoughts on what that tax would do to economic growth, 
economic activity, and how it would impact you as a county, and 
you as a state?
    Judge Whitley. I am not sure I know the answer to that. At 
this point, it is a concept that is, as you indicated, 
Congressman, being discussed more broadly now. And I guess we 
shouldn't rule anything out summarily. But the principle that 
ought to be applied is the one you articulated.
    We ought to find a way to move all of our states and 
counties and localities toward greater prosperity; to encourage 
entrepreneurship; to put more people back to work, to support 
the services of government through greater economic activity 
and revenue-generation, rather than raising tax burdens.
    So I guess, in this fiscal climate, we shouldn't say no to 
anything at the outset. But we should gain some information 
from the experience of other nations that have done it, and 
then decide where to go.
    Mr. Jordan. Governor, I am curious--well, look the counties 
talk is a little bit--as a general statement, do you believe 
Americans are overtaxed or under-taxed right now--if you had to 
say one or the other?
    Governor Douglas. Well, I would argue that the tax burden 
is quite high. According to a recent report, Vermonters bear 
the second-highest burden in America of state taxes per capita. 
And that is something that I continue to try to reduce. But the 
principle that I outlined in my remarks, and would suggest 
again, is that states ought to be given the flexibility to make 
their own decisions and, in fact, their own mistakes.
    Judge Whitley. As a CPA, it may surprise you a little bit 
to hear me say that I really believe we have got to move away 
from the taxing system that we currently have. I have to send 
my employees to an 8-hour training session just to figure out 
how to depreciate this table for tax purposes.
    Mr. Jordan. Yes.
    Judge Whitley. So it is absolutely ridiculous--the 
complications that we have moved ourselves into. I guess, also, 
I would say that, if you look to some sort of a value-added--I 
mean, you have got a lot of things. It is regressive. So you 
are going to have to look at some means by which to move some 
of that--the dollars actually being paid back to those at the 
lower-income levels. But you also avoid the--for the most part, 
the people who fail to file; the people who are making income 
and who are not paying or not filing a tax return.
    Mr. Jordan. Yes.
    I mean, look, I happen to think the value-added tax is a 
terrible idea; and particularly, when you try to impose it on 
top of all the ridiculous tax burden and complex tax system we 
have today.
    Let me ask one final thing, because I am down to my last 30 
seconds. This was also in the news just last week: Do you think 
it is healthy for a Nation to have 47 percent of the citizens 
not paying income tax--not paying into the system? Now, they 
pay payroll tax and other things. But do you think that is 
healthy for our culture; healthy for our society; healthy for 
our great country?
    Judge Whitley. As one of the 53 percent who had to write a 
check today, no.
    Governor Douglas. Well, interestingly, in the recent 
health-care debate, one of the principles was everybody had to 
pay. But that is not true in our system of income taxation.
    Mr. Jordan. Thank you, Mr. Chairman. I yield back.
    Mr. Cohen. Thank you.
    Mr. Johnson, you are recognized. And if you would like to 
ask if it would be better if our society didn't have this big 
gap between the rich and the poor, where everybody did pay--if 
you could do that----
    Mr. Johnson. Well, I was just getting ready to mount a 
vicious attack on those who are well-healed and find all kinds 
of loopholes to utilize so that they don't have to pay taxes. 
And we have been on a tax-cutting binge since 1980. And during 
that time, the tax system has become so complex that even my 
daddy--he would have to start about 10--15 days early to get 
his taxes squared away. And, for me, I have to have someone 
else do my taxes, because I don't want to end up pulling my 
hair out.
    But I will say that, with respect to state and local 
governments, I am very attuned to the fact that the Federal 
Government has established a habit of imposing mandates without 
funding, on state and local governments. And I am also 
particularly affected by how state legislatures impose the 
mandates upon local government. And the fact is local 
government does not have any option to be able to shift 
responsibility for certain expenses to another entity. And so 
the buck stops with local government.
    I want to congratulate you, Mr. Whitley, for your recent 
election as chair of NACo. I was a member of that organization 
up until 2006, when I started campaigning for this office. And 
I was also Budget Committee chair for DeKalb County. That 
county is now upwards of $80 million shortfall.
    And, by the way, we are one of two counties in Georgia that 
relies upon a sales tax, as opposed to property tax, for county 
operations. And our school board, which still relies on 
property taxes, is--is laying off power professionals and 
closing schools because of a roughly $55 million reduction in 
the amount of income that they are receiving--the amount of 
revenue that they are receiving.
    And everyone feels like we are paying too much in taxes. 
But I will tell you, one of the counties that I represent 
partially--people got so riled up about a millage increase that 
there was a mass rally right there at the commission meeting. 
And it forced the commission to back off of a plan to raise the 
millage rate. And when those same people found out that it was 
affecting the operation of their library system, and when they 
found out that police and fire protection was being adversely 
affected, then they changed course and went back to the county 
commission. And, as a result, the millage rate was increased so 
that those services did not have to be cut.
    And those are the things that we are straddled with in our 
state government--a shortfall that continues to escalate at 
unprecedented numbers, causing lots of layoffs, early 
retirements, and this kind of thing.
    I am very sensitive to state and local governments, when it 
comes to unfunded mandates and--but I do want to say that--
Governor Douglas, there has never been a instance where all 
states have enacted a uniform tax law. They have gone as far--
group states--agreeing to model uniform tax laws; but a 
minority of those states have enacted the various model laws.
    So H.R. 2010--which has the approval of 49 of 50 state-
revenue collectors--would be the first, should it pass. Do you 
think that mobile workers and their employers would benefit 
from a uniform act?
    Governor Douglas. The National Governors Association hasn't 
taken a formal position on that proposal, Congressman Johnson. 
But we would be willing to engage in those discussions with you 
and your colleagues. We all have that phenomenon of people 
living in one state and working in another. We are next door to 
New Hampshire--that has no personal income tax. And so folks 
come across the state line, work in Vermont, and we have the 
benefit of their income-tax payments. And, obviously, it is 
quite prodigious of the New York metropolitan area.
    So I think it is an issue that is worth discussion. And we 
would be happy to be a part of that.
    Mr. Johnson. Thank you.
    Mr. Cohen. Thank you, Mr. Johnson.
    I now recognize the Ranking Member, Mr. Franks, for 5 
minutes.
    Mr. Franks. Well, thank you, Mr. Chairman. Thank you for 
your indulgence here.
    Gentlemen, thank you for being here.
    Governor Douglas, you know, I used to be in state 
government. And I really do sincerely identify with the 
challenges of state government. It seems like the Federal 
Government is always placing unfunded mandates or something 
that just complicates state governments' lives to the extent 
that it is maddening. And I just wish, you know, you could know 
how much I do identify with that. So, please grant me 
diplomatic immunity here, with any of these questions, if you 
would.
    At the end of your written testimony, you set forth a 
number of principles that Congress should consider when 
enacting state-tax legislation. I know there have been a number 
of legislative proposals put forth in the last few years, as 
you know--the Business Activity Simplification Act, the Cell 
Tax Fairness Act, the Mobile Workforce Act--to name three.
    And do any of these bills, in your judgment, or the other 
state-tax bills that may be out there, satisfy your principles 
as a state governor, or--that would merit NGA support?
    Governor Douglas. Most of them, I would not be enthusiastic 
about, frankly, Congressman Franks. The one area where we would 
like to see the Congress consider action is the Streamlined 
Sales Tax. In order to be fair to the merchants on Main Street 
in our communities, we want to make sure that they are not 
placed at a competitive disadvantage by untaxed transactions 
over the Net.
    So 18 states now are full, participating members. Six other 
are part way toward being a part of that compact. And we would 
like to see the Congress embrace that in order to have a fair 
system of taxation in that area.
    But most of the other proposals, frankly, would work to the 
detriment of states, in my view, to either collect revenues, or 
impose restrictions that would limit the ability of states to 
have the flexibility to design their own tax structure. So I 
would urge the Subcommittee to be cautious in proceeding with 
most of the bills that are pending.
    Mr. Franks. Well, your testimony establishes that the 
current economic crisis has, you know, been a burden on states. 
And I think somebody would have to be living on the moon to not 
realize that.
    I live in Arizona, which is close. But the reality is that 
it has been a profound challenge for the states. And I do 
understand that. So I guess the question I would ask is: It 
does, in spite of that, seem that states or cities or counties 
really never have a time when they think it is okay for us to 
do this.
    And so I want to ask you to predict the future. But can you 
give me an example, in the last 20 years, when states would 
have considered it acceptable, from a budgetary standpoint, for 
Congress to pass a tax-related law?
    Governor Douglas. Well, first of all, I have a son who 
lives in Arizona. So I get firsthand reports on the fiscal and 
economic challenges of your state. And there----
    Mr. Franks. So you know I speak the truth----
    Governor Douglas. Indeed.
    I don't know. I am trying to think of an example. 
Obviously, the Federal Government has imposed certain 
telecommunications taxes over the recent past. And there may be 
some legitimate justification for some of them. But I think, as 
a general proposition, since states have to balance their 
budgets on an annual basis, especially in this climate, we 
ought to respectfully limit the involvement of the Federal 
Government in tying their hands, so that they can design 
structures that are best for their constituents.
    And sometimes, those decisions won't be advantageous, as I 
suggested earlier. But that is the laboratory of democracy----
    Mr. Franks. Sure.
    Governor Douglas [continuing]. That we need to let states 
pursue.
    Mr. Franks. Well, you know, the ironic part, of course, 
here, is I--everything you are saying resonates in my own 
heart, because you--it makes a lot of sense to me. The 
challenge, of course, is that when one state does--overtaxes 
here, then it impacts another state. And, then, we are called 
upon to have some sort of, you know, effort to try to maintain 
commerce through the states. And it makes it kind of difficult.
    So let me just ask you a final question. Say, with respect 
to the Sale Fairness Tax Act, of which I am a--I am a cosponsor 
of that bill--the national average tax rate that consumers pay 
for wireless services--15.2 percent. But consumers in some 
states, as you know, pay over 20 percent in taxes and fees. And 
I guess I would just ask you: Is there a point--or what point 
does the tax rate on a competitive good or service--you know, 
that can be bought from interstate situations--is there a time 
when it becomes exorbitant?
    Governor Douglas. Well, I guess, a couple of thoughts in 
response to that question--first of all, the bill uses the term 
``discriminatory,'' and there will probably be a lot of debate 
over what constitutes a discriminatory tax. And that is why I 
think the best policy is to reserve that to the states.
    I am sensitive to your comment about states' developing a 
level of taxation that is excessive; but, to some extent, I 
think that can be self-correcting. It is no secret back home 
that I believe we have a--a tax level that is quite high--as I 
mentioned, second only to Alaska, in terms of per-capita 
taxation.
    And because our income tax is so high, we have seen an 
exodus of well-to-do residents to other states, where the 
burden is less. So I am urging our legislature to reduce that 
burden so we can be more competitive. And I hope other 
legislative bodies will do the same, when the burden gets too 
high.
    Mr. Franks. Well, thank you, Governor. You are a very 
compelling witness. Thank you very much.
    Mr. Johnson. [Presiding.] Thank you.
    Next, we will have questions from Congresswoman Chu.
    Ms. Chu. Governor Douglas, your association, the National 
Governors Association, along with the Congressional Budget 
Office and other analysts have estimated that the passage of 
the Business Activity Tax, H.R. 1083, would cumulatively cost 
states between $1 billion and $6.6 billion annually. Of course, 
it is because it would expand the Federal prohibition against 
state taxation of interstate commerce.
    Well, what does that amount mean to you, and what kind of 
impact would that have on the states?
    Governor Douglas. I have seen some different calculations, 
but they are in that range, Congresswoman Chu. I have seen some 
as high as $8 billion; but in that order of magnitude.
    It is hard to know what the impact is on an individual 
state. It depends on its own structure of taxation. But I 
return to the principle that I outlined in my opening remarks--
that we ought not to tie the hands of states, especially when 
we are confronting cumulative shortfalls of $136 billion over 
the next couple of fiscal years.
    States are really struggling. I know Members of the 
Subcommittee are well aware of that. But I want to make sure I 
put an exclamation point on that comment, because this is such 
an extraordinary time. And the challenges are so profound.
    We have, cumulatively, $1 trillion worth of unfunded 
pension liabilities in state pension systems as well. And as 
governors are laying off employees, cutting back on things that 
we feel strongly about--environmental protection, K-through-12 
education, higher ed, vital human services--we need to have a 
tax structure that doesn't tie our hands, and gives states 
flexibility through this difficult period.
    So the impact of that particular proposal is a little less 
than some of the other initiatives that we have seen; but in 
the cumulative sense, can be quite serious, especially when 
states are facing budget shortfalls of that magnitude.
    Ms. Chu. Let me bring up another thorny issue, which is 
auction sites, like EBay, which offer entrepreneurs a great 
opportunity to bring home some extra money, or get their small 
business off the ground. On the other hand, much of this 
commerce has not produced tax revenue, even if those products 
are sold within the same state. And, then, there are the myriad 
of tax regulations that are different from across the states.
    What can we do to address this problem, and should there be 
different tax standards for online sellers that make a certain 
amount of profit in a state, or complete a certain amount of 
business in a state?
    Governor Douglas. Well, I think the streamlined-sales-tax 
project would be an important step forward to capture some of 
the revenue that is lost from online transactions. There are 
about 1,000 companies nationwide that voluntarily participate 
now, and collect those revenues, and distribute them to the 
states, and so the lost amount that we have been estimating has 
come down somewhat. But it is still on the order of magnitude 
of $12 billion a year. So I think that would be an important 
first step that would be very helpful for the Subcommittee to 
consider.
    Judge Whitley. You know, I would add on that, I guess, that 
we are--if you don't have level playing fields, you are really 
going to hurt your Main Street businesses--your small 
businesses back home. And with technology today, I just refuse 
to accept that the programs can't be developed that will take 
into account the complexity, or what a particular local area 
tax rate is. When Google can look at my home from its 
satellites, then I have an idea that there is a program out 
there that can figure out what my tax rate is in Tarrant 
County.
    Ms. Chu. I appreciate that.
    Now, Judge Whitley, I know you indicated that NACo 
supports, yet opposes some of the language in the streamlined 
sales-and-use tax legislation. I was wondering what the 
governors' position was.
    Are the positions of support and opposition along the same 
lines, or what? What are the differences?
    Governor Douglas. I haven't seen the NACo policy, 
Congresswoman Chu, but the Governors are concerned about those 
provisions that suggest compensation to local companies. We 
think that that ought not to be a part of what, ultimately, is 
passed. So I think we may be on on the same page, there.
    Ms. Chu. Okay. Thank you. I yield back.
    Mr. Johnson. Thank you.
    Next questioner will be my friend, the Ranking Member of 
the Courts and Competition Policy Subcommittee, which I Chair, 
Mr. Howard Coble.
    Mr. Coble. Thank you, Mr. Chairman.
    Governor--good to have you and the judge with us.
    Governor, I have come in back and forth, because of--so I 
may ask that--this may be repetitive. But is the Green Mountain 
State the only state that does not have an amendment or a 
statute to require a budget to be balanced?
    Governor Douglas. That is correct.
    Mr. Coble. How, Governor, has that impacted your ability to 
either cut spending on the one hand, or raise taxes on the 
other?
    Governor Douglas. We like to think, Congressman Coble, that 
Vermonters don't need that constitutional imperative--we are so 
responsible and thrifty.
    Mr. Coble. I can see why you are the governor, Governor.
    Governor Douglas. And, in fact, we are rated AAA by both 
Moody's and Fitch. So I think the fiscal responsibility that we 
have been able to achieve has been comparable to that of other 
states, even though we are the only one, as you noted, without 
a requirement--either constitutional or statutory--to have a 
balanced budget.
    Mr. Coble. And that speaks of self-discipline. I think that 
is noteworthy.
    Now, Governor, are you here on behalf of the National 
Governors Association?
    Now, of the other state groups, such as the National 
Conference of State Legislatures, has expressed support for the 
Streamlined Sales Tax Agreement, and the Main Street Fairness 
Act. I noticed, however, that your testimony was silent on 
that. Do you want to comment one way or the other about that?
    Governor Douglas. I did refer to that in response to a 
question. We do support, as an association, the streamlined-
sales-tax project. Vermont is one of 18 states that is a full-
fledged member of that effort now. And I believe, as Judge 
Whitley and I have suggested, that it is only a matter of 
fairness to those vendors--those retailers in our states and 
counties and communities who are faced with unfair competition 
through online transactions.
    So we are strong supporters of that, and hope that the 
Subcommittee can take it up.
    Mr. Coble. Thank you, sir.
    Judge, your written testimony singles out 
telecommunications providers as entities that should not 
receive special treatment. You specifically mentioned the 
telecommunication provision in the Streamlined Sales Tax 
Agreement, and the Cell Tax Fairness Act; yet, 
telecommunications providers would argue that they should--that 
they shoulder a disproportionate burden of state and local 
taxes.
    Is there any reason why NACo's views--strike that. Is there 
any reason why NACo views telecommunication's taxes, in 
particular, to be sacrosanct, or holy?
    Judge Whitley. Now, I don't know that. I think that there 
is.
    What we look at--I can tell you, especially, in Texas, and 
in Tarrant County, with regards to the cell phones, and with 
regards to the taxes on that--it goes back to our emergency 
services--our 911. We are making tremendous changes, and 
investing a tremendous amount of money in the technology that 
will allow us to be able to identify where that cell phone is 
calling from. And if it was just a land line, there wouldn't be 
that problem.
    So most of the fees--when we look at fees, we don't 
normally just stick fees on there, and then use those--the fees 
coming from--like the telecommunications arena--for other areas 
of general revenue or general budget. We are pretty well 
looking for it for a user-type fee.
    When we get to something that is going to be kind of 
general, we go back to our property tax. But our citizens get 
pretty testy when we start putting a whole lot of property tax 
in there to do things which they consider to be better paid for 
with user fees.
    Mr. Coble. I got you.
    But, now, Governor, or--is either you or the judge 
familiar--I mentioned it in passing--the Sales Tax Fairness 
Act--are you all familiar with that?
    What do you say in response to that bill?
    Governor Douglas. I assume that is the legislation that was 
referred to by some other Members earlier. Is that the proposed 
moratorium that is proposed?
    Mr. Coble. Well, it prohibits states or local governments 
from imposing any new discriminatory taxes on mobile services, 
et cetera.
    Governor Douglas. Yes, right. I suggested that the National 
Governors Association does not support that initiative, 
Congressman Coble. We really believe that there ought to be 
maximum flexibility for states to make their own 
determinations, and that that ought to not be approved.
    Mr. Coble. Thank you, Governor.
    Judge?
    Judge Whitley. Same way with NACo. You know, again, when 
you start applying moratoriums, then you really tie our hands 
with regards to tax reform, and with regards to expenditures 
that, a lot of times, we are required to make.
    Mr. Coble. Thank you both for being here.
    Thank you, Mr. Chairman. I yield back.
    Mr. Johnson. Thank you, Mr. Coble.
    Next, we will have questions from Congressman Scott, Chair 
of the Crime Subcommittee of the Judiciary Committee.
    Mr. Scott. Thank you.
    And, thank you, Mr. Chairman.
    You know, we have--we are in a situation where all of the 
states and all of the counties are suffering from a financial 
decline, and are looking for revenue whenever they can get it. 
And one way is to encroach on other states to get some of their 
tax revenue. It has the added advantage of--you are increasing 
taxes, but not on anybody that actually votes for you. And so 
there is a great incentive during these times to kind of expand 
your tax base.
    Governor Douglas, if you expand your tax base and start 
taxing, essentially, out-of-state residents, do the out-of-
state residents get a tax credit in their home state, 
necessarily, for the taxes they pay in your state?
    Governor Douglas. That is probably a function of the tax 
laws in their individual states, but I think, in many cases, 
they do.
    We are very sensitive to the point that you have raised, 
Congressman Scott, because we rely on tourism as a major part 
of our economy. And I don't want to take steps that would be 
discouraging to people to come and visit. And, also, we have a 
lot of second-homeowners and business property that is owned by 
non-residents. And so I am concerned about the burden of 
property taxation and not making that too high, so that it is 
not competitive either.
    So I think your point is well taken that tax policy ought 
to be, first, as low as possible to meet the legitimate needs 
of government; and, secondly, balanced in a way that doesn't 
put any class of taxpayers at a disadvantage.
    Mr. Scott. Well, yes, but in those cases, you have 
indicated the tax is actually applied to something that is 
clearly going on in Vermont. Some of these schemes that are 
taxing people for things where you are really kind of 
stretching a little bit, and getting people back in the home--
the Internet, where you don't really have a physical presence 
in Vermont, and getting some activity going on in Vermont, and 
getting that kind of tax--those kind of taxes.
    But if you pay those taxes, the question is whether you get 
a tax credit, or whether you are essentially getting taxed in 
your home state for the business activity, and in the out-of-
state tax--you are being taxed twice for the same activity--can 
that happen?
    Governor Douglas. Well, I don't know about the tax laws of 
all the other states. We don't do that in Vermont. In fact, 
there was a case on a motor-vehicle tax that went all the way 
to the United States Supreme Court to make sure that Vermonters 
don't pay double tax on their motor-vehicle-registration taxes.
    Look, both of my sons, at one point, had some income in 
other states while they were residents of Vermont. And we don't 
provide a system of double taxation. But I, honestly, don't 
know what the laws of other states are.
    Mr. Scott. Well, if there is no double taxation, then the 
$8 billion impact would not be an overall impact, it would be 
kind of a shifting of where you pay the taxes, not how much 
taxes are paid.
    Governor Douglas. Yes, it is hard to estimate what the 
impact would be. I guess the essence of my testimony is that 
there ought to be flexibility for states to make their 
decisions, and not have an imposition by the Congress on what 
has traditionally been the prerogative of state and local 
government.
    Mr. Scott. Well, if you are only going to pay a certain 
amount of tax, then the question is: Who gets it? So----
    Judge Whitley. But I think the question, in some cases, is 
they are not paying any tax at all.
    Mr. Scott. Well, that takes place over--to a large extent, 
on Internet sales.
    What would you suggest as the appropriate thing to do with 
Internet sales, in light of the fact that the seller really has 
no way to individually calculate, even by zip code, what the 
tax rate is in the state, county, town, and whatever 
subdivision--business subdivision there may be--what the 
appropriate tax would be?
    Judge Whitley. I believe that, with technology as it is 
today, that, as I stated earlier--I believe that the technology 
exists to be able to take it to the zip code and determine 
exactly what I pay in Hurst, Texas, in the form of school--no, 
those are property taxes. The sales tax would simply be the 
city and the state. And it would be 8.25 percent.
    You know, if I am going to buy something in Hurst, Texas, 
out of my home, then that sales tax that I would pay if I 
bought that in Hurst, Texas, is going to take care of the fire 
and the police, and all the services that I get----
    Mr. Scott. And you ought to pay the same tax if it is 
shipped in?
    Judge Whitley. Yes, because I am still going to--when the 
fire and the----
    Mr. Scott. You don't see a complication about the 
calculation of the tax. What about physical presence in an 
area--when you try to tax someone for an activity for which 
there is no physical presence?
    Judge Whitley. I don't know that I--I think, if we are 
talking about--I guess the point of purchase, is what I am 
suggesting, is where the tax should apply, and not necessarily 
the point of the sale. Whether they have--you know, whether 
whoever someone I am purchasing something from has a presence 
in Hurst, Texas or not, the fact is I am buying it. Coming to 
Hurst, Texas--eventually, whatever is there, the police are 
going to--if it gets stolen, I am going to call the police and 
report it stolen in Hurst, Texas.
    Mr. Scott. I think the next panel might address this, but 
there is some--I know we have had some problems with truckers 
going up the New Jersey Turnpike and, essentially getting 
kidnapped because they were going through New Jersey with their 
shipment, when that was about the only activity they had. New 
Jersey was trying to assess a tax on the contents.
    But we will deal with that on the next panel.
    Mr. Johnson. The gentleman's time has expired.
    I want to thank you both for your testimony. And you may 
both be excused.
    And, as you depart, the second panel can assume the 
positions that you now occupy.
    Judge Whitley. Thank you very much.
    Governor Douglas. Thank you, Mr. Chairman.
    Mr. Johnson. Thank you all for participating in today's 
hearing. And you are under the same instructions as the 
previous panel.
    Our first witness on this panel is Mr. Robert Ward. He is 
the deputy director of the Nelson A. Rockefeller Institute, and 
heads the institute's State and Local Government Finance 
Research. He has studied and written about New York state 
government for more than 20 years as a newspaper reporter and 
editor, as assistant to the chairman of the Assembly Ways and 
Means Committee, and as director of research for the Public 
Policy Institute of New York State, the research affiliate of 
the Business Council of New York State.
    He is also the author of ``New York State Government,'' 
published by the institute in 2002, and revised in 2006. His 
work on state finances includes leading the institute's recent 
research into gambling revenues for states, and a study of 
long-term changes in the property tax in New York state.
    Mr. Ward, welcome; and please begin your testimony. And I 
will introduce you all as we get to you.

         TESTIMONY OF ROBERT B. WARD, DEPUTY DIRECTOR, 
         NELSON A. ROCKEFELLER INSTITUTE OF GOVERNMENT

    Mr. Ward. Thank you very much, Mr. Chairman. And it is an 
honor to be invited to speak with you today.
    I would like to say a special hello to Congressman Maffei, 
from my home state of New York.
    But it is an honor to speak with all the Members of the 
Subcommittee.
    My testimony will focus on essentially three things. And I 
will limit my oral testimony. First, I will talk a little bit 
about the current picture for states. We are about to release, 
tomorrow morning, our latest look at state tax collections from 
around the country. I will also touch briefly on the long-term 
trends in state-and-local tax revenues. And I will close with 
some suggestions for broader thinking about the role of the 
Federal Government in shaping fiscal policy at the state level.
    As I mentioned, the report that we will be releasing 
tomorrow morning shows that calendar 2009 was the worst year on 
record in terms of decline in overall state-tax collections, 
with an overall drop of 11 percent from calendar year 2008. The 
fourth quarter of 2009 brought the fifth consecutive quarter in 
which state revenues showed a decline. We now have preliminary 
data in hand for about half of the first quarter of 2010, and 
it appears likely that that quarter will represent a sixth-
straight quarter of year-over-year decline.
    Broadening the picture just a little bit--if we compare 
these numbers to 2 years ago, tax revenues during the final 
quarter of 2009 were down by 8.6 percent through that same 
quarter in 2007.
    Over the past two decades, before the last national 
recession, state-tax revenues have averaged annual year-over-
year increases in the range of 5 percent to 5.5 percent. So in 
normal times, the last 2 years could have been expected to 
produce an overall tax-revenue increase of something in the 
range of 10 percent or more.
    When we combine that with the actual decline that I have 
mentioned, states have seen revenue drop by more than 18 
percent over those 2 years, relative to recent historic norms. 
The current decline in overall state-tax collections is more 
than twice as deep as in the previous recession, which itself 
brought declines from historically high levels of revenue.
    After accounting for inflation, state-tax revenue is 
essentially at the same level as it was 10 years ago, although 
the Nation's population has increased by approximately 10 
percent during that period. In my written testimony, I have 
some discussion of the outlook. I will simply say here that 
looking immediately ahead, we think that there is significant 
risk that income-tax revenues in April and May will fall 
relative to the already weakened level of a year ago.
    And, echoing some of the comments in Governor Douglas' 
prepared testimony, we do not expect much strengthening during 
the remainder of this year; and, of course, we know that there 
are enormous fiscal challenges for states in the years ahead.
    Some reflections on longer-term trends--the income tax has 
become much more important to states over time. And one 
ramification of this is a heightened risk of volatility in 
states' revenue streams. Economists from the Federal Reserve 
Bank of Chicago have concluded that greater reliance on the 
income tax and increases in the more volatile sources of 
income, such as capital gains, have made state revenues more 
responsive to the business cycle since 1998.
    We have seen the downside of such volatility over the past 
12 to 18 months in New York and in other states, as income-tax 
revenues have plummeted, and states that are highly dependent 
on capital gains have seen particularly significant declines in 
overall tax revenue.
    Many of the issues that the Congress considers relating to 
state and local taxes reflect varying perceptions over the 
burden of taxation, and the adequacy of resources for public 
services. In that context, it may be worth noting that, 
measured as a proportion of the Nation's economic activity, the 
total burden of state and local taxes has remained remarkably 
constant for the last 20 years.
    And there is a chart in my prepared testimony showing that. 
As a matter of fact, there has been relatively little change 
over the past 40 years. And, perhaps, that is worth keeping in 
mind as we now enter a period at the national level, where we 
are looking at significant changes in the overall fiscal 
relationship between Washington and the states.
    On that point, Congress and the Federal courts have stepped 
in to policy-setting or policy-shaping roles, in selected, and 
often narrow, areas, generally, with relatively little 
attention to the overall structure of state and local tax 
systems. Perhaps it is time for broader thinking and analysis 
within the boundaries that the Constitution provides.
    Beyond the fiscal challenges to states that I mentioned 
earlier, we are all well aware that the Federal Government 
faces its own major budgetary concerns in the years and decades 
ahead. Whether one's favored solutions to the challenges facing 
both the national and state governments--whether those favored 
solutions involve more revenue sources such as a value-added 
tax, or new restraints on health-care and other spending, or 
some combination, the complex array of fiscal relationships 
between Washington and the states will be an important subtext 
of any serious debate.
    Mr. Johnson. And, Mr. Ward, if you could, sum----
    Mr. Ward. I will simply sum up by saying that there will be 
debate about the--ongoing and significant debate--about the 
relationship between Washington and the states. The question is 
how we may best inform that debate.
    [The prepared statement of Mr. Ward follows:]
                  Prepared Statement of Robert B. Ward

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                               __________

    Mr. Johnson. Thank you, sir.
    Next, we will hear from Mr. Joseph Henchman. He is a 
constitutional attorney and policy analyst, who supervises the 
Tax Foundation's state policy and legal programs. His analysis 
of state-tax trends and tax-law developments has been featured 
in several publications, and in court decisions and testimony 
at the Federal and state levels.
    Before joining the Tax Foundation in 2005, Mr. Henchman 
previously worked in the historic 2003 California Recall 
Election as press-policy aide to gubernatorial candidate and 
interned with the Office of D.C. attorney general, Citizens 
against Government Waste, and University of California Outreach 
in the Central Valley.
    Thank you, Mr. Henchman. Please begin your testimony.

TESTIMONY OF JOSEPH HENCHMAN, TAX COUNSEL AND DIRECTOR OF STATE 
                    PROJECTS, TAX FOUNDATION

    Mr. Henchman. Thank you, Mr. Chairman; Mr. Ranking Member; 
and Members of the Subcommittee.
    I appreciate the opportunity to testify today on the role 
of Congress in ensuring that state taxation does not do harm to 
the national economy. This is not a new issue. One of the 
reasons we have a constitution is because of states' impulse to 
do death with a thousand cuts to the national economy through 
their tax policy.
    As Professor Daniel Shaviro put it, ``Perceived tax 
exportation is a valuable political tool for state legislators, 
permitting them to claim that they provide government services 
for free.'' Frowning on these divisive and destructive 
practices, the founders inserted several constitutional 
provisions empowering Congress and the courts to restrain state 
tax power. And for over a century and a half, states' power of 
taxation stopped at their border and did not extend to 
interstate commerce.
    That changed in the 1977 Complete Auto decision, where the 
U.S. Supreme Court permitted states to tax interstate commerce 
if the tax met a four-part test. The most relevant one of today 
is nexus. Nexus survives as a restraint on state tax power, 
although it is now under attack.
    First, there is the state corporate income tax. It is a 
dying tax, killed off by thousands of credits, deductions, 
abatements and incentive packages. Corporations are able to 
plan their way out of the corporate income tax, resulting in 
significant compliance and administrative costs, compared to 
other revenue sources.
    The beggar-thy-neighbor policy adopted by states of 
apportionment formula games, mercantilist film and incentive-
credit programs, destructive gross-receipts taxes, and 
corporate welfare are the reason for the collapse of this tax 
as a revenue source. But rather than fix those problems, the 
push has been, by some states, to reach across state lines and 
out of their borders with the nebulous concept of economic 
nexus. A uniform physical-presence standard would limit these 
destructive state efforts to export tax burdens, and they will 
decrease transaction costs for the interstate business 
activity.
    For sales taxes, the adoption of sales taxes in the 1930's 
was quickly followed by use taxes to discourage consumers from 
buying goods in lower-tax states. Use taxes seek to equalize 
tax burden for the tax on transactions occurring in other 
states--essentially a protectionist measure. But judicial 
decisions have barred states from forcing non-physically-
present individuals and businesses to collect their use taxes. 
These decisions are premised both on the geographic limit of 
state powers, and on the difficulty of complying with over 
8,000 constantly changing sales taxes, with different bases, 
different rates, different exemptions; and, contrary to popular 
belief, not aligned with nine-digit or even five-digit zip 
codes.
    Brick-and-mortar retailers claim unfairness. They must 
collect sales taxes while their online and out-of-state 
competitors do not. Of course, the proposal on the table is to 
impose a greater obligation on out-of-state and online 
businesses, forcing them to collect thousands of different 
sales taxes, while brick-and-mortar retailers need to track and 
collect only one.
    For the income tax, nearly half the states require non-
resident employees to set up individual income-tax withholding 
for their first day of travel into the state. Sixteen more 
states also require withholding after a certain point--and that 
is just withholding, not the obligation to file a return or pay 
taxes.
    A few years ago, we at the Tax Foundation got a call from a 
woman in Ohio. Her son was a soccer goalie, and he had earned 
$28,000 doing that. And spread across this woman's kitchen 
table were 10 state income-tax returns, divvying up the tax on 
$28,000. States are becoming more aggressive in this regard, 
with non-resident income taxes, hunting down schedules via 
Twitter, demanding travel vouchers; generally imposing a 
colossal compliance burden that is a net national-revenue wash, 
transferring tax dollars from low-tax, low-expense states to 
the states with the highest tax burdens.
    The states are hurting, it is true. But they aren't 
entirely innocent in that predicament. I want to echo Mr. Ward, 
who emphasized that those states that rely heavily on volatile 
revenue sources such as taxes on capital gains and taxes on 
high-income earners are those states that are hurting the most. 
I should also note that state fiscal pain does not justify 
beggar-thy-neighbor policies that impose significant compliance 
burdens and deadweight losses on the national economy. State 
power to tax should not extend to everything, everywhere. 
Simplification should be something that everyone embraces, and 
is not a partisan issue.
    As Chief Justice Marshall said, ``The power to tax is the 
power to destroy,'' and state tax overreaching can destroy.
    As a country, we have gone from the artisan to Amazon.com. 
But the sophistication of technology does not override the 
timeless constitutional principles designed to restrain states 
from burdening interstate commerce and imposing uncertainty on 
the national economy.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Henchman follows:]
                 Prepared Statement of Joseph Henchman

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                               __________

    Mr. Johnson. Thank you, Mr. Henchman.
    Next, we will hear from Ms. Kerry Korpi, our final witness.
    Ms. Korpi is director of the Department of Research and 
Collective Bargaining Services for the American Federation of 
State, County and Municipal Employees, a union of 1.6 million 
working and retired public-service workers. The department 
provides assistance to AFSCME affiliates on a variety of 
issues, including public-sector budgets and finance, and health 
and pension benefits.
    Ms. Korpi has worked for AFSCME at its Washington, D.C. 
headquarters, and in various field assignments since 1982.
    Welcome, Ms. Korpi, and please begin.

 TESTIMONY OF KERRY KORPI, DIRECTOR OF RESEARCH AND COLLECTIVE 
 BARGAINING SERVICES, AMERICAN FEDERATION OF STATE, COUNTY AND 
                      MUNICIPAL EMPLOYEES

    Ms. Korpi. Thank you, Mr. Chairman and Members of the 
Committee, for holding this hearing, and for inviting me to 
testify----
    Mr. Johnson. And would you turn that microphone on right 
there, and pull it a little closer to you?
    Mr. Henchman. It is on. I don't think it is working.
    Ms. Korpi. Can you hear me?
    Mr. Johnson. Maybe we could switch microphones.
    Ms. Korpi. This works?
    Mr. Johnson. Yes.
    Ms. Korpi. There we go.
    Mr. Johnson. Yes. Thank you.
    Ms. Korpi. Thank you for holding this hearing, and for 
inviting me to testify on behalf of AFSCME's 1.6 million 
members. We represent public-service workers around the 
country, in jobs ``from accountants to zookeepers,'' as we say, 
and everything in between.
    You have got my written testimony, so rather than repeat 
that, let me speak to this topic from the perspective of our 
members and the people that they serve.
    We have heard a lot about the recent couple of difficult 
years. Back in the years 2002 to 2005, we were seeing a fiscal 
crisis in state and local governments that, at that time, was 
the worst that I had seen in my years at AFSCME. And, little 
did we know then, it would be nothing compared to what we are 
seeing now.
    In the last couple of years, our members have experienced 
layoffs, furloughs, wage freezes, wage cuts, and we expect more 
fiscal trouble in the next 2 fiscal years. This certainly puts 
a strain on our members, but also puts serious strains on the 
public services and the people that they work for. The demand 
for food stamps, unemployment insurance, employment services, 
TANF, Medicaid, the need for child-welfare services, have all 
increased dramatically in this downturn. And systems that were 
stretched before this crisis have reached a breaking point.
    And the role of other public services in a bad economy may 
not be quite as obvious, but they are just as important--public 
safety, parks and recreation; libraries have become a place 
where people search for jobs. And they are closing and 
shortening hours and putting a lot of people at real hardship. 
So when we talk about taxes, I think it is important to 
remember what those taxes pay for.
    What we are also seeing are major policy changes enacted as 
a result of the budget crisis. In some states, there are fewer 
school days. As Governor Douglas mentioned, several states are 
releasing inmates en mass early, before they serve their 
sentences. Now, these policies certainly shouldn't be set in 
stone, and there is room to debate them. But we probably 
shouldn't just change them because we have run out of money.
    In addition to making budget cuts, states are biting the 
bullet and raising taxes by some $32 billion recently. But 
state and local governments are running out of options for 
dealing with the continuing budget problems.
    The American Recovery and Reinvestment Act was tremendously 
helpful. It closed some 30 percent to 40 percent of the 
deficits that states expect from 2009 to 2012. And we thank the 
House and the Senate for passing the $26 billion extension of 
FMAP, and we urge you to quickly reconcile the two versions of 
the bill so that these can get to states.
    We also urge you to continue recovery funding for schools. 
There was funding included in the Jobs for Main Street Act, 
passed by the House, and also in representative George Miller's 
Local Jobs for America Act, which we strongly support as well.
    And I want to join other speakers in strongly urging you 
not to restrict state's options at this critical time. There is 
a temptation in Congress and in states to use state-tax systems 
to protect particular industries, particular new or emerging 
industries, so that they can grow and thrive. And while that 
intention may be good and admirable, the result is many state-
tax systems that we're good in the 1930's are completely 
inadequate for the 21st century. And it means that state-tax 
systems capture less and less economic activity over time, and 
those sectors that are taxed foot the bill.
    So in closing, we urge you to do what only the Federal 
Government can do, and continue to provide relief so that 
states and local governments can provide the services we need 
to get our economy on track. And we also urge you to allow them 
the flexibility to do what they can do to get their own budgets 
back on stable footing. And thank you again for calling this 
hearing, and for inviting me here.
    [The prepared statement of Ms. Korpi follows:]
                   Prepared Statement of Kerry Korpi

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                               __________

    Mr. Johnson. Thank you, Ms. Korpi.
    Our final witness, Mr. Scott Pattison, serves as executive 
director of the National Association of State Budget Officers, 
NASBO, in Washington, D.C. Prior to coming to NASBO, Mr. 
Pattison served for 4 years as Virginia's state budget 
director. Previous to serving as state budget director, Mr. 
Pattison headed the Regulatory and Economic Analysis section of 
the Virginia Department of Planning and Budget. He also served 
in a variety of capacities in the Office of the Virginia 
attorney general, including as counsel.
    Mr. Pattison began his career with the Federal Government, 
serving in several positions at the U.S. Federal Trade 
Commission in Washington, D.C., including as an attorney 
advisor. He also briefly ran a small non-profit focusing on 
consumer-protection issues.
    Thank you, Mr. Pattison. And please proceed with your 
testimony, and welcome.

 TESTIMONY OF SCOTT D. PATTISON, EXECUTIVE DIRECTOR, NATIONAL 
              ASSOCIATION OF STATE BUDGET OFFICERS

    Mr. Pattison. Thank you, Mr. Chairman, and Members of the 
Subcommittee, for inviting me to testify today. I really 
appreciate it.
    And speaking on behalf of the National Association of State 
Budget Officers, which was founded in 1945 and represents the 
budget and finance officers in the 50 states, as well as the 
territories: We collect an enormous amount of data about state 
fiscal conditions. And probably no surprise--I have to tell you 
that states are currently facing an unprecedented fiscal and 
economic situation.
    Mr. Ward talked about the declines in revenue. We have 
found the worst situation since the Great Depression. For the 
first time ever, in the data we have collected over several 
decades, there are 2 years in a row of outright actual 
declines--real declines--in state year-over-year spending. We 
have never had that before. And I think it does demonstrate a 
very difficult time.
    Unfortunately, I have to say, as Governor Douglas and 
others talked about, too--is we expect this to continue through 
fiscal 2013 for the states. There is a lag between the time of 
economic recovery and actual recovery for state governments. So 
it will take a while there.
    Now, while there are efficiencies that come from tighter 
budgets, and some reforms, it is still important to note that 
states must balance their budgets, and they do not have the 
same flexibility and tools that national governments, like the 
Federal Government have, such as controlling the currency, to 
deal with their budget situations.
    The other thing that I want to emphasize, which I think is 
so critical to remember, is the constraints that states have 
upon them, that makes it very difficult already to manage their 
finances. There are very significant state expenses, governed 
by Federal requirements such as regulations in Medicaid. There 
are formulas that have been put into place by states 
themselves, in terms of K-through-12 funding. There are court-
ordered expenditures that sometimes can be hundreds of 
millions, if not in the billions. So there are a lot of 
constraints on the flexibility of states already.
    And the reason that is important is that we do feel that 
any additional requirements, particularly during this 2- to 3-
year period of unprecedented difficult fiscal times for states, 
are extremely problematic, and should be avoided.
    Now, many states are spending considerably less now than 
they did even a few years ago. One of the most extreme examples 
is Michigan, which is actually spending the amount now that 
they spent in 1996. There are a lot of states that are spending 
less now than they did 2, 3, 4 years ago. In other words, there 
is an outright actual decline in spending, even with the 
Recovery Act funds and other revenue increases that they have 
had to take on.
    Now, states have had to work within these constraints. And 
many have attempted to do so. And I think one of the things 
that is important to remember, too, is that states do attempt 
to deal with this volatility with rainy-day funds. During the 
mid-2000's, they had rainy-day funds equaling 11 percent of 
their general funds. That is fairly significant. And they have 
really helped--these rainy-day funds, along with the Recovery 
Act funds--to prevent even further cuts and tax increases, 
despite the fact that there have been significant cuts, and 
significant tax increases during this period.
    Therefore, given this unprecedented fiscal situation facing 
the states, and the fact we expect it to continue at least for 
another 2 years and, unfortunately, for some states like 
California, beyond that, we urge you to consider that any 
changes to Federal tax laws that limit the states' ability to 
have the flexibility to deal with this economic and fiscal 
crisis should be avoided; and, again, especially during this 
very unprecedented, difficult fiscal time for the states. Thank 
you.
    [The prepared statement of Mr. Pattison follows:]
                Prepared Statement of Scott D. Pattison

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                               __________

    Mr. Johnson. Thank you, sir.
    And we will now begin with questioning, starting with 
myself, who I will recognize for 5 minutes.
    Mr. Henchman, in your testimony, you state that, 
``Simplification should be something everyone embraces.'' Could 
you explain the hardships and burdens that are placed on 
everyday Americans when there is uncertainty with respect to 
income-tax liability? And can you explain how this uncertainty 
affects mobile workers?
    Mr. Henchman. Sure.
    I think simplicity is something that is really striking, 
especially today. Today is the deadline for filing Federal 
income taxes. And just figuring out income taxes is an enormous 
burden. In my spare time, I help some of my friends with their 
income-tax returns. And in this area, there are a lot of people 
who move around. So there are people who live in one state, or 
move between different states. So having to file multiple state 
returns is--it is kind of common around here.
    And it is starting to get more common as more states become 
more aggressive about collecting revenue. I mean, as we have 
learned from this panel and the one before it, states are doing 
anything they can to get cash in the door right now. And one 
way to do that is to hunt down the people that are in a state, 
and are not residents of the state, and hit them up for income 
taxes. And that is something that we are seeing.
    In D.C., I heard of a business turned upside-down to get 
travel vouchers. Schedules are getting more common online. And 
states are making use of that technology, unless there is some 
Federal restraint put on it.
    The catchword today seems to be ``flexibility.'' The 
problem with that is that every state wants this revenue. And 
you can only divvy it up so many ways before you are really 
imposing enormous compliance costs, especially with the Mobile 
Workforce Bill, where if you add it all up, it is a net 
national revenue wash. So we have all of this paperwork and all 
of this record-keeping and all of this auditing, and states, on 
whole, get no additional revenue out of it.
    Mr. Johnson. So this simplification in the Mobile Workforce 
Act, which has been proposed as H.R. 2010, would alleviate some 
of that compliance burden on the part of both states and 
employees.
    Mr. Henchman. The virtue of the bill, I think, is that it 
provides a uniform rule in which all states have to abide by. 
And uniform rules in that regard can assist in reducing 
complexity. People will be certain about where they can go, and 
what their taxes will be, and what the rules are. Right now, it 
is not.
    I think the Council on State Taxation has put together a 
very good paper on what they--the best they can figure are--the 
rules are today, on people traveling around. I mean, I am sure 
everyone on the panel--and everyone on the Committee--
Subcommittee--travels around a lot. I don't think anybody 
actually sets up withholding before they travel somewhere. 
Maybe some people file all the tax returns for every state they 
have spent more than a day in. I can't imagine many people do 
that.
    But it is a potential revenue source for states. And, yes, 
they want the ``flexibility'' to go after that. And this bill 
might help address that.
    Mr. Johnson. Thank you, sir.
    Next, I will address a question to Ms. Korpi.
    AFSCME represents 1.6 million working and retired public-
service employees. Some of them would, I imagine, be employed 
by the city of Atlanta. And, on behalf of my colleague who had 
to depart this morning early, Chairman Cohen--I am sure that 
there are a lot of employees in his area as well--Memphis, 
Tennessee.
    Have the state and local spending cuts affected public-
service employees in Atlanta and in Memphis; and to what 
extent, if any?
    Ms. Korpi. In virtually every city around the country--Can 
you hear me now?--we have seen serious problems. The problems 
hit first at the state level, frankly. And, then, as states 
started cutting aid to local governments, we have seen--in 
local governments as well. And as property values are reset, we 
expect those problems to continue.
    The data on cities is not as comprehensive as the data on 
states, but certainly, anecdotally, in the city of Atlanta, in 
the city of Memphis, we have got members who have serious 
problems, who have been, you know, ask to sacrifice benefits, 
have been in discussions about wages and so on, and seeing 
public services cut as well.
    Mr. Johnson. Thank you.
    Next, we will have questions from Mr. Bobby Scott, from the 
great state of Virginia.
    Mr. Scott. Thank you, Mr. Chairman.
    All of the witnesses have talked, again, about the need for 
more revenue on a state and local basis. And with the 
reluctance, I guess--or decision--not to raise tax rates, you 
have got to go find more income to tax. And the best place is 
to smack out-of-state residents who don't vote.
    Now, Mr. Henchman, you mentioned ``net wash.'' What do you 
mean by that?
    Mr. Henchman. As far as I know, every state has a--gives a 
credit for taxes paid to other states. So, for instance if--I 
live in Virginia. I am a constituent. And if I work in New York 
and I have to file a New York income-tax return, I will be able 
to credit those taxes paid to New York from my Virginia return.
    Mr. Scott. Will you credit the taxes, or would you shield 
that income from Virginia taxation?
    Mr. Henchman. Well----
    Mr. Scott. That would----
    Mr. Henchman. It ends up doing both.
    Mr. Scott. Well, it would end up doing both if the tax rate 
is the same. If one is a higher tax rate, it would have----
    Mr. Henchman. If the tax rate is the same, it would end 
up--it really wouldn't matter. But, of course, New York has a 
higher income-tax rate than Virginia does. So the result would 
be that New York would get more of the taxes than--than they 
deserve, in a way, because I would get a credit for all those 
taxes I paid to New York on my Virginia taxes.
    Mr. Scott. Now, that is for the individual income tax.
    Mr. Henchman. Correct.
    Mr. Scott. What about things like business-activity tax? 
Does the business get a local credit for the business-activity 
tax they pay somewhere else?
    Mr. Henchman. It depends, I think. I don't think the rules 
are as certain as they are on the individual income tax.
    Mr. Scott. So----
    Mr. Henchman. And, often, it depends on whether a company 
has nexus. And even that can be disputed.
    Mr. Scott. So that if one state gets very aggressive 
against out-of-state companies, kind of making up a nexus and 
assessing the tax, the business may not get a credit back at 
home.
    Mr. Henchman. I mean, that is a problem we see with both 
the individual and the corporate income tax. It is sort of a 
race to be the highest-tax, highest-burden state, because that 
is the one that gets to take from all of the other states.
    Mr. Scott. Okay.
    Internet sales--any of the witnesses--we have heard the 
last panel suggest that it is not difficult for the Internet 
seller to actually calculate all of the local different taxes--
that there are programs that can calculate this. Is there any 
dispute about that on this panel?
    Mr. Henchman. I would dispute that. I work at the Tax 
Foundation, where one of our missions is to keep track of all 
of the different taxes that are in the United States. And we 
try to put them up on our website as a public service. And it 
is almost impossible to keep track of all of the different 
sales taxes.
    And it is not so much a technological problem. I mean, you 
can create calculators, and if you feed the data into it, it 
would be fine; although, there is some issue of lining them up 
with zip codes, because most people know their five-digit zip 
code. Almost no one knows their nine-digit zip code. And of 
course, sales taxes aren't even aligned by that.
    But the problem is essentially in states and localities 
constantly changing what is taxed and what the rate is, and 
little rate surcharges, because different things can be taxed 
under different state and local tax systems. So it can be very 
difficult to keep track of, especially for retailers, whose 
main goal is to run their business, not become tax experts, 
like the people testifying today.
    Mr. Scott. Is it difficult to clarify exactly--just to 
clarify, to simplify, exactly where the income is earned, for 
the purpose of taxation?
    Mr. Henchman. It can be, because the main thing is who gets 
to tax it. If I, living in Virginia, buy something on the 
Internet, does Virginia get to tax it? Does the state where the 
person sold it to me get to tax it? Does the state that has the 
distribution center that sent it to me get to tax it? Does 
every state that the truck passes through get to tax it?
    The Streamlined Sales Tax Project has developed some 
uniform rules associated with this, although I think they are 
still under discussion. But, of course, not every state is a 
member of that. And if you left it up to the states, every 
state would say they want a piece of it.
    Mr. Scott. Well, would it be possible to leave it up to the 
states, to let them, by compact, decide who gets to tax, and 
let the Federal Government out of it?
    Mr. Henchman. Yes, Representative. That would be an option. 
It doesn't seem to be going anywhere any time soon, though.
    Mr. Scott. Well, if we don't clarify it, you have got 
things like use taxes and business-activity taxes, where, based 
on what you said, it is possible for the same business activity 
to get taxed in two different states.
    Mr. Henchman. Correct.
    Mr. Scott. So we have a reason to want to clarify that.
    Thank you, Mr. Chairman.
    Mr. Johnson. Thank you.
    I would like to thank all of the witnesses for their 
testimony today. Without objection, Members will have 5 
legislative days to submit any additional written questions, 
which we will forward to the witnesses, and ask that you answer 
as promptly as you can, to be made part of the record.
    Without objection, the record will remain open for 5 
legislative days for the submission of any other additional 
materials. Again, I thank everyone for their time and patience. 
This hearing of the Subcommittee on Commercial and 
Administrative Law is adjourned.
    [Whereupon, at 12:40 p.m., the Subcommittee was adjourned.]
                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

Prepared Statement of the Honorable John Conyers, Jr., a Representative 
  in Congress from the State of Michigan, Chairman, Committee on the 
 Judiciary, and Member, Subcommittee on Commercial and Administrative 
                                  Law
    Today's hearing focuses on the impact of federal legislation on 
State and local tax revenues. This hearing is particularly timely in 
light of the fact that today is also the deadline for taxpayers to file 
their federal tax returns.
    During the current economic downturn, State and local governments 
have greatly suffered as a result of decreased tax revenues and the 
increased need for public services spending. Out of necessity, many 
have responded by cutting spending for programs as well as raising 
taxes and fees.
    For example, my home State of Michigan, along with several other 
States, has resorted to furloughing employees in an effort to reduce 
expenditures.
    Another example is the City of Los Angeles, which is considering 
temporarily closing its agencies two days a week. Nevada has cut its 
primary and higher education budget nearly 7%. And Mississippi--in an 
effort to reduce its expenditures for its prison systems--is making 
nonviolent offenders eligible early for parole.
    Unfortunately, even these spending cuts may not fully stabilize the 
current financial situation of States and municipalities. Economists 
predict that State revenues will lag well behind the country's economic 
rebound.
    This Committee has an interest in the current financial situation 
of State and local governments, especially those governments' tax 
policies that may affect interstate commerce.
    The Subcommittee on Commercial and Administrative Law has conducted 
hearings over the past Congresses examining legislative proposals and 
general taxation concepts, including an oversight hearing last February 
that focused on defining nexus.
    Accordingly, I welcome today's hearing, and find it to be 
particularly timely on Tax Day. As we hear testimony from today's 
witnesses, we should consider the following three points:
    First, we should be cognizant of how the current economic situation 
affects our State and local governments.
    Given the potential for our legislative proposals to limit the 
ability of State and local governments to determine how and whom to tax 
within each jurisdiction's borders, it is critical for Congress to 
understand the effects of pending and future legislative proposals not 
just on taxpayers, but also on State and local government revenues.
    State and local governments depend on tax revenues to support 
programs, fund education and essential emergency services, and enhance 
transportation infrastructure.
    Many States have laws that require them to balance their budgets. 
When tax revenues decline, as they continue to do so now in most 
States, because of lower employee payrolls, sales receipts, or property 
values, State governments must adapt. They must cut funding to 
programs, or raise taxes.
    The current economic environment requires State officials to make 
tough decisions. We should be aware that State legislators and 
governors, local councils and mayors, have to decide where to cut 
spending and how much to raise taxes.
    Second, we need to identify those legislative proposals before this 
Committee that restrict State and local governments' authority to tax 
and raise revenues and be aware of their impact on revenues. We also 
should consider legislation which would expand State and local 
governments' taxing authority, while not burdening interstate commerce.
    With their revenues declining for the foreseeable future, State and 
local governments have had to make tough choices to spur economic 
growth while balancing their budgets.
    My home State of Michigan has been hit especially hard as its tax 
base continues to dwindle. In response, Michigan has had to cut 
spending and tweak its tax policies just to stay afloat.
    Our State and local governments have to create tax policies not 
only to pay for providing essential services, but also to spur economic 
development and promote job creation.
    When Congress considers legislation that may restrict State tax 
authority, we should remember the impact that such restrictions have on 
the ability of State and local governments to provide essential 
services. We should consider targeted State taxation legislation to 
lessen the burden on interstate commerce, which encourages the free 
flow of commerce.
    We should consider legislation introduced during the last Congress 
by Representative Delahunt, which would grant the authority of states 
to require remote sellers to remit use taxes. That legislation, setting 
tenets to be incorporated in the Streamlined Sales Tax Project, would 
establish a level playing field for brick and mortar retailers and 
electronic commerce retailers.
    But most relevant to today's hearing, that legislation would bring 
in much needed revenue for states, which have seen their sales tax 
receipts dwindle when consumers move their purchase-making to the 
Internet, and avoid paying sales taxes.
    The Supreme Court has weighed in on the issue of States' requiring 
remote sellers to remit use taxes. In 1992, in Quill Corp. v. North 
Dakota, the Court clearly left it to Congress to decide this issue. The 
Court stated: ``Congress is now free to decide whether, when, and to 
what extent the States may burden interstate [commerce] with a duty to 
collect use taxes.''
    Congress should weigh in on this issue, especially in light of the 
current fiscal situation we find in the States.
    Third, we should encourage State and local governments--together 
with the relevant taxpayers--to work jointly to establish competitively 
neutral tax policies. And we should be actively involved in these 
deliberations.
    Competitively neutral tax policies would not burden interstate 
commerce; they would provide certainty and fairness, and foster 
business development. They would also encourage technological 
development and job creation.
    I thank Chairman Cohen for holding this very important hearing, to 
help us as we consider the impact of legislative proposals on State and 
local governments.

                                

 Prepared Statement of the Honorable Henry C. ``Hank'' Johnson, Jr., a 
   Representative in Congress from the State of Georgia, and Member, 
           Subcommittee on Commercial and Administrative Law
    Thank you, Mr. Chairman, for holding this important hearing 
on state taxation today. It is especially fitting as today is 
``Tax Day.''
    Today we will examine the impact of congressional 
legislation on state and local governments. This hearing will 
give us the opportunity to examine the pending legislative 
proposals before this Subcommittee regarding state taxation.
    The recession has severely affected state and local 
governments and their residents. State and local governments 
are forced to make tough decisions regarding their budgets. 
They are faced with laying off workers, making cuts to 
education, police and fire departments.
    We need to provide a solution for our constituents.
    This is why I have introduced H.R. 2110, the Mobile 
Workforce State Income Tax Fairness and Simplification Act.
    This legislation provides for a uniform, fair, and easily 
administered law that would ensure that the correct amount of 
tax is withheld and paid to the states without the undue burden 
that the current system places on employees and employers.
    The Mobile Workforce bill does not relieve any employee 
from paying state income taxes imposed by his or her state of 
residence. Therefore, the resident state of the short-term 
traveling employee will not be affected by this legislation.
    From a national perspective, the mobile workforce bill will 
vastly simplify the patchwork of existing inconsistent and 
confusing state rules. It would also reduce administrative 
costs to states and lessen compliance burdens on consumers.
    I thank the chairman for holding this hearing, and I look 
forward to hearing from our witnesses today.

                                

  Response to Post-Hearing Questions from the Honorable Jim Douglas, 
    Governor, State of Vermont, on behalf of the National Governors 
                              Association

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Response to Post-Hearing Questions from the Honorable B. Glen Whitley, 
County Judge, Tarrant County, TX, on behalf of the National Association 
                              of Counties

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 Post-Hearing Questions submitted to Robert B. Ward, Deputy Director, 
             Nelson A. Rockefeller Institute of Government*
---------------------------------------------------------------------------
    *At the time of the printing of this hearing record, the 
Subcommittee had not received a response to the questions submitted to 
this witness.

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       Response to Post-Hearing Questions from Joseph Henchman, 
       Tax Counsel and Director of State Projects, Tax Foundation

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

   Response to Post-Hearing Questions from Kerry Korpi, Director of 
  Research and Collective Bargaining Services, American Federation of 
                 State, County and Municipal Employees

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      Response to Post-Hearing Questions from Scott D. Pattison, 
   Executive Director, National Association of State Budget Officers

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

         Prepared Statement of the Direct Marketing Association

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  Prepared Statement of the Honorable Ronald O. Loveridge, President, 
          National League of Cities, and Mayor, Riverside, CA

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