[Senate Hearing 112-758]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 112-758

  TAX REFORM: WHAT IT MEANS FOR STATE AND LOCAL TAX AND FISCAL POLICY

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

                                HEARING

                               before the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               ----------                              

                             APRIL 25, 2012

                               ----------                              



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            Printed for the use of the Committee on Finance









                                                        S. Hrg. 112-758

  TAX REFORM: WHAT IT MEANS FOR STATE AND LOCAL TAX AND FISCAL POLICY

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

                                HEARING

                               before the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 25, 2012

                               __________





[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]





            Printed for the use of the Committee on Finance



                                _____

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                          COMMITTEE ON FINANCE

                     MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West         ORRIN G. HATCH, Utah
Virginia                             CHUCK GRASSLEY, Iowa
KENT CONRAD, North Dakota            OLYMPIA J. SNOWE, Maine
JEFF BINGAMAN, New Mexico            JON KYL, Arizona
JOHN F. KERRY, Massachusetts         MIKE CRAPO, Idaho
RON WYDEN, Oregon                    PAT ROBERTS, Kansas
CHARLES E. SCHUMER, New York         MICHAEL B. ENZI, Wyoming
DEBBIE STABENOW, Michigan            JOHN CORNYN, Texas
MARIA CANTWELL, Washington           TOM COBURN, Oklahoma
BILL NELSON, Florida                 JOHN THUNE, South Dakota
ROBERT MENENDEZ, New Jersey          RICHARD BURR, North Carolina
THOMAS R. CARPER, Delaware
BENJAMIN L. CARDIN, Maryland

                    Russell Sullivan, Staff Director

               Chris Campbell, Republican Staff Director

                                  (ii)















                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page
Baucus, Hon. Max, a U.S. Senator from Montana, chairman, 
  Committee on Finance...........................................     1
Hatch, Hon. Orrin G., a U.S. Senator from Utah...................     3

                               WITNESSES

Sammartino, Frank, Assistant Director for Tax Analysis, 
  Congressional Budget Office, Washington, DC....................     5
Rueben, Dr. Kim, senior fellow, Urban-Brookings Tax Policy 
  Center, Washington, DC.........................................     7
Hellerstein, Walter, Francis Shackelford professor of taxation, 
  University of Georgia School of Law, Athens, GA................     8
Henchman, Joseph, vice president of legal and state projects, Tax 
  Foundation, Washington, DC.....................................    10
Zinman, Sanford, owner, Zinman Accounting, White Plains, NY......    12

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:
    Opening statement............................................     1
    Prepared statement...........................................    29
Cantwell, Hon. Maria:
    Prepared statement...........................................    31
Enzi, Hon. Michael B.:
    Prepared statement with attachments..........................    33
Hatch, Hon. Orrin G.:
    Opening statement............................................     3
    Prepared statement...........................................    44
Hellerstein, Walter:
    Testimony....................................................     8
    Prepared statement...........................................    46
Henchman, Joseph:
    Testimony....................................................    10
    Prepared statement...........................................    79
Rueben, Dr. Kim:
    Testimony....................................................     7
    Prepared statement...........................................    93
Sammartino, Frank:
    Testimony....................................................     5
    Prepared statement...........................................    98
    Responses to questions from committee members................   116
Zinman, Sanford:
    Testimony....................................................    12
    Prepared statement...........................................   122
    Responses to questions from committee members................   131

                             Communications

Airgas, Inc......................................................   137
Amazon.com.......................................................   139
American Bankers Association.....................................   143
American Booksellers Association.................................   147
American Federation of State, County, and Municipal Employees 
  (AFSCME).......................................................   149
American Public Power Association (APPA).........................   155
American Trucking Associations...................................   157
Beall's Inc. and Subsidiaries....................................   168
Bond Dealers of America..........................................   170
Cardozo School of Law, Yeshiva University........................   174
Center for Fiscal Equity.........................................   184
Coalition for Rational and Fair Taxation.........................   187
The Computing Technology Industry Association (CompTIA)..........   197
Consumer Electronics Association (CEA)...........................   204
Copeland, Dale...................................................   205
Cornett, Hon. Mick...............................................   207
Council of Development Finance Agencies (CDFA)...................   212
Council On State Taxation (COST).................................   214
The Cristol Group................................................   219
Direct Marketing Association, Inc. (DMA).........................   220
The Dow Chemical Company.........................................   225
Download Fairness Coalition......................................   227
eBay Inc.........................................................   232
Economists Incorporated..........................................   238
FASTSIGNS International, Inc.....................................   243
The Federal Tax Authority, LLC (FedTax)..........................   245
Federation of Tax Administrators.................................   250
Fischer and Wieser Specialty Foods, Inc..........................   255
Fuhrman, Hon. Stephen............................................   263
Institute on Taxation and Economic Policy (ITEP).................   265
International Association of Fire Fighters.......................   275
International City/County Management Association, et al..........   282
International Franchise Association (IFA)........................   285
Large Public Power Council (LPPC)................................   287
LORD Corporation.................................................   295
Macy's, Inc......................................................   298
Motion Picture Association of America, Inc.......................   299
Multistate Tax Commission........................................   303
National Association for the Specialty Food Trade, Inc. (NASFT)..   315
National Association of Counties, et al..........................   318
National Conference of State Legislatures........................   325
National Education Association (NEA).............................   338
National Foreign Trade Council, Inc. (NFTC)......................   340
National Governors Association...................................   341
National Marine Manufacturers Association........................   348
National Retail Federation.......................................   351
National Taxpayers Union (NTU)...................................   356
Nesset, Hon. Jeff and Hon. Leon Smith............................   359
NetChoice........................................................   361
Neutral Posture..................................................   373
New Jersey Bankers Association...................................   375
New York Bankers Association.....................................   377
North American Association of Food Equipment Manufacturers 
  (NAFEM)........................................................   380
Oklahoma Municipal League........................................   383
OppenheimerFunds, Inc............................................   386
Organization for International Investment (OFII).................   394
Outdoor Living Brands, Inc.......................................   400
Partnership for New York City....................................   409
Performance Marketing Association, Inc...........................   411
ProHelp Systems, Inc.............................................   414
PulteGroup, Inc..................................................   420
Retail Industry Leaders Association (RILA).......................   422
Sears Holdings Corporation.......................................   426
Securities Industry and Financial Markets Association (SIFMA)....   428
Smithfield Foods, Inc............................................   430
The Soccer Dealers Association...................................   433
Software Finance and Tax Executives Council (SOFTEC).............   435
Specialty Equipment Market Association (SEMA)....................   442
Stonewall Kitchen LLC............................................   445
Third Way Progressives...........................................   448
Twin Falls Area Chamber of Commerce..............................   458
Washington Retail Association....................................   460
Watermark Books and Cafe.........................................   462

 
  TAX REFORM: WHAT IT MEANS FOR STATE AND LOCAL TAX AND FISCAL POLICY

                              ----------                              


                       WEDNESDAY, APRIL 25, 2012

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10:11 
a.m., in room SD-215, Dirksen Senate Office Building, Hon. Max 
Baucus (chairman of the committee) presiding.
    Present: Senators Wyden, Cantwell, Nelson, Cardin, Hatch, 
Snowe, and Thune.
    Also present: Democratic Staff: Lily Batchelder, Chief Tax 
Counsel; Holly Porter, Tax Counsel; Tiffany Smith, Tax Counsel; 
and Ryan Abraham, Tax Counsel. Republican Staff: Chris 
Campbell, Staff Director; Mark Prater, Deputy Chief of Staff 
and Chief Tax Counsel; Nick Wyatt, Tax and Nomination 
Professional Staff Member; and Jim Lyons, Tax Counsel.

   OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM 
            MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. The hearing will come to order.
    In Federalist Paper No. 41, James Madison wrote that one of 
the powers conferred on the Federal Government is the 
``maintenance of harmony and proper intercourse among the 
States.''
    When Madison and our founders crafted the Constitution, 
they debated the proper division of power between the Federal 
and State governments. Today we examine that question when it 
comes to the tax code.
    Most State governments are in tough financial shape. In 
2010, 48 States had budget shortfalls. All States except one 
are required by State law to balance their budgets. That has 
forced States to make tough decisions, such as raising taxes or 
cutting spending.
    Since the financial crisis, 46 States have cut services; 30 
have raised taxes. To help States and local governments balance 
their budgets, the Federal Government provides direct support 
through programs like Medicaid. Thirty-six percent of all State 
revenues come from Federal grant programs.
    The Federal Government has also long played an indirect 
role boosting State and local governments through the tax code. 
Since the first income tax law, Congress has exempted interest 
on State and local bonds. This exemption helps cover part of 
the borrowing cost of projects by State and local governments. 
The interest exemption on bonds totals about $50 billion a 
year.
    The same is true for State and local taxes; that is, the 
tax deductions. Since 1913, Congress has allowed some or all of 
the State and local income, general sales, excise, and real 
property and personal property taxes to be deducted from income 
for Federal income tax purposes. That totals about $66 billion 
a year.
    These tax exemptions and deductions total more than twice 
what the Federal Government provides to States in highway 
funding. Combined, they cost more than $105 billion per year 
or, if you add in the private activity bonds, close to about 
$115 or $116 billion a year.
    During hard economic times, this Federal support helps 
cushion the blow on State and local finances. It also ensures 
that State and local governments play a role in deciding how 
some Federal dollars are spent. For example, making the 
interest on bonds tax-exempt reduces the interest rate State 
and local governments pay to finance roads, schools, hospitals, 
and other construction projects. Just this February, voters in 
Manhattan, MT approved new bonds so the community can afford to 
repair the Manhattan Elementary School's roof.
    Likewise, the deduction for State and local taxes reduces 
the burden that a State or local government places on its own 
residents in raising revenue. As we reform the tax code to 
encourage growth and make our country more competitive, we need 
to ask whether the current exemptions and deductions make 
sense.
    State and local taxes could potentially be allowed as 
above-the-line deductions, allowing all taxpayers to benefit. 
We could also consider providing a uniform subsidy for 
bondholders. Tax-exempt bonds subsidize interest paid on such 
bonds by exempting the interest from the tax, and, currently, 
the value of this subsidy varies based on taxpayers' marginal 
income tax rates.
    For every dollar we spend on infrastructure through a tax-
exempt bond, $0.20 goes to tax breaks for higher-income 
taxpayers. A uniform subsidy would mean each taxpayer receives 
the same subsidy regardless of tax bracket. The Build America 
Bonds Program achieved success using just this approach.
    In Montana, the Barrett Hospital in Dillon was outdated and 
in need of constant repair. Dillon issued $30 million of 
insured Build America Bonds at a 3.67-percent interest rate, 
reducing the borrowing cost to Dillon residents by a full 
percentage point, saving them more than $800,000. The project 
created 33 full-time jobs. Dillon now has a new, state-of-the-
art critical access hospital.
    Beyond these provisions in current law, we should also ask 
what else we can be doing to efficiently help State and local 
governments maintain sustainable budgets. We need to make sure 
our Federal, State, and local tax systems are working together. 
As part of tax reform, we should ask how we can help States 
collect taxes owed and how we can encourage standard rules to 
protect taxpayers from multiple taxes and needless complexity.
    We have worked together with the States to simplify rules 
in the past. Originally driven by the States, the international 
fuel tax agreement provides a uniform system for the 
administration and reporting of fuel taxes paid by commercial 
trucks and buses operating in multiple States. States agreed to 
simplified administration burdens in exchange for ability to 
enforce fuel use taxes.
    More recently, Congress enacted the Mobile 
Telecommunications Sourcing Act to establish uniform rules 
under which the States can tax mobile calls.
    We should consider how we can learn from these examples. So 
we must work to reform the code. Let us remember the lessons 
from Madison and our Founders. Let us bear in mind the 
relationship between our Federal tax code and State and local 
tax systems and improve the code to create growth and make the 
U.S. more competitive. And let us do this in a way that 
improves Federal, State, and local budgets.
    [The prepared statement of Chairman Baucus appears in the 
appendix.]
    The Chairman. Senator Hatch?

           OPENING STATEMENT OF HON. ORRIN G. HATCH, 
                    A U.S. SENATOR FROM UTAH

    Senator Hatch. Thank you, Mr. Chairman. In reading the 
written testimony of our guests today, I was particularly 
struck by Mr. Hellerstein's recitation of the Hippocratic Oath: 
``First, do no harm.''
    Too often, Congress forgets this sensible advice. My hope 
is that this hearing, drawing on the wisdom of our five 
witnesses, will help Congress observe and honor Mr. 
Hellerstein's admonition. The rush for new tax dollars that too 
often characterizes the Federal legislative process oftentimes 
leaves issues involving Federal-State tax coordination by the 
wayside. But we cannot forget that the policies being discussed 
today touch on fundamental constitutional principles--
principles of federalism and separation of powers. And, if we 
are to do no harm, it is important to hold hearings such as 
this one.
    Though I do not have all the answers to the specific policy 
questions this particular hearing will wrestle with, I do have 
a series of bedrock principles that I believe will serve as a 
useful guide.
    The 10th amendment to our Constitution serves as the 
lodestar for today's hearing. As the testimony of our witnesses 
at least implicitly reminds us, under our Constitution of 
enumerated and limited Federal powers, the powers not delegated 
to the United States by the Constitution or prohibited by it to 
the States are reserved to the States, respectively, or to the 
people.
    Now, issues involving the Federal impact on State and local 
revenues impact both the Constitution's separation of powers 
between the Federal and State Governments and the separate 
identity of the sovereign States.
    Too often, some view the Constitution and its limits on 
Federal power as a hindrance to important objectives. I cannot 
subscribe to this approach. We all take an oath to protect and 
defend the Constitution. That Constitution, with its limits on 
Federal power, is our greatest strength, not weakness. And in 
walking the fine line between Federal and State powers, we need 
to be especially mindful of our oath.
    Federal discussions about State finances frequently 
highlight budgetary pressures that have required cuts in 
spending. These are no doubt difficult issues for States, but 
it simply is not the responsibility of the Federal Government 
to address State budget shortfalls.
    Some argue that the recent recession has uniquely harmed 
State revenues, somehow justifying the use of the Federal 
Government as a backstop. Yet, as the Census Bureau noted in an 
April 12, 2012 report, State government tax collections in 
fiscal year 2011 were actually up nearly 8 percent from the 
revenue collected in fiscal year 2010.
    Something else is driving State budget shortfalls, and I 
think, in many instances, the principal issue for States is 
their own unsustainable spending. Also, it is important to 
recall that the States are already receiving significant 
support from Federal taxpayers. According to the Joint 
Committee on Taxation, Federal deductions for State and local 
taxes will diminish Federal taxes by about $347 billion from 
2011 to 2015.* These deductions are generally regarded as 
helping States to leverage spending by minimizing the true cost 
of State and local government. And, as someone dedicated to 
States' rights, I believe that a State should be free to set 
its own tax and spending policies.
---------------------------------------------------------------------------
    * For more information, see also, ``Present Law and Background 
Information Related to State and Local Government Finance,'' Joint 
Committee on Taxation staff report, April 23, 2012 (JCX-36-12), https:/
/www.jct.gov/publications.html?func=startdown&id=4422.
---------------------------------------------------------------------------
    But with rights come responsibilities, and State officials 
need to take responsibility for their own spending decisions.
    In closing, I want to show my appreciation to the members 
of this committee who have a strong interest in these issues 
involving Federal and State interaction. I know Senator Enzi 
has worked very hard for many years on what is now the 
Marketplace Fairness Act. Senator Thune and Senator Wyden have 
proposed the Digital Goods and Services Tax Fairness Act. 
Senators Snowe, Wyden, Menendez, and Nelson are cosponsors of 
the Wireless Tax Fairness Act. Now, your work on these issues 
is a resource for all of us, and I look forward to continuing 
to work with all of you.
    And thank you, again, Mr. Chairman. The work already done 
in this area, which is substantial, and the opportunities 
facilitated by this hearing, will help us ensure that when we 
go down the road of comprehensive tax reform, we do no harm and 
possibly even accomplish some good. So I am grateful for this 
hearing.
    Thanks so much.
    [The prepared statement of Senator Hatch appears in the 
appendix.]
    The Chairman. Thank you, Senator.
    I would now like to introduce our witnesses. First is Mr. 
Frank Sammartino. Mr. Sammartino is the Assistant Director for 
Tax Analysis at the Congressional Budget Office. Thank you very 
much, Mr. Sammartino. We depend on you a lot. Thank you for all 
your work.
    Next is Dr. Kim Rueben. Dr. Rueben is a senior fellow at 
the Urban-Brookings Tax Policy Center. Thank you for being 
here, Dr. Rueben.
    The third witness is Mr. Walter Hellerstein. Mr. 
Hellerstein is the Francis Shackelford professor of taxation at 
the University of Georgia School of Law.
    Fourth is Mr. Joseph Henchman, vice president of legal and 
state projects at the Tax Foundation.
    Finally, Mr. Sanford Zinman, owner of Zinman Accounting in 
White Plains, NY.
    Thank you all for coming.
    Our practice here is for your statements automatically to 
be included and for each of you to speak about 5 minutes.
    It is also my practice--all of you probably have prepared 
written statements. You can read them if you want, but just 
tell it like it is. Do not pull your punches. Be candid.
    Mr. Sammartino?

   STATEMENT OF FRANK SAMMARTINO, ASSISTANT DIRECTOR FOR TAX 
     ANALYSIS, CONGRESSIONAL BUDGET OFFICE, WASHINGTON, DC

    Mr. Sammartino. Chairman Baucus, Senator Hatch, members of 
the committee, thank you for the invitation to testify on 
Federal support for State and local governments provided 
through the tax code and on some ways in which tax reform might 
affect that support. My testimony focuses on two particular 
aspects of current policy--the use of tax-preferred bonds by 
State and local governments and the deductibility of State and 
local taxes.
    The Federal Government provides preferential tax treatment 
for bonds issued to finance activities of State and local 
governments. As a result, those governments are able to borrow 
more cheaply than they otherwise could. At the end of 2011, 
State and local governments owed roughly $3 trillion in the 
form of tax-preferred bonds.
    The most common type of tax-preferred bond is one for which 
interest income is exempt from Federal taxes. Another type of 
tax preference for a State and local bond, which until recently 
has not been much used, is to offer a Federal tax credit in 
lieu of some or all of the interest income from the bond.
    Although a large majority of tax-preferred bonds are 
traditional tax-exempt bonds, such bonds are relatively 
inefficient mechanisms for the Federal Government to transfer 
funds to State and local governments. Specifically, with tax-
exempt bonds, the Federal Government forgoes more in tax 
revenues than State and local governments receive. Estimates 
suggest that the difference is about $6 billion per year or 
about one-fifth of the approximately $30 billion in Federal 
revenues lost through that tax preference. That sum accrues to 
investors who pay high marginal tax rates.
    In contrast, for tax credit bonds, the revenues foregone by 
the Federal Government are captured entirely by State and local 
governments. However, tax credit bonds have not been especially 
well received in financial markets until a few years ago. 
Investors' lack of enthusiasm for such bonds probably stemmed 
from the limited size and temporary nature of most tax credit 
bond programs and an absence of rules for separating tax 
credits from the associated bonds and reselling them.
    In contrast, direct-pay tax credit bonds, for which the 
value of the tax credit takes the form of a payment from the 
Treasury to the State or local government issuing the bond, 
became a significant source of State and local financing in the 
years during which they were authorized, namely, 2009 and 2010.
    The deductibility of State and local taxes provides another 
means of Federal support for State and local governments. 
Taxpayers who itemize their deductions may claim a deduction 
from most State and local taxes. That taxes-paid deduction 
provides an indirect Federal subsidy to State and local 
governments because it decreases the net cost to taxpayers of 
paying such deductible taxes.
    By lowering the net cost of those State and local taxes, 
the taxes-paid deduction encourages State and local governments 
to impose higher taxes and provide more services than they 
otherwise would and to use deductible taxes in place of other 
taxes.
    According to an estimate by the staff of the Joint 
Committee on Taxation, the tax subsidy provided through this 
deduction was $67 billion in 2011.
    How much a given State or local government benefits from 
this deduction depends on the structure of its tax system and 
the characteristics of the taxpayers who provide revenues to 
it. For example, a State or local government that finances its 
spending by using a larger share of deductible taxes receives a 
larger benefit through the deductibility provision, as does the 
State or local government whose taxpayers are more likely to 
itemize deductions.
    In 2009, slightly fewer than one-third of all tax filers 
claimed the deduction for State and local taxes paid. The 
amount of those taxes paid, the tax savings from the deduction, 
and the likelihood that a taxpayer would claim the deduction 
all generally increase with increasing taxpayer incomes.
    Over the next several years, scheduled changes to tax 
provisions and the interaction of the regular income tax and 
the alternative minimum tax will change the number of taxpayers 
who claim the deduction and the associated loss of Federal 
revenues, because the AMT does not allow people to claim the 
taxes-paid deduction.
    Without further changes to tax law, tax provisions that 
were originally enacted in 2001 and 2003 will expire at the end 
of 2012, increasing regular income tax rates for many 
taxpayers. Those increases will raise the value of the taxes-
paid deduction for those who claim it and increase the 
associated revenue loss for the Federal Government.
    In addition, with the higher tax rates, many taxpayers will 
shift from being subject to the AMT to being subject to only 
the regular income tax and will, therefore, be able to claim 
the deduction for State and local taxes paid.
    If certain tax policies that have recently been in effect 
were extended rather than allowed to expire, as under current 
law, the revenue effects of the taxes-paid deduction would be 
different.
    Specifically, if all tax provisions expiring after 2012, 
including the lower regular income tax rates originally enacted 
in 2001 and 2003, were extended and the AMT exemption levels 
were increased for years after 2011, there would be two 
opposing effects on the taxes-paid deduction. First, the lower 
regular income tax rates would reduce the tax savings and the 
associated revenue loss for the Federal Government for 
taxpayers claiming the deduction, but, second, the higher AMT 
exemption levels would reduce the number of taxpayers subject 
to the AMT, thereby increasing the number of taxpayers who 
would claim the deduction.
    That concludes my opening testimony. I will be happy to 
answer questions.
    [The prepared statement of Mr. Sammartino appears in the 
appendix.]
    The Chairman. Thank you very much, sir.
    Dr. Rueben, you are next.

          STATEMENT OF DR. KIM RUEBEN, SENIOR FELLOW, 
       URBAN-BROOKINGS TAX POLICY CENTER, WASHINGTON, DC

    Dr. Rueben. Thank you. Chairman Baucus, Senator Hatch, and 
members of the committee, thank you for inviting me to be here 
today. I am thrilled that you are having this hearing about how 
Federal reform will affect State and local governments.
    With increasing concerns about the Federal deficit, 
fairness, and the complexity and inefficiency of our tax 
system, the need for fundamental Federal tax reform is 
critical. Often overlooked, however, is the fact that any such 
reforms will also affect the tax and fiscal policies of State 
and local governments.
    As mentioned by you, Mr. Chairman, before, although this 
country's economic condition is improving, State and local 
governments are still struggling to balance their budgets. They 
also play an important role in our economy, running about half 
of all domestic public programs, and with State and local 
spending making up about 15 percent of GDP.
    Decisions about changing Federal policy should take into 
account the potential effects on State and local government 
budgets in both the short and the long run.
    I make four points today. First, Federal tax policy and 
reform can help or hurt States. Second, unstable Federal tax 
policy trickles down to the States, and uncertainty is 
especially problematic for States' budgeting. Third, if 
fundamental tax reform is undertaken, transition relief might 
be important for State and local governments. And, finally, 
Congress can play a role in helping to coordinate or protect 
the existing State and local tax base.
    Returning to the first point, Federal tax policy and reform 
can help or hurt States. Federal policy affects how attractive 
specific taxes are for State and local governments and, 
therefore, how those governments organize their tax and revenue 
system.
    State revenue sources, especially income taxes, often 
piggyback on Federal rules. More specifically, statutory 
changes in Federal law can result in significant increases or 
decreases in State revenue. For example, State income tax 
revenues increased after the 1986 tax reform expanded the 
Federal income tax base and also allowed States to reduce their 
rates as well. In contrast, the elimination of the State and 
local tax deduction could increase the cost to State and local 
governments of providing services.
    Second, unstable Federal tax policy trickles down to the 
States, and uncertainty is especially problematic for State and 
local governments. As mentioned before, State and local 
governments are required to pass balanced budgets every year. 
This requires being able to accurately forecast revenues. 
Problems with State tax systems are often exacerbated by 
uncertainty in Federal tax rules. Temporary extensions of 
credits, deductions, and tax rates complicate State 
forecasting. Policy changes and uncertainty can directly affect 
State tax bases through changing definitions of income or 
indirectly due to changes in taxpayer behavior. Especially 
problematic has been uncertainty about future Federal estate 
taxes, tax rates on dividends and income, and dividends and 
capital gains, sources of volatile income for State 
governments.
    Third, if fundamental tax reform is undertaken, and I hope 
it is, transition relief might be important for State and local 
governments. Tax changes can help or hurt States, but 
understanding the short-run effects will be important and may 
require slower adoption of certain policies or some fiscal 
relief. Understanding the state of the economy and the fiscal 
health of State and local governments will be critical in 
undertaking any reform.
    Finally, due to our federalist system, Congress has a role 
in helping to coordinate or protect the existing State and 
local tax base. State and local governments' ability to raise 
revenue can be hobbled by limitations that Congress could 
remove. Most notably, Congress can enact legislation that could 
help coordinate actions across States and would help enable 
State and local governments to collect taxes on Internet and 
mail-order sales.
    As we consider tax reform, it is important to remember that 
our actions will also affect State and local governments.
    Thank you, again, for inviting me to appear today. I look 
forward to your questions.
    [The prepared statement of Dr. Rueben appears in the 
appendix.]
    The Chairman. Thank you, Dr. Rueben, very much.
    Mr. Hellerstein?

STATEMENT OF WALTER HELLERSTEIN, FRANCIS SHACKELFORD PROFESSOR 
  OF TAXATION, UNIVERSITY OF GEORGIA SCHOOL OF LAW, ATHENS, GA

    Mr. Hellerstein. Thank you, Mr. Chairman. I am honored by 
your invitation to testify today, and I hope I can be of 
assistance to the committee.
    My remarks this morning will be limited to horizontal tax 
coordination--coordination among State tax regimes--although my 
written testimony also addresses vertical tax coordination--
coordination between Federal and State tax regimes.
    In considering Federal legislation affecting horizontal tax 
coordination, I think Congress should be guided by three 
overarching objectives. First, Congress should seek to remove 
the unreasonable burdens that State taxes impose on interstate 
commerce. Second, in pursuing the first objective, Congress 
should not unreasonably restrict the States from exercising 
their essential taxing powers to fulfill their constitutional 
obligations within our Federal system. Third, when possible, 
Congress should strive to achieve both objectives at once, a 
point that the chairman has already made.
    Thus, Congress can both prescribe the manner in which 
States may tax interstate commerce, thereby removing burdens 
that complex State regimes impose on interstate commerce, 
while, at the same time, enable States to exercise their taxing 
power by eliminating preexisting judicially imposed constraints 
on State taxing power that were designed to prevent the very 
burdens that Congress has removed through its legislation. I 
would like to offer the committee two examples of the third 
type of intervention, one of them recently enacted, one of them 
now pending before Congress.
    In my view, the Mobile Telecommunications Sourcing Act, to 
which the chairman has already referred, enacted by Congress in 
2000, is a poster child for horizontal Federal-State tax 
coordination at its best. Prior to this Act, the States' power 
to tax interstate telecommunications was governed by the rule 
announced by the U.S. Supreme Court under the dormant Commerce 
Clause in the case called Goldberg v. Sweet. In Goldberg, the 
Court held that the only States that have jurisdiction to tax 
the consumer's purchase of an interstate telephone call are 
States where the call either originates or terminates and is 
charged or billed. But this rule often left the States 
powerless to tax wireless telecommunications, as, for example, 
when a business traveler who lives in State A, where she 
received and paid her monthly phone bill, made a call while on 
business in State B to a person in State C.
    These and related difficulties led Congress, with the joint 
support of the telecommunications industry and the States, to 
enact the Mobile Telecommunications Sourcing Act, which permits 
the State to tax all mobile telecommunication charges for 
services provided by the customer's home service provider at 
the customer's place of primary use, but only at the place of 
primary use.
    Congress both expanded and contracted State taxing power by 
reference to the preexisting dormant Commerce Clause standard 
established by Goldberg, simultaneously conferring such power 
upon and limiting it to the customer's place of primary use.
    The Mobile Telecommunications Sourcing Act is, thus, a 
model for Federal-State horizontal tax coordination. It employs 
Congress's power to both expand and restrain State tax power in 
a manner that allows taxes to be collected in a sensible 
manner, and, at the same time, protects taxpayers from multiple 
taxation.
    Let me turn, finally, to what I regard as an analog to the 
Mobile Telecommunications Sourcing Act and several related 
bills that are presently pending before Congress relating to 
the States' power to require out-of-state sellers who have no 
physical presence in the State to collect the sales or use 
taxes that are due on their sales to customers in the State.
    Just as the U.S. Supreme Court's decision in Goldberg was 
essential to understanding the problem addressed by the Mobile 
Telecommunications Sourcing Act, so the U.S. Supreme Court's 
decision in Quill Corporation v. North Dakota is essential to 
understanding the problem addressed by the proposed 
legislation. Quill held that States have no power under the 
dormant Commerce Clause to require mail-order sellers to 
collect sales and use taxes on sales to customers in the State 
unless they are physically present in the State. The proposed 
congressional legislation, reflected in three bills, is 
designed to authorize the States under specified conditions, 
generally requiring harmonization and simplification of their 
sales and use tax regimes, to require collection of sales and 
use taxes by remote sellers despite their lack of physical 
presence in the State.
    Although the bills differ in their detail, they share in 
common the concept of a deal authorizing collection of taxation 
from remote sellers in return for removal of existing burdens 
on such sellers through simplification and harmonization, as 
well as the provision of tax-compliant software.
    Without burdening this morning's hearing with the nuances 
of my views on the different bills--they are contained in my 
written testimony--I would say that legislation along the lines 
of these proposals is precisely the type of horizontal tax 
coordination that Congress should be considering, on the one 
hand, and uses Congress's power to provide for increased 
uniformity and simplicity among State tax regimes, as well as 
the availability of tax-compliant software, thereby reducing 
burdens on interstate business, on the other hand. And, at the 
same time, it uses Congress's power to remove judicial 
restraints from the States' taxing power that were attributable 
to the burdens that Congress's requirement of uniformity have 
now removed.
    Thank you for the opportunity to address this committee.
    [The prepared statement of Mr. Hellerstein appears in the 
appendix.]
    The Chairman. Thank you, Mr. Hellerstein, very much.
    Mr. Henchman?

STATEMENT OF JOSEPH HENCHMAN, VICE PRESIDENT OF LEGAL AND STATE 
            PROJECTS, TAX FOUNDATION, WASHINGTON, DC

    Mr. Henchman. Good morning. Thank you, Mr. Chairman, Mr. 
Ranking Member, members of the committee. Thank you for the 
opportunity to testify today on the role that Congress plays in 
State tax policy.
    In the 75 years since our founding, the Tax Foundation has 
monitored tax policy at the Federal and State levels, and our 
analysis is guided by the principles of economically sound tax 
policy--simplicity, neutrality, transparency, and stability.
    The main question I want to answer for you is, what is 
Congress's role in State tax policy? After all, to be an 
American is to be a believer in federalism, and that means 
Congress has its areas and the States have their areas. Most of 
the time, Congress should let the States do their thing, even 
if it is bad policy. But, in a very few important situations, 
Congress has the power and the responsibility to get involved 
in State tax policy--two situations, in fact.
    The first is to preserve the power of the Federal 
Government. States cannot tax the Federal Reserve, for 
instance, and there are Federal laws banning State taxes on 
non-resident members of Congress and non-resident members of 
the military.
    The second situation goes to the reason why we adopted the 
Constitution in the first place, which was mentioned by the 
chairman in his opening statement. States went wild under the 
Articles of Confederation. Port States put punitive taxes on 
commerce going to interior States and vice versa. Tariff wars 
proliferated.
    So the Constitution was adopted, giving Congress the power 
to restrain States from enacting laws that harm the national 
economy by discriminating against interstate commerce.
    In short, States will put their own interests ahead of the 
Federal interests every time. They have an incentive to shift 
tax burdens from physically present individuals and businesses 
to those who are beyond their borders, non-voters. And, when 
this behavior is not prevented by Congress or the courts, the 
results can be taxpayer uncertainty, incompatible standards, 
and harm to national economic growth.
    As one example, take a multistate corporation with 
operations in five States. If each of those five States imposes 
a State corporate income tax, the companies' profit must be 
divvied up or apportioned among those five States. That is so 
no State taxes more than its fair share and no multiple 
taxation occurs.
    States game this, bending their apportionment rules to tax 
profits that were earned in other States. Congress recognized 
this problem and set up the Willis Commission in 1959 to adopt 
one uniform apportionment standard. That threat was successful 
in getting the States to adopt one on their own, although, 
without congressional force backing it up, the States began 
drifting away from it soon afterwards, and today only 11 States 
stick with that uniform apportionment rule. The rest have 
abandoned it to grab revenue from other States.
    There are similar situations today which cry out for a 
uniform standard, which I describe in detail in my written 
statement. Just to highlight one problem, this is BNA's survey 
of State tax departments. It is a compilation of State 
questionnaire results on nexus-creating activities for business 
activity taxes.
    According to the survey results, 13 States find that you 
are within their taxing jurisdiction if you have a website 
hosted on another entity's server in that State. One State and 
DC will tax you if you send employees to attend a seminar, even 
if you engage in no sales activity. This volume, while the best 
source we have today for businesses asking when they can be 
subject to tax, is littered with footnotes, exceptions, and 
appendix notations, reinforcing the lack of clarity the States 
have imposed on those who engage in interstate commerce.
    We at the Tax Foundation get calls all the time from 
taxpayers caught in a trap by aggressive State nexus standards. 
The same is true with individual income taxes on business 
travelers, with sales tax, and with many other State taxes.
    The States cannot solve these problems on their own. 
Congress told the States to adopt a uniform corporate income 
tax apportionment standard in 1959, and we are still waiting. 
Sales taxes, despite the work of the Streamline Project, are 
getting more complex and more numerous each year.
    On income tax, on business travelers, or on sales taxes, 
the States are not budging from their positions. Today, with 
new technologies, even the smallest businesses can sell their 
products and services in all 50 States. Business travel is 
easier than ever before. The temptation is great to treat 
interstate commerce like a golden goose to be squeezed. This 
temptation can only be countered by well thought-out, uniform 
rules imposed and enforced at the Federal level.
    Thank you, and, as always, we are eager to be of assistance 
on these issues now and in the future.
    Thank you.
    [The prepared statement of Mr. Henchman appears in the 
appendix.]
    The Chairman. Thank you, Mr. Henchman, very, very much.
    Mr. Zinman?

              STATEMENT OF SANFORD ZINMAN, OWNER, 
              ZINMAN ACCOUNTING, WHITE PLAINS, NY

    Mr. Zinman. Thank you, Mr. Chairman and members of the 
committee. I am a certified public accountant, I am a member of 
the American Institute of CPAs, and I am currently the national 
tax chair of NCCPAP, the National Conference of CPA 
Practitioners.
    Accompanying me is Mr. Edward Caine, the national vice 
president of NCCPAP, who is a CPA in the Philadelphia area.
    You have received my written testimony, and I would like to 
focus on some key issues. The types of taxes which impact 
taxpayers the most are income taxes of individuals and other 
entities, employment taxes, and State and local sales and use 
taxes.
    The issue of income taxes for individuals with multistate 
residency is not new, but has grown in recent years. Many 
individuals, married or single, are purchasing second homes in 
other States and dividing their time between their residences. 
This poses a problem for these taxpayers.
    In which State do they declare residency? Currently, this 
issue is not being decided by the individual, but by the State 
tax laws, and the State governments have become aggressive in 
seeking additional sources of revenue. Each State sets its own 
rules to establish and define what residency is for purposes of 
income taxes, sales and use tax, and estate tax. I acknowledge 
that Federal law should not supersede State law, but 
individuals are left to battle with each jurisdiction that 
wants a piece of the action in their tax dollars.
    Businesses which have a nexus in multiple jurisdictions are 
also potentially subject to double or triple taxation. Although 
all States will acknowledge that credit should be given for 
taxes paid to other jurisdictions, those credits will not be 
given if the State perceives that the tax paid to another 
jurisdiction is improper. Individuals and businesses may choose 
to pay double taxation to avoid a lengthy administrative 
process. After all, these taxes are often deductible federally 
anyway.
    Regarding employment taxes, workforce mobility is here to 
stay. Federal law recognizes this mobility and offers 
individuals and entities incentives to ensure that the workers 
can keep working and the companies can keep good workers. 
However, State and local employment laws and regulations vary 
greatly from State to State.
    The Treasury Department regulations on uniform definition 
of a qualifying dependent have gone a long way toward resolving 
related income tax issues. A similar effort on who is an 
employee would be extremely helpful and would do a lot to level 
the playing field for employers.
    Next, there is the alternative minimum tax. NCCPAP has long 
advocated for the abolishment of the AMT. The AMT 
disproportionately affects taxpayers in certain States and 
areas of the country, even though it is clear that was an 
unintended consequence of the law.
    Finally, sales and use tax issues also significantly affect 
State and local governments. Over the past several years, in an 
effort to increase revenue, States have increased their 
collection efforts. By the end of 2011, eight States had 
enacted click-through nexus provisions and more than 15 States 
have proposed laws expanding sales tax nexus.
    The States have begun to look for any connection that an 
out-of-State seller might have and could be construed as a 
physical presence. Some States have enacted legislation 
imposing a sales tax liability on Internet companies if the 
company has an agent in the State. While most people understand 
the need for separation of Federal and State governments, it is 
apparent that there is a loss of sales tax revenue due to 
cross-border sales. It should also be noted that this 
represents a potential loss of revenue to main street small 
business retailers who have a physical presence in one State, 
but are not big enough to be a multistate retailer.
    The Multistate Tax Commission, in 2011, directed its sales 
and use tax uniformity subcommittee to begin drafting a model 
nexus statute based on the Amazon case. There is a strong need 
for Federal oversight of State sales and use tax to ensure that 
all States are able to collect their proper tax revenue.
    Thank you.
    [The prepared statement of Mr. Zinman appears in the 
appendix.]
    The Chairman. Thank you, Mr. Zinman, very much.
    We all know that the cry these days is ``tax reform.'' It 
is lower the rates, broaden the base, simplicity. A lot of 
people refer back to the 1986 tax reform, where there was 
significant rate reduction and base broadening.
    Where in this area--that is, State and local taxes--can 
Congress look to reduce tax expenditures; that is, reduce the 
deduction, change the deduction, if you will, raise revenue, in 
order to compensate rate reduction?
    Let us assume, for purposes of discussion, that we are 
talking about revenue neutrality here. But we all know we have 
a tremendous debt, national debt. And without being too 
dramatic here, we also know that if Congress were adjourned 
today, of the $15 trillion national debt that we have, if 
Congress adjourned today and did not reconvene until sometime 
next year, we would automatically shave about $9 trillion over 
10 years off that national debt--$9 trillion over 10 years.
    Now, that is just debt reduction. Many suggest we need to 
raise revenue and cut spending in order to address the debt. We 
know the Simpson-Bowles Commission has all kinds of proposals. 
Rivlin-Domenici, the Gang of 6, and so forth, almost all of 
them say we should reduce the national debt by $4 trillion over 
10 years, and we should do it with some combination of spending 
cuts and revenue raised and try to get annual deficits down to 
at least 3 percent of GDP. That is what economists tell us is 
sustainable.
    But in addition to tackling national debt, we have a 
separate problem, which is tax reform. They are separate, but 
they are also joint, because with tax reform, maybe we try to 
broaden the base and lower the rates in a way that also raises 
revenue.
    So I just ask you. If we have to raise--let us start with 
the easier one. Let us say a revenue-neutral effort to lower 
rates and broaden the base, in this area, where do we cut tax 
expenditures? Where in this area are tax expenditures reduced, 
in addition to other areas of the code--we have other tax 
expenditures that have to be reduced--in order to get the rates 
down?
    Some talk about the corporate rate is 35 percent, getting 
it down to 25; some say get the top individual rate down to 25. 
If that means we have to cut out some deductions and credits 
and exclusions here, if we do all this, in this area, if we 
have to, if Congress really wants to, if the American public 
really wants to have tax reform--I am giving you time to think 
about this. Where do we start to chop away?
    Who is boldest here and wants to lead off?
    Mr. Sammartino. Maybe I will. Of course, the Congressional 
Budget Office does not make recommendations for policy.
    The Chairman. Right. Right.
    Mr. Sammartino. But we have, in the past, looked at various 
options in this area, including options to limit the State and 
local tax deduction, and we found that various options, from 
eliminating it completely to placing a cap on it or, in one 
case, converting it to a 15-percent credit, all would raise 
significant revenues over a 10-year period.
    One thing we looked at, in addition, was one of the main 
features of the alternative minimum tax, which is that it 
eliminates the State and local tax deductions for taxpayers who 
are on the AMT.
    So we considered the same set of options in the context of 
eliminating the AMT, and we found that for all the options we 
looked at, again, including complete elimination of the State 
and local deduction, placing a cap on it, and all those options 
except the option for the 15-percent credit, that if you both 
restricted or eliminated the taxes-paid deduction and 
eliminated the AMT, you would still raise revenues through that 
combination.
    Now, these estimates were done a couple of years ago. More 
taxpayers would be likely eligible for the AMT. So the numbers 
might change, but still, that is kind of one possible tradeoff 
one can think about in the context of tax reform that we have 
looked at.
    The Chairman. Right. And that approach, is it a one-for-
one, or is this reduction in State revenue less than the gain 
in Federal revenue?
    Mr. Sammartino. So what we found is that if you were to 
completely eliminate the taxes-paid deduction and eliminate the 
AMT, it would still be a net revenue increase for the Federal 
Government.
    The Chairman. And the effect on the States would be?
    Mr. Sammartino. I mean, the States, it is a problem, 
because you are reducing some of the subsidy to State and local 
governments. We did not examine what the impact would be. It 
depends on how States would respond to that.
    The Chairman. I just urge you and urge all panelists and 
anybody else listening, anyone else who cares about tax reform, 
to start thinking seriously about this and coming up with some 
reasonable alternatives and reasonable suggestions, creative 
suggestions on how to do it.
    Yes, Dr. Rueben? My time has expired, but very briefly, 
please. Briefly.
    Dr. Rueben. I was just going to say, the other thing that 
happens when you make this tradeoff between the AMT and State 
and local deductions is you are also changing the distribution.
    It is a way of shifting some of the tax burden away from 
families who are more likely to be on the AMT. So there is some 
within-State variation that occurs. But I think, in some ways, 
if you actually had consistent tax policy with reform of the 
AMT, that would be incredibly helpful for States. So you might 
be able to have some sort of tradeoff between limiting the 
deduction, if you gave them more knowledge about what tax 
systems would look like.
    The Chairman. Thank you very much.
    Senator Hatch?
    Senator Hatch. Thank you, Mr. Chairman.
    This question is for the whole panel. Currently, most 
taxpayers who itemize have a choice of deducting certain taxes 
paid to State and local municipalities. Currently, deductions 
are allowed for State and local real property, personal 
property, State sales, and income taxes. Now, the Joint 
Committee on Taxation estimates that the revenue loss to the 
Federal Government will be around--well, from 2011 to 2015, 
these deductions will be about $347 billion, if they are 
extended for that time.
    Now, as Mr. Sammartino notes, by lowering the net cost of 
those State and local taxes, the taxes-paid deduction 
encourages State and local governments to impose higher taxes.
    My question is, how much do these deductions subsidize 
State and local governments? We know what the revenue loss is 
to the Federal Government, but even if one is comfortable 
subsidizing State government, is this a good way to do it?
    Additionally, for Mr. Zinman, how aware is your average 
client of the dynamics of these deductions? Do they understand 
that they are viewed as a benefit to State and local government 
that might increase other taxes?
    So whoever wants to answer that.
    Mr. Zinman. I can tell you that 10 years ago, in my 
office--as I have in my written testimony--my typical client 
for individual income tax was not a wealthy stock trader, but a 
working person. Ten years ago, we did not talk about AMT at 
all.
    Now, this is the typical conversation, and the conversation 
centers around how much, in my case, in the New York 
metropolitan area, people are paying for real estate taxes, but 
are not getting a deduction on their Federal tax return because 
of AMT. And, in fact, if nothing happens to AMT, it is 
projected that by 2013, 50 percent of Americans will be 
calculating their taxes using the alternative minimum tax 
calculation.
    So there are a number of individuals in certain States, and 
that number is growing, who are now faced with an issue. Their 
issue is that they are paying a higher amount of State and 
local real estate taxes, State and local income taxes, and they 
are not getting the Federal tax deduction that they were hoping 
to get.
    So the Federal income tax is not offset by what is 
happening, and this is starting to trouble a lot of people.
    Senator Hatch. Thank you.
    Does anybody else care to comment? It is pretty simple.
    Let me go to a second question. President Obama has 
proposed to dramatically reduce the charitable deduction in his 
latest budget, as well as previous budgets. He does so by 
proposing to take away up to 29 percent of itemized deductions 
for families that are in either of the top two income tax 
brackets. Now, this appears to me to be a policy that would 
lead to an absolute reduction in charitable giving, and charity 
should be the last thing that the President is attacking, in my 
opinion. The President is also going after the ability of 
families and individuals to exclude interest on tax-
exempt bonds from their income.
    So this question is for the whole panel, anybody who wants 
to answer it. Yes or no? Let me just ask you to give a ``yes'' 
or ``no.''
    Does everyone on this panel agree with me that the 
President's proposal will increase borrowing costs for State 
and local governments?
    Mr. Sammartino?
    Mr. Sammartino. Well, actually, we think it might have just 
a minor effect on borrowing costs, because, when the State and 
local governments have to set an interest rate to sell the 
amount of bonds they want, it is usually--in order to clear the 
market, they have to target that rate to taxpayers with lower 
marginal tax rates to provide enough subsidies so those 
taxpayers would buy the bonds, and I think most of the evidence 
suggests that that rate is something below--at or below 28 
percent.
    So the President's proposal to limit the benefit of 
itemized deductions to 28 percent would not affect taxpayers 
whose marginal tax rate is at or below 28 percent. Taxpayers 
above that, if their alternative to buying tax-exempt bonds is 
to buy a taxable bond, would still be better off buying the 
tax-exempt bonds at current rates than buying a taxable bond 
and paying the tax.
    Now, there could be some effect, because some of those 
taxpayers may decide that they would shift their portfolios a 
bit. But for most taxpayers, we think it is not going to have a 
very big effect.
    Senator Hatch [presiding]. My time is up.
    Senator Cantwell?
    Senator Cantwell. Thank you, Mr. Chairman. And, obviously, 
one of the things that we care about in the Pacific Northwest 
is tax fairness and the fact that we do not have an income tax, 
and we want the ability to deduct our sales tax from our 
Federal income tax obligations. We do have a lot of itemizers 
because of this. And so making sure that we continue that 
policy and make it permanent is a big priority.
    I did want to follow-up on this tax-exempt bond issue, 
because one of the issues for us is that some of these tax-
exempt bonds are used to finance public power projects for 
capital investment.
    And I do not know. Maybe you do not know. Dr. Rueben, I do 
not know if you know the answer to this or not. But what impact 
would this have on utility rates as a result, if we got rid of 
the tax-exempt bond status?
    Dr. Rueben. I do not know what the precise rates would be, 
but part of it is going to depend on how transition is done. So 
part of the reason I think any sort of reform, especially in 
the muni bond market, will need to have a certain level of 
reform and transition involved is because financial markets and 
local government revenues are still kind of not totally 
recovered.
    So I think whatever we do--and as the Federal Government 
goes forward--if there is some switch in how we treat tax-
exempt debt, it will be important to think about how specific 
localities will fare under these arrangements. And so having 
some sort of transition period will be pivotal in terms of 
being better able to understand what is going to happen in 
individual locations.
    Senator Cantwell. Would that missing advantage then have to 
be covered by ratepayers overall?
    Dr. Rueben. Partly, it depends how it is set up. So, if we 
basically lower the tax-exempt status, it depends on whether it 
is newly issued debt or whether it is existing debt.
    So existing debt, any disadvantage would actually be borne 
by the people who are holding the debt right now. So it is not 
necessarily the people issuing it.
    If we moved into a new regime where there was a different 
system which maybe included tax credits rather than a tax-
exempt status, I think it would depend on the issuing ability. 
And that is why I think having both systems in place, if we 
were going to do some transition for a little while, will be 
important to see whether revenue bonds can be approved at 
minimal cost to investors and issuers.
    Senator Cantwell. Well, I think this is an important 
question. So we will be following up with you and the committee 
on this just to make sure that public power is not 
disadvantaged in a bond structure, moving forward.
    We are continuing to grow, and we sell a lot of power to 
California. We sell a lot of power all over. And making sure 
that people have access and continue to build the grid is 
something very, very important to us. It is a key element of 
our economy.
    So thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Thune?
    Senator Thune. Thank you, Mr. Chairman.
    I want to thank you and Senator Hatch for holding today's 
important hearing, and to thank our panelists for their 
willingness to testify.
    There are a number of very important issues regarding State 
and local taxation that are being discussed today, and I wanted 
to focus on one in particular--the taxation of digital goods 
and services.
    Last year, I introduced, along with my colleague from 
Oregon, Senator Wyden, the Digital Goods and Services Tax 
Fairness Act. Our legislation would ensure that the fast-
growing digital economy is not stymied by multiple and 
discriminatory State and local taxes.
    Digital goods and services, such as movie and music 
downloads and cloud computing services, are an ever-increasing 
and vital part of our economy. Just as an example, in 2010, in 
the United States, online retailers sold over 1 billion digital 
music tracks, totaling $1.5 billion in revenue.
    E-book sales in the U.S. reached $1 billion in 2010. They 
are expected to almost triple by the year 2015. And sales of 
downloaded apps have been especially fast-growing. In 2010, 
there were 8 billion apps downloaded in the U.S. Last year, 
there were 18 billion apps downloaded. It is projected that 
more than 90 billion apps will be downloaded by the year 2015. 
App revenue from smart phone downloads is projected to increase 
from $1.9 billion in 2010 to more than $29 billion by the year 
2015.
    So, as the digital economy grows, we need to make sure that 
we set some basic rules of the road so that multiple States 
will not attempt to tax the same downloads. The legislation 
that Senator Wyden and I have introduced simply clarifies that 
the State with the authority to tax the digital download is the 
State where the consumer resides. Our bill does not take away 
taxing authority from States. In fact, it should provide States 
with greater certainty going forward.
    For States such as South Dakota, which does not have an 
income tax and which relies heavily on sales taxes, protecting 
the State's sales tax base is important, just as it is 
important that Congress extend the deductibility of State sales 
taxes for taxpayers who itemize, a provision that expired at 
the end of last year.
    I hope the Senate will have an opportunity to consider the 
Digital Goods and Services Tax Fairness Act later this year, 
and I appreciate the leadership of the Senator from Oregon on 
this issue and look forward to working with him and with this 
committee and hopefully being able to move this legislation 
forward.
    I just have a question for anybody on the panel. You 
identified the Mobile Telecommunications Sourcing Act--I think 
that was you, Mr. Hellerstein--as the poster child highlighting 
the appropriate role for Congress to address certain 
complexities that surface in State and local taxation of 
interstate commerce.
    Do you see the need--same need, I should say, for Congress 
to set forth a similar framework for digital commerce?
    Mr. Hellerstein. Senator, I think that that would 
actually--that would fit within at least my view of what would 
be appropriate legislation. It is very important, again, to 
come back to Senator Hatch's point about, first, do no harm. It 
is very important that this be done surgically.
    So, if we are to identify a particular State that may tax 
these goods and services and only that State, that, I think, is 
quite consistent with the Mobile Telecommunications Sourcing 
Act. On the other hand, as I read through this draft bill, I 
think it would be a field day for lawyers given the 
uncertainties with some of the definitions and the scope. So I 
would just urge this committee or whoever is considering this 
bill to be very, very careful in trying to do good, because 
there are provisions in the bill, as drafted, which I would 
regard as not ideal.
    Senator Thune. Does anybody else want to comment on that?
    [No response.]
    Senator Thune. No. Let me ask just a question about this 
issue. If you had a consumer from Washington who is visiting 
Florida and downloads a song that is provided from a server in 
Utah, which State has the legal authority today to receive the 
tax revenue from that purchase?
    Mr. Henchman. They can all try, and that is the problem.
    Senator Thune. Yes. And without congressional action, is it 
not questionable as to which State, if any, has a right to 
receive the tax revenue from that transaction?
    Mr. Henchman. Absolutely, and they will all try.
    Senator Thune. Just as a question, too, I think you 
indicated State and local taxes should not impose an undue 
burden on interstate commerce.
    Does it not make sense, then, if you agree that the 
purchase of downloaded music should be taxed no differently 
than the local purchase of a CD--I mean, if you are going to 
buy a CD in a store--that downloading music ought to be taxed 
in a similar way?
    Mr. Zinman. Conceptually, that makes a lot of sense, yes. 
Administratively, it may be difficult to do, but conceptually, 
it makes a lot of sense.
    Senator Thune. But nobody basically disagrees with that 
concept? Conceptually, it makes sense?
    The Digital Goods and Services Tax Fairness Act does not 
dictate whether or not a State can tax digital transactions, 
but rather sets a framework upon which State and local taxes 
can be applied to this form of commerce in a fair and rational 
manner.
    Some have asserted there is no such impediment to a 
rational tax structure under existing law, citing the fact that 
consumers can get credits if they pay double taxes. However, 
would not all stakeholders be better served for Congress to 
establish some sort of framework that will provide the 
certainty for consumers, providers, and State and local 
governments in the taxes collected from digital commerce?
    Mr. Henchman. Yes.
    Senator Thune. Does anybody disagree with that?
    Mr. Henchman. The States will not do it themselves.
    Senator Thune. Thanks. Well, I guess the question is, how 
we do it. And we have a proposal out there and, hopefully, with 
your input, we can perhaps refine that and make it stronger and 
more effective. But certainly it is an area that I think needs 
to be addressed. And, with all the advances that we are seeing 
in technology and the way that people purchase various things 
these days, we are going to need some kind of a framework, and 
it seems, to me at least, that that is an issue that Congress 
is going to have to deal with.
    So I thank you, Mr. Chairman. And thank you all for sharing 
your insights today.
    The Chairman. Thank you, Senator.
    Senator Cardin?
    Senator Cardin. Thank you, Mr. Chairman. And let me thank 
the panelists.
    I want to talk about one of the major sources of revenues 
for our States, and that is the sales and use tax.
    Dr. Rueben, I want to focus on the fact of how much of 
those revenues are not being collected today. It has been 
estimated, as a result of out-of-State shipments, and 
principally through the Internet, that there is $11 billion a 
year not being collected.
    Now, I got the Maryland number, and the Maryland number is 
$300 million, which is an interesting number, because the 
Governor is talking today about bringing the legislature back 
to a special session in May because of a $300-million gap and 
is looking at increasing a lot of taxes in our State because we 
need $300 million to balance our budget.
    If we had the sales and use tax, we would have a balanced 
budget and there would be no need to bring the legislature back 
into session, which brings me to the Marketplace Fairness Act 
and trying to establish a level playing field.
    You can go to a retail store in Maryland, use your phone to 
take a photograph of its identification, then go on the 
Internet and get that product shipped into Maryland and avoid 
the sales tax. The price might be identical, but you are 
avoiding the sales tax. And to me, this is a matter of tax 
integrity.
    That person who does that is supposed to pay a use tax. And 
I have heard that retailers or Internet sellers feel it is such 
a burden to have to collect a sales tax. It is a huge burden. 
They ask Marylanders to pay a use tax.
    So are we not picking winners and losers if we do not take 
some action to provide for a level playing field?
    Dr. Rueben. I am a big fan of there being some action to 
help coordinate these issues. I think that as more sales get 
done on the Internet or electronically or through catalogs, I 
think State and local governments are going to be at a 
disadvantage. And so congressional action to help coordinate 
this seems like a no-brainer, in my perspective.
    Senator Cardin. Thank you.
    Mr. Zinman, I see that you are anxious to respond. I am 
going to give you a chance.
    Mr. Zinman. I am just agreeing.
    Senator Cardin. Well, good. Let me just pose the question. 
There are two issues that are usually raised by those who have 
asked for delay of Federal action. One is that it is a little 
complicated because of all the different sales and use taxes. I 
point out that there is free software available that would 
assist in the collection of this. And the other issue is a 
small business exemption, which is included, by the way, in the 
Marketplace Fairness Act.
    I am not aware of any small business exemptions on the 
brick-and-mortar requirements to collect sales tax if you have 
a facility located in our State. Is there any administrative 
reason why we should not be moving forward on this?
    Mr. Zinman. Absolutely not. If you look at what is 
happening with Best Buy, that is, even though they are 
multistate, they are brick-and-mortar, and they are hurting a 
lot because of the Internet sales because--I will give you a 
perfect example.
    An individual can go to New York and buy a set of golf 
clubs, but he has a place in Florida. He buys an expensive set 
of golf clubs. He says, ``Ship it to Florida.'' No sales tax. 
It will cost him $30 to ship the golf clubs down to Florida.
    Mr. Henchman. And Florida has a very high sales tax.
    Mr. Zinman. But he is not paying--he is supposed to pay--I 
am not saying what he is supposed to do. I am saying what 
actually happens. What actually happens is he is not reporting 
that sales tax in Florida.
    Senator Cardin. I have not checked Florida's use taxes, but 
my guess is there are not many being filed by individual 
consumers.
    Mr. Zinman. That is right. In New York, we have a line on 
our New York State return--and many States have a line on their 
tax return--asking the taxpayer to voluntarily compute and give 
back the sales tax they should have paid in the form of a use 
tax.
    But you now take a State like Florida that does not even 
have an income tax form to report this. They have the use tax 
forms. They are there. They are available. But many people who 
have multistate residences--and I am just using New York and 
Florida as an example, because that is a corridor that a lot of 
people travel--a lot of individuals are ignoring the taxes that 
they have to pay.
    Senator Cardin. It is my understanding that--and we have a 
form in our State where you can include the use tax. So we have 
that in Maryland.
    The $300-million number I gave you was a net number.
    Mr. Zinman. Right.
    Senator Cardin. I do not know the exact amount of use taxes 
we collect from individual consumers, but it is miniscule.
    Mr. Zinman. I am sure it is miniscule.
    Mr. Henchman. Very briefly, I just want to make sure the 
goal of simplification is not minimized here, because, while 
that retailer has to collect and does not get a de minimis 
threshold, they are only collecting one sales tax. Internet 
retailers would have to track and collect 9,600 across the 
country.
    And, yes, there is software on the rates, but that software 
does not help you distinguish between all the sales tax 
holidays and all the different rates on different products.
    Senator Cardin. Are you telling me that computers cannot 
figure this out? I have my----
    Mr. Henchman. It is not computers. It is tracking the----
    Senator Cardin. I am amazed at what I can put into my iPad 
and get an answer to immediately. Are you trying to tell me 
that we do not have a computer program that can figure out this 
issue?
    Mr. Henchman. It is not a question of computer programming, 
but a question of tracking changes in legislative laws. And 
there is a lot of----
    Senator Cardin. And my iPad gets me the up-to-date 
information on traffic instantaneously. You are trying to tell 
me we do not have that technology available today?
    Mr. Henchman. I work at the Tax Foundation. We do our best 
to keep track of all State and local laws and changes, and it 
is difficult for us, and we are not running a business. We are 
a tax policy----
    Senator Cardin. I think you had better get a better 
program. I find this hard to understand that when you have 
governmental actions, which are very public actions, every time 
taxes are changed, that that cannot be done.
    I am not minimizing the issues of simplicity. And we have 
been talking about this ever since I have been in Congress, 
which is 20-some years. This is being used as an excuse for 
inaction. It is not a problem that cannot be overcome.
    Mr. Henchman. To me, it is not an excuse for inaction. It 
is an excuse for the right kind of action. Some of the bills 
you mentioned have some very good----
    Senator Cardin. After 20-some years, do you not think it is 
time for some action?
    Mr. Henchman. I agree.
    Senator Cardin. Thank you. I appreciate your agreement.
    Mr. Henchman. Some of the bills have some very good 
simplification rules.
    Senator Cardin. Thank you, Mr. Chairman.
    The Chairman. I like that. That is good. [Laughter.]
    That is how you get information out. That is great.
    Senator Wyden?
    Senator Wyden. Thank you, Mr. Chairman.
    Mr. Chairman, in beginning, I want to commend you for what 
I think folks need to understand is really what is at issue 
with your agenda today. What you are essentially doing is 
giving us an opportunity to lay out the digital rules of the 
road, and the fact is, if you look over history, it has always 
been this way with the economy. When you have new technologies 
and new developments, you have to update the rules of the road. 
We did it for the railroads. All through time, we have had to 
do it.
    So I want to commend you for the agenda, the way we are 
looking at these issues, and I am looking forward to working 
with you.
    Senator Thune talked about one of our bipartisan bills and 
laid out the Digital Goods and Services Tax Fairness Act. And 
with Senator Snowe here, I thought what I would do is take a 
couple of minutes to talk about our other major bipartisan 
bill, the Wireless Tax Fairness Act.
    Here is the reality, folks. Here is my smart phone. And 
what we are dealing with is, we have smart phones today and 
dumb tax policies, tax policies that have not kept up with the 
times.
    So we all remember the days of the mobile phone, these big, 
old things, and essentially we have the same tax policies for 
smart phones. And smart phones, of course, are how millions of 
Americans access the Internet. They are really a lifeline for 
some of the folks with a modest income that the Urban Institute 
does a lot of wonderful work for.
    So what Senator Snowe and I want to do is make sure that, 
for the next 5 years, these smart phones are not subject to 
what amounts to multiple and discriminatory taxes--multiple and 
discriminatory taxes on wireless communications.
    And, if you look at the last few years and all the taxes 
that have been heaped on wireless technology, we now have many 
States with taxes above 20 percent, the national average over 
16 percent.
    So what I would like to do is, first, get on the record, 
Mr. Sammartino, we had the CBO analyze the tax implications of 
our legislation. Now, remember, this is a bill--what Senator 
Snowe and I are advocating is something that would be 
prospective. It is not something that looks back in time.
    It is part of laying out the rules of the road for the 
digital economy for the future. And it is my understanding that 
CBO has said--in the most recent analysis of July 28th of 
2011--that our legislation, in the words of CBO, would have no 
significant cost to the Federal Government. And then at page 2 
of the analysis, CBO did not identify any costs as well to 
State, local, or tribal governments.
    So here is an opportunity, as we move in the committee of 
jurisdiction for laying out these rules as they relate to the 
digital economy, to take a major step forward in something that 
is literally a lifeline for millions of Americans.
    And I want to kind of trace the history from those big 
mobile phones to these wonderful smart phones that are carried 
by millions to access the net, and we can do it without any net 
cost to either the Federal Government or the State and local 
governmental authorities.
    I would just like to get your confirmation that that is the 
latest analysis by CBO, that the bill that Senator Snowe and I 
are talking about will not generate new costs to either the 
Federal Government or the State and local authorities. Is that 
your understanding, Mr. Sammartino?
    Mr. Sammartino. That is my understanding, Senator.
    Senator Wyden. Then for you, Mr. Henchman, we have done a 
lot of work with you all at the Tax Foundation. Why don't you 
give me your thoughts--and we are certainly going to be talking 
about the Marketplace Fairness Act in the days ahead, having 
followed this since the days when I was a coauthor with Senator 
Sununu and Senator McCain of the Internet Nondiscrimination 
Act.
    We have always tried to come to grips with how to handle a 
new emerging technology. Is not the heart of it trying to have 
policies that have the Federal Government, first of all, do no 
harm and to ensure that there are not multiple and 
discriminatory taxes that come about from these thousands of 
jurisdictions?
    When I first listened to some of the issues surrounding the 
Marketplace Fairness Act, I looked out at these scores of 
taxing jurisdictions, more than 5,000 of them, and some of the 
stuff just defied common sense. You would have jurisdictions 
that might--I remember there was one that would treat a 
chocolate bar one way and a cookie another way.
    Mr. Henchman. Right.
    Senator Wyden. Are these not some of the issues that we are 
going to have to deal with as we try in this committee to write 
these digital rules of the road?
    Mr. Henchman. Correct. And, as I specified, it is important 
that simplification be kept in mind, because right now we are 
up to 9,600 sales tax jurisdictions, growing by a couple 
hundred a year. We added 400 last year.
    So we are moving away from uniformity and away from 
simplification in terms of number of rates, definitions, and 
how complex it is, and there are a lot of things Congress could 
lay out. And as I mentioned, some of the bills offer some very 
promising simplification options.
    Senator Wyden. My time has expired, Mr. Chairman. But, 
again, I want to thank you, and I hope people understand what 
is really at issue here, and that is, you are updating what are 
essentially the rules for the modern economy, the economy where 
the jobs are, and I really appreciate your leadership.
    The Chairman. Thank you, Senator. You are pushing us in 
that direction too, and we deeply appreciate it.
    Senator Snowe?
    Senator Snowe. Thank you, Mr. Chairman. Thank you for 
holding this hearing. And I, too, want to underscore what 
Senator Wyden has indicated with respect to this double 
taxation and, also, on the whole issue of wireless technology.
    It has a disproportionate impact on low-income households, 
not to mention defeating our Federal policy of trying to make 
broadband ubiquitous. And so I think, for all those reasons, I 
would hope that we could pass this legislation, because it is 
undeniable that wireless is playing a very critical role for 
more than 300 million subscribers to wireless, not to mention 
to our economy.
    I would like to get to the broader issue of tax reform. 
Because as I see it, comparing it to the past when we last 
engaged in tax reform in the U.S. Congress--which, as you know, 
culminated in the passage of the Tax Reform Act of 1986--
believe it or not, it was 2 weeks before mid-term elections. It 
seems virtually impossible in today's political environment, 
regrettably.
    I commend the chairman for holding a host of hearings on 
this issue. I just would hope that ultimately we move beyond 
the issue of discussing overall tax reform to making it a more 
concrete goal rather than a theoretical goal, because 
ultimately, if you look at the scope and the entirety of the 
issues that we are facing in this country with respect to the 
economy, it is subpar economic growth. It is the worst post-
recession recovery in the history of our country.
    There are two central issues. They are taxes and 
regulations, and providing certainty--certainty to consumers, 
certainty to businesses, but, also, certainty to State and 
local governments.
    Think about the range of issues that keeps State and local 
governments in turmoil, between the failure to pass 
appropriations and budgets on time to the fact that we have an 
uncertainty with respect to the tax code, the disparate issues 
that affect the economy, and tax policy changes from State to 
State.
    So I would like to ask the panelists--you, Mr. Henchman, 
about the whole question of tax reform. If Congress could deal 
with it, when should it happen and how should it happen? And is 
that not preferable? I mean, we are talking about a lot of 
different important issues.
    But, if we start piecemealing our approach, it really is 
going to preempt the overall necessity of overhauling the tax 
code that has had more than 15,000 changes since 1986.
    Mr. Henchman. The template of 1986, I think, is the best 
one that you can go off of. I work mostly in State policy and, 
generally, bolder plans have more success than piecemeal 
approaches, because, when you are just parceling out one or two 
deductions to eliminate, the beneficiaries of those deductions 
can concentrate and preserve them and then you end up with 
nothing at all.
    Maryland, a few years ago, looked to broaden its sales tax. 
It selected a handful of items to broaden it to. The 
beneficiaries of those descended on Annapolis, and eventually 
it turned into a tax on the one thing that had no lobbyists in 
Annapolis--a tax on computer services. Then they hired 
lobbyists and got that taken out, and Maryland ended up with 
nothing at the end of the day.
    So I do not think that approach works. I think a 1986 
approach is better--broader, comprehensive. And rather than 
saying, ``Well, should we get rid of this deduction,'' look at 
it from the other perspective. Start from a blank slate and 
say, ``What is justifiable? What should be included? What is 
the best way to do it through a tax deduction as opposed to 
through some other way?''
    Senator Snowe. Would anybody else care to comment? Dr. 
Rueben?
    Dr. Rueben. I would just say that we should have something 
that has certainty in it, getting rid of a lot of the temporary 
provisions. I know it is costly if you are undertaking reform 
and you have to pay for things, but I think, from the State 
perspective, the fact that we are doing tax reform, and we are 
doing tax policy, through 1- or 2-year extensions is a problem. 
So anything that could make it more permanent rather than 
having things expire would be useful.
    Senator Snowe. Well, it is interesting, because one witness 
who testified before this committee in a recent hearing 
described our tax code as a permanent temporary tax code. And I 
think that that is very realistic and true, and I think that 
that is having a tremendous effect on the private sector, for 
example, in trying to create jobs, to invest in capital 
equipment, on consumers to make decisions, and, certainly, even 
on State and local governments having to make up the difference 
and the pressures on their own budgets.
    So I think that that is the ultimate imperative, frankly, 
and one that we need to grapple with sooner rather than later, 
because ultimately I do not think we are going to see the kind 
of economic recovery that we deserve in this country and most 
certainly what the American people deserve.
    Thank you.
    The Chairman. Thank you, Senator. You make an excellent 
point. But I must remind all of us that none of this is easy. 
It is going to require some hard, tough decisions.
    Since 1986, there are 15,000 changes to the code--15,000. 
In 1986, with tax reform, there were no extenders. Today, we 
have about 142, something like that; that is, provisions in the 
code which are temporary. They last for a year, 18 months, et 
cetera.
    And I agree with the theory, and I am going to push hard to 
practice it, that is: deal with these provisions, make them 
either permanent or repeal them. Because you are right, 
Senator: uncertainty is one of the biggest impediments to 
growth in this country today, in my judgment, and the code 
certainly adds to that uncertainty.
    But, if we are going to make it more certain, we are going 
to have to make some tough choices, very tough choices. And 
that really means just, to a larger degree, interest groups are 
going to have to subsume their narrow interests and try to come 
up with some alternative that makes a little more sense for the 
greater good.
    The degree to which groups do that, the more likely it is 
we are going to achieve our desired result here. But, if they 
do not, with the narrow special interest politics in this 
country these days, it is going to be extremely difficult to 
achieve the goal that we all are pursuing.
    So I just call on us all to be ready to bite the bullet and 
to come up with constructive alternatives. You cannot beat 
something with nothing. Come up with an alternative that might 
make a little more sense as we work better together.
    It really depends on the degree to which this country comes 
together and the degree to which people that we work for--we 
are just hired hands. We are just employees. It depends a lot 
on how much our employers really themselves want to come up 
with a constructive solution to this problem.
    But you are right, Senator. I could not agree more. It is 
going to be difficult.
    Senator Hatch?
    Senator Hatch. Thank you, again, Mr. Chairman.
    Mr. Hellerstein, in your testimony, you stressed the 
importance of adhering to a standard where income taxes are 
paid by those who work or live in a jurisdiction. You also 
discuss the example of a semi-professional soccer player who, 
though earning a small sum of money, nonetheless was obliged or 
obligated to file tax returns in many States.
    In fact, I know this committee used to employ a 
professional minor league baseball umpire who was required to 
file returns in multiple States. And I am interested in your 
analysis of how States have, over the past few years, become 
increasingly aggressive in pursuing taxes from non-residents 
and how new sources of information have become available in 
States to facilitate their search for revenues.
    Now, when did this trend originate, and how long has it 
been going on? And do you see it increasing in the future?
    Then, finally, Mr. Zinman, if you could answer how you have 
witnessed States become more aggressive in their search for 
revenues and how this has impacted your clients. Do you think 
your clients are able to make residency decisions with full 
knowledge of the tax implications of their decisions, or does 
the complexity of State tax laws make that difficult?
    So, if I could have you first, Mr. Hellerstein, and then 
Mr. Zinman.
    Mr. Hellerstein. Thank you, Senator. With all due respect, 
I believe it was not my testimony. Presumably, it was Mr. 
Zinman who referred to the soccer player. But I am familiar 
with the problem of taxing professional athletes, and, more 
generally--insofar as my testimony did address the problem of 
personal income taxation with regard to the role that Congress 
may play, and, indeed, this is an issue that I have testified 
about before in the House--I believe that Congress has a 
positive role to play here, at least with regard to employees 
who are temporarily in a State.
    It seems to me both a burden on the employee, not to 
mention on the employer, who has to track 2 or 3 days of work 
in whatever State the employees go to. To provide a uniform 
standard under which employers have certainty and employees 
have certainty as to when they have an obligation, with some 
threshold--I do not know whether it should be 30 days or 40 
days--I think is an appropriate thing to do, particularly 
because, like academic disputes, there is so little at stake, 
because to be sure, there are five States that do not have 
income taxes and, for the most part, we are just talking about 
which State gets the revenue. It is not like the revenue is 
going up in smoke.
    But I believe Mr. Zinman may have more colorful examples 
than I do.
    Senator Hatch. Mr. Zinman?
    Mr. Zinman. Thank you, Senator.
    First, let us talk about the problems that we have if we 
are an employee. Employees in various States, if they work in 
various States--and that is happening a great deal now--they 
get taxed in those States as non-residents. However, States 
have certain regulations on how the employers are supposed to 
report the information, and who is an employee and who is not 
an employee varies from State to State.
    It becomes very difficult for an employee to report his 
information. I had a client this year who was a part-year 
resident of North Carolina and a part-year resident of New 
York. New York regulations require, whether you are a part-year 
resident, a non-resident, or a full-year resident, to report 
100 percent of your earnings on your W-2 form in New York, and 
then the tax preparer or yourself, if you have to, allocates 
out based on the days, which is not always correct. So there 
are a lot of issues that happen.
    Now, as far as the residency decision is concerned, besides 
family and quality of life, the tax rules do matter to a lot of 
people. A lot of people have moved to Florida because of estate 
tax issues, because of income tax issues, and a lot of people 
have moved to a State like Florida--and this also happens out 
in the West. They move to States that are tax-friendly, 
especially with estate tax issues, and they go there, one, 
because of quality of life and, two, because they can then give 
more of their estate to their children.
    So these issues do become important. And what becomes even 
more important is that, if you do not do it right, your 
previous State where you resided is going to try to grab some 
of your assets anyway.
    There are a lot of issues about people who reside in two 
different States and each State trying to claim that that 
person was a resident, and that does impact Federal law also. 
There was just recently a Tax Court decision in Brown where a 
husband and wife were New York and South Carolina residents, 
and New York had an audit and declared that their capital gains 
were New York capital gains. They agreed. They paid New York. 
They paid New York the deficiency. They paid penalties and 
interest, and they claimed the credit in South Carolina. The 
Federal law did not want to allocate the interest expense and 
the interest income the same way. So there was a problem, and 
the Browns actually, in Federal law, lost a little bit of extra 
money.
    So where you are a resident and how the States look at that 
residency and how much they go after, that is very important to 
what the decisions are.
    Senator Hatch. Well, thank you. The more I listen to you, I 
just am very grateful that I am just a humble attorney rather 
than a CPA. [Laughter.]
    Mr. Zinman. We have a lot of fun doing this stuff.
    Senator Hatch. I will bet you do.
    Let me just end with this. Mr. Sammartino, I noticed in 
President Obama's fiscal year 2013 budget that the President's 
proposal for Build America Bonds resulted in an increase in 
outlays of $70 billion, as well as an increase in taxes of $63 
billion, according to the Joint Committee on Taxation.
    Outlays are defined as spending under the Congressional 
Budget Act. Therefore, the President's Build America Bonds 
proposal would increase spending by $70 billion and would 
increase taxes by $63 billion. Now, this would naturally 
increase the size of the Federal Government by at least $63 
billion, as I view it.
    Now, do you agree that the President's proposal increases 
spending by $70 billion and that it increases revenues by $63 
billion? And do you agree that outlays are spending?
    Mr. Sammartino. Yes. Those were the numbers that JCT 
estimated for the proposal, that outlays would go up by $70 
billion over 10 years and revenues from the reduction in 
deductible State and local taxes would increase by $63 billion.
    CBO agrees that outlays for Build America Bonds are 
spending, but we also recognize that many economists would say 
that it is not clear whether higher revenues from a reduction 
in the tax expenditure for State and local interest is really a 
tax increase or a spending reduction, even though it is scored 
on the tax side of the budget.
    But, yes, those were the numbers reported in our analysis 
of the President's budget.
    Senator Hatch [presiding]. Well, thank you. I appreciate 
that.
    I just want to mention, before we close down shop here, 
that Senator Enzi would have been here, but he is ranking 
member on the Health, Education, Labor, and Pensions Committee 
that I have been going back and forth to, and he wants to be 
excused, as he should be, because he is the ranking member 
there and has had to be in that markup this whole morning. So 
we will make excuses for him. And he is one of the more active 
members of this committee, and I just want to make that very 
clear.
    We are really appreciative of your testimony. There are so 
many other issues that could be raised, but we appreciate the 
testimony. We appreciate the statements that you have put in 
writing. We read those, and, frankly, this has been a very good 
panel.
    I just want to thank all of you for being here. And with 
that, we will recess until further notice.
    [Whereupon, at 11:40 a.m., the hearing was concluded.]



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