Eight Tax Reforms for Mobility and Modernization

Lexicons have changed these past two years. From “coronavirus” and “PCR test” to “Zoom” and “Slack,” our changing vocabulary reflects a changed world. Another word has taken on new significance as well, and that word is “mobility.”

There is nothing new about mobility, of course, in any of its senses. But if one word describes the new world in which we find ourselves, and with which policymakers must grapple, this might be it. Mobility because individuals and businesses are suddenly freed of many of their former geographic constraints, as work can increasingly be performed anywhere with a high-speed internet connection—what we might call, in this context, their outward mobility. But mobility, too, in people’s trajectories, as people reexamine career plans and life goals as we emerge from the COVID-19 pandemic, and, with enhanced geographic mobility, become increasingly empowered to choose to live in a place that enables their upward mobility.

Our economy is changing, but state tax codes have failed to keep up. States are unprepared for the ongoing shift to remote and flexible work arrangements, or for the industries and activities of today, to say nothing of tomorrow. Ossified tax codes stifle innovation, misdirect investment, and constrain the choices of individuals and businesses. But mobility fosters competition, so states have not only the opportunity but the necessity of catching up—of transforming their tax codes to make them more neutral, more competitive, and consequently more pro-growth.

Tax codes should not interfere with people’s upward mobility, and in this new environment, individuals and businesses have the enhanced outward, geographic mobility to find states that will not get in the way of their success.

Modernizing state tax codes and designing them for mobility are two sides of the same coin. Outdated tax bases, impediments to modern working arrangements, high compliance costs, and policies that put a thumb on the scale in favor of legacy industries or politically favored investments all cry out for modernization, and all stand in the way of mobility and economic growth. Competitive reforms like rate reductions and reducing or eliminating punitive taxes on business investment unleash opportunity while allowing a modern economy to flourish.

Policymakers can choose to see geographic mobility as a blessing or as a curse—as an opportunity to attract individuals and businesses through robust state competition, or as a threat as people decamp for greener pastures. What they cannot do is wish this increased mobility away.

The world has changed, whether policymakers like it or not. Individuals and businesses have newfound mobility and are not giving it up. The only question is how lawmakers will respond to it: will they dig in their heels with outdated, uncompetitive tax codes or will they embrace the opportunity to adopt tax codes reflective of the dynamism of a new economy?

Within the realm of tax policy, policymakers who choose to see mobility as an opportunity have no shortage of options to improve their state’s tax competitiveness, designing a modern tax code that attracts employers and employees with newfound flexibility, and which gives residents—old and new alike—the freedom to reach their own potential. What follows is a short list, far from exhaustive, of tax reforms lawmakers should consider to align their tax codes for growth and opportunity—in other words, to embrace mobility and modernization.

The Reforms

Each of the eight reforms considered in this paper help states respond to the new economic landscape. They help remove impediments to new living and working arrangements, enhance states’ attractiveness for increasingly mobile employers and employees, and respond to greater economic uncertainty and rising inflation.

All but five states have significant room to improve on at least one of these eight factors. Since many of these reforms deal with individual and corporate income taxes, it is unsurprising that three of the states which score perfectly on these metrics—Nevada, South Dakota, and Washington—go without individual or corporate income taxes, and the two other states which forgo both—Texas and Wyoming—only have meaningful room to improve on one metric each. Arizona and Maine are the only states to impose income taxes but score well across each of the eight areas of reform considered in this paper.

Of course, these eight provisions are far from the only measures of a state’s overall tax competitiveness, and states like Washington, with its high-rate gross receipts tax and other punitive taxes on business investment, have substantial room for improvement elsewhere.

Additionally, the focus here has not been on absolute perfection but on addressing substantial deviations from best practices. For instance, we highlight states with net operating loss (NOL) provisions inferior to the federal standard as in need of reform, but some states offer provisions that are better than those provided at the federal level. States conforming to federal NOL provisions could further improve their tax codes by modeling those states with superior provisions, but they are not called out here as in particular need of reform.

Fortunately, states are in a strong position to implement tax reform, with most experiencing dramatic revenue gains and projecting robust revenues in coming years as well. Now is a good time to make an investment in a better tax code, whether that means implementing improvements that require a net tax cut, or, in other cases, simply taking advantage of their current revenue buffer to offset transition costs associated with reforms.

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Taken from: www.taxfoundation.org

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