More About Michael Mazerov

Michael Mazerov

Mazerov joined the Center staff in January, 1998. He is a Senior Fellow with the Center's State Fiscal Project.

Full bio and recent public appearances | Research archive at CBPP.org


More Evidence That State Income Taxes Have Little Impact on Interstate Migration

August 26, 2014 at 1:00 pm

The New York Times’ Upshot blog has published a fascinating set of graphs of Census Bureau data on interstate migration patterns since 1900, bolstering our argument that state income taxes don’t have a significant impact on people’s decisions about where to live.

We plotted the same Census data, which shows which states do the best job of retaining their native-born populations, on the chart below, also noting which states have (or don’t have) a state income tax.  Our chart shows that taxes have little to do with the extent to which native-born people leave their states of origin.

If Heritage Foundation economist Stephen Moore’s claim (which other tax-cut advocates often repeat) that “taxes are indisputably a major factor in determining where . . . families locate” were true, states without income taxes would see below-average shares of their native-born populations leaving at some point in their lifetime, while states with relatively high income taxes would see the opposite.  But the graph shows no such pattern:

  • Three of the nine no-income-tax states perform very poorly in holding on to native-born residents.  Wyoming, Alaska, and South Dakota have three of the nation’s four highest shares of native-born residents who left the state.
  • Four other no-income-tax states are closer to the middle of the pack.  Nevada is almost exactly in the middle of the state rankings, while New Hampshire and Tennessee fall almost equally below and above Nevada; Washington falls within that interval as well.  New Hampshire does no better in retaining its native born than its high-tax neighbor, Vermont.  Tennessee’s neighbor, North Carolina, has had the highest income tax rates among southern states for the past 20 years but outperformed nearly all of them in retaining its native born, tying for second nationally.
  • Only two of the nine no-income-tax states are top performers in retaining their native born.  Threeof the five states that retain the largest shares of their natives — California, Georgia, and North Carolina — have income taxes, and California and North Carolina in particular have had higher income taxes than their neighbors.  Texas and Florida are the only no-income-tax states that rank highly for retention.  

Congress Shouldn’t Renew Internet Tax Freedom Act Unless It’s Paired With the Marketplace Fairness Act

July 21, 2014 at 2:54 pm

The Internet Tax Freedom Act’s (ITFA) ban on state and local sales taxation of monthly Internet access fees costs state and local governments about $6.5 billion annually in forgone revenue, and the states and localities currently taxing access under ITFA’s “grandfather” provision would lose at least $500 million on top of that each year if the provision expired, as I’ve recently explained.  Despite these costs, the House last week approved making ITFA permanent while letting the grandfather clause expire.  A new bipartisan Senate bill, however, would help state and local governments make up for the lost revenue.

The Senate bill would pair a 10-year ITFA extension with the Marketplace Fairness Act (MFA).  The MFA would enable states and localities to receive a substantial share of the sales tax that is legally due on purchases of goods and services from Internet and catalog merchants like Amazon and L.L. Bean but that they can’t collect from the companies.

Due to 1967 and 1992 Supreme Court decisions, a state can require out-of-state companies to charge its sales tax only if they have a physical presence in the state like a store, warehouse, or sales force.  The tax is still legally due, and consumers are supposed to pay it directly to their state, but few people do.  Those lost revenues could help pay for schools, roads, police, and other critical state and local services, and they keep sales and income tax rates higher than they’d otherwise need to be.

MFA would authorize states to require out-of-state sellers with more than $1 million in nationwide interstate sales to charge the applicable taxes — provided that states simplify their sales taxes and give merchants free software that calculates the correct tax.

This change would allow state and local governments to collect as much as $23 billion in annual revenues that they are owed under current law.  That would help them maintain and possibly reinvest in public services they cut during the recent recession.  It would also help offset states’ and localities’ ITFA-related $7 billion revenue loss — lost dollars that will grow as more people subscribe to Internet service; others trade-up to faster, and therefore more expensive, service; and others cancel their taxable landline telephones and cable TV in favor of Internet-based alternatives like Skype and Netflix.

MFA’s long-overdue enactment would also:

  • Create a more level playing field for local store-based retailers.  Because combined state and local sales tax rates typically range between 5 and 10 percent, Internet retailers that don’t collect sales taxes outside their home states start out with a price advantage over their local competitors.  This makes it harder for Main Street merchants to create local jobs.  It also has a ripple effect on local economies, as depressed sales at the neighborhood book or musical instrument shop lead to fewer purchases by their owners and employees at the farmers’ market and dry cleaner. 
  • End the unfair sales tax treatment of consumers who don’t shop online.  Low-income people who lack the computers, Internet access, or credit cards needed to shop online pay more than their fair share of sales taxes because online shoppers can avoid these taxes. 

These are worthy goals, and Congress should have passed the MFA long ago to achieve them.  But if lawmakers decide to extend ITFA, it’s even more urgent that they also enact MFA.  Congress should not extend the moratorium without also enacting MFA.

Busting Three Myths About the Internet Tax Freedom Act’s “Grandfather Clause”

July 18, 2014 at 4:08 pm

The Senate next week will likely consider its version of a bill to renew the Internet Tax Freedom Act (ITFA), a federal law prohibiting state and local governments from taxing the monthly Internet access subscription fee that households and businesses pay.  The House voted earlier this week to make ITFA, which is due to expire on November 1, permanent.

ITFA was enacted in 1998 with strong bipartisan support, and it has always included a “grandfather clause” that allowed states and localities that were taxing Internet access to keep doing so.  Despite its long history, there’s widespread misunderstanding about the grandfather clause in the current debate about renewing ITFA.  Here are the facts behind three widespread myths about that clause:

Myth:  The House and Senate bills that would make ITFA permanent preserve the grandfather clause.

Fact:  The House-approved bill and its Senate analog both effectively eliminate the grandfather clause.  There has been confusion about this because both bills strike ITFA’s November 1, 2014 expiration date with no mention of the grandfather clause.  But the current law terminates the grandfather clause as of November 1, 2014, meaning that it expires as of that date unless policymakers explicitly extend it.  Neither the House nor Senate bill does so.

Myth:  Eliminating the grandfather clause would affect the revenues of only seven states that directly tax Internet access service. 

Fact: Virtually every state, and thousands of local governments, would be at risk of losing revenue if the grandfather clause expires — dollars they use to pay teachers and police, provide financial aid to state university students, repair roads, and provide many other critical services.  That’s because the clause not only preserves the pre-1998 direct taxes on Internet access service of Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas, and Wisconsin, it also preserves all pre-1998 taxes that could be considered indirect taxes on Internet access.  That would include, for example, state and local taxes that Internet access providers pay on the things they buy in order to provide Internet service, such as computer servers, fiber-optic cable, or even gasoline for their vehicles.  Almost all of these taxes existed before 1998, so the grandfather clause protects them from legal challenge.  But if Congress eliminates the clause, Internet access providers could challenge these taxes in court as indirect taxes on Internet access service and therefore voided by ITFA.  (For more on this issue, see pages 8-10 of my recent analysis.)

Myth:  The grandfather clause was intended to give states time to phase out Internet access taxes, which they’ve had ample time to do.

Fact:  The original 1998 committee reports on ITFA don’t back up this claim.  Such a rationale wouldn’t have made sense anyway, because ITFA itself was supposed to be temporary.  As the 1998 Senate Commerce Committee report said, ITFA was intended to be “a temporary moratorium on Internet-specific taxes [that] is necessary to facilitate the development of a fair and uniform taxing scheme.”  Lawmakers included the grandfather clause to protect the interests of states and localities that had already come to rely on Internet access tax revenues to fund services.  If Congress had wanted to push the states taxing Internet access to phase out those taxes, it could have had the grandfather clause expire sooner than the overall moratorium in the original 1998 legislation or in any of the three subsequent renewals, but it didn’t.

The facts make the case:  if Congress extends ITFA, no matter for how long, the law must continue to include the grandfather clause.

Mazerov on the Risks of Permanently Banning Sales Taxes on Internet Access Charges

July 14, 2014 at 4:04 pm

Writing today in The Hill, I explain why policymakers should reject an effort to permanently bar states from applying their normal sales taxes to the monthly charges that households and businesses pay for Internet access.  Such a permanent ban, which the House is expected to consider this week, could cost states roughly $7 billion a year in potential revenue.

Here’s an excerpt:

For starters, the bill would strip Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas, and Wisconsin of at least $500 million in annual state and local revenue from their existing taxes on these charges.

Beyond costing states the $7 billion a year in potential revenue to support education, healthcare, roads, and other services, the bill would violate an understanding between Congress and the states dating back to the 1998 Internet Tax Freedom Act (ITFA):  that any ban on applying sales taxes to Internet access charges would be temporary and not apply to existing access taxes.

Enacted when Internet commerce was still in its infancy, ITFA sought to balance Congress’ desire to encourage development of the Internet against states’ and localities’ need to finance essential services.  Thus, it imposed only a temporary “moratorium” on new taxes on Internet access and protected existing taxes through a “grandfather” clause.

Congressional extensions of ITFA in 2001, 2004, and 2007 maintained those two key features.  This latest ITFA legislation, though, eliminates both — the first time Congress has seriously considered doing so.

Congress should end, not extend, the ban on state and local taxation of Internet access, as I explained in our recent paper.  As I point out in The Hill:

The Internet is no longer an infant industry needing protection from taxes that apply to other services for which Internet access is a close substitute.  Cable television service is widely taxed, for example, but if someone decides to pay Verizon $50 a month so that they can stream Netflix to their TV, ITFA bans the taxation of the access charge.  This unequal treatment doesn’t makes sense.

Read the full op-ed here.

No Justification for Permanently Banning Sales Taxes on Internet Access Charges

July 11, 2014 at 10:31 am

For the first time since Congress enacted the Internet Tax Freedom Act (ITFA) in 1998, lawmakers are seriously considering permanently extending the moratorium on new state and local sales taxes on Internet access service and eliminating the “grandfather clause” exempting existing taxes — changes that could cost states $7 billion a year in potential annual revenue.  Our new paper explains why Congress should do the opposite: allow all states to apply their normal sales tax to this service, just as they tax similar communication and entertainment services like long-distance telephone service and cable TV.

Even if Congress isn’t prepared to let ITFA lapse, there’s no justification for making the law permanent and eliminating the grandfather clause, as a bill that the House is expected to consider next week would do.  Congress can achieve all of its major objectives by enacting another temporary extension that leaves the grandfather clause intact.

A temporary extension would ensure that no new states and localities tax Internet access.  It also would continue ITFA’s ban on “discriminatory taxation” of Internet access service and other types of Internet commerce — for example, taxing these items at higher rates than other kinds of interstate communications or consumer purchases.

At the same time, another extension would avoid the problems that the House bill would cause, namely:

  • Eliminating the grandfather clause would strip Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas, and Wisconsin of at least $500 million in annual state and local sales tax revenue they use to pay for education, police, and other services.  These states (and many of their localities) would have to reduce services or increase other taxes to offset the revenue loss. 
  • Eliminating the grandfather clause would put at risk numerous other state and local taxes that Internet access providers pay on the things they buy in order to provide Internet service, such as computer servers, fiber-optic cable, or even gasoline for their vehicles.  Almost all of these taxes existed before 1998, so the grandfather clause protects them from legal challenge.  But if Congress eliminates the clause, Internet access providers could challenge these taxes in court as indirect taxes on Internet access service and therefore voided by ITFA. 
  • Permanently extending ITFA risks widespread legal challenges by Internet merchants to a host of state and local taxes based on the law’s prohibition of discriminatory taxes on electronic commerce.  ITFA’s definition of “discriminatory tax” is broad and vague, but Internet companies have largely refrained from using it to challenge state taxes because they knew that if they were too aggressive, ITFA opponents could use this to argue for repealing the law when it came up for renewal.  But with ITFA permanently on the books, that restraint would disappear, potentially leading to widespread litigation.

Congress first enacted ITFA when Internet commerce was still in its infancy and high-speed Internet access was just becoming available to individual households.  Congress sought to balance state and local governments’ need to finance essential services against Congress’ desire to encourage the development of the Internet industry.  Even then, Congress decided that striking that balance entailed grandfathering existing taxes and prohibiting new taxes on Internet access only temporarily.

There is no need to continue treating the Internet as an “infant industry” and exempting it from state and local taxes that other industries must pay.  But even if Congress wishes to renew ITFA, surely its tax treatment should be no more favorable than in 1998 — a temporary exemption for taxes on Internet access service, with pre-1998 taxes still grandfathered.