States Pressing Out-of-State Retailers to Collect Sales Tax

February 2, 2012 at 5:18 pm

States and localities lose up to $23 billion in revenue a year in sales taxes that are legally due on interstate sales but that online retailers and other “remote sellers” do not collect.  That hurts local retailers, too, since they have to collect sales taxes but their online competitors don’t.

Fortunately, the past week has seen two significant developments in states’ fight to force remote sellers to collect and remit sales taxes.

First, on January 27, the Tennessee Court of Appeals ruled that Scholastic Book Clubs must collect sales taxes on book sales in which teachers distribute the company’s marketing materials to students, collect the money, and distribute the books.  Tennessee is the sixth state to sue the company and the third to win.

Of course, the way Scholastic sells its products is not typical of most remote sellers.  The decision, however, reinforces the principle that a remote seller’s use of people within a given state to help make sales can obligate the company to charge sales tax in that state.

This legal principle is at the heart of much more far-reaching legislation — which New York and seven other states have enacted and several other states are considering — that requires remote sellers to charge sales tax when they hire independent websites in a state to solicit customers on their behalf.  Amazon has challenged the New York law.  Should the case reach the state’s top court or the U.S. Supreme Court, the Tennessee Scholastic decision will bolster New York’s argument.

Second, and perhaps more importantly, Arizona has handed Amazon a bill for $53 million in back taxes for its failure to charge sales tax to customers there, the Seattle Times reported today.  Amazon has warehouses in Arizona but claims that, because an Amazon subsidiary owns them, it doesn’t have to charge sales tax there.  (In the 1992 Quill decision, the U.S. Supreme Court held that a state can require a remote seller to charge sales tax only if the seller has a “physical presence” in the state.)  Arizona apparently is dismissing Amazon’s argument — as did Texas, which imposed a similar $269 million assessment on Amazon last year.  Amazon says that it is challenging the Arizona and Texas charges.

Clearly, states are trying to chip away at the costly problem of untaxed remote sales using their current legal authority.  Bipartisan legislation now before Congress is the only really comprehensive way to solve the problem, but these state actions move the ball forward and pressure Congress to act.

Economy Struggling to Be All That It Can Be

February 2, 2012 at 3:23 pm

In my blog post this week for US News & World Report, I look at the disturbingly slow economic recovery:

The economy has been moving in the right direction for two and a half years, but so slowly that the Congressional Budget Office (CBO) says in its latest The Budget and Economic Outlook that “the economy remains in a severe slump” and will not be back to operating on all cylinders until the first half of 2018.

This chart shows CBO’s estimates of potential GDP (what the economy could produce if it Economy Projected to Operate Well Below Capacity for Yearsmade full use of labor and factories and other capital) and actual GDP.  As it shows, the economy is operating well below capacity and will have to grow substantially faster than CBO now projects in order to eliminate the gap between actual and potential GDP before 2018.

Policymakers should be pursuing temporary policies that give the economy more of a boost in the short term (so that we get back to operating at full capacity faster) while enacting longer-term deficit-reduction policies that don’t take effect until the economy is stronger (since large spending cuts or tax increases now would weaken the recovery).

For more charts on the recovery, see our chart book, The Legacy of the Great Recession.

Will the Real Mitt Romney Please Stand Up?

February 1, 2012 at 6:31 pm

As you may have heard, Mitt Romney said this morning, “I’m not concerned about the very poor. We have a safety net there. If it needs a repair, I’ll fix it.” We’re glad the governor is expressing support for a safety net and for fixing it if it needs repair.  Yet his own budget proposals would tear gaping holes in the safety net and damage it severely.  Consider the following:

  • The Romney budget proposals would make massive cuts in safety-net programs.  For starters, he has embraced the budget that House Budget Committee chairman Paul Ryan proposed last year, which would make the deepest cuts in assistance for low-income Americans in modern U.S. history.  The Ryan budget would convert Medicaid to a block grant and cut its funding by 49 percent by 2030 below currently scheduled levels, a proposal that Governor Romney has specifically defended.  It would also convert SNAP (formerly known as the Food Stamp Program) to a block grant and cut its funding by $127 billion (or almost 20 percent) over the next decade.  These cuts, combined with deep cuts in Pell Grants, low-income housing assistance, and other programs for low-income people, would total a stunning $2.9 trillion over the next decade.  The Ryan budget would get nearly two-thirds of its savings over the next ten years by cutting programs targeted on people with low or modest incomes, even though those programs account for only about one-fifth of the budget, making it the most regressive budget plan that a chamber of Congress has ever passed.

    And the Romney proposals go farther than Rep. Ryan’s — they would lead to even deeper cuts in basic safety-net programs for the poor than the Ryan budget would.  That’s because Governor Romney has proposed to:  1) shrink federal spending to 20 percent of GDP for 2016 and all subsequent years, which is a bit below what federal spending would fall to over the next two decades under Chairman Ryan’s budget; 2) increase defense spending to 4 percent of GDP, a higher level of spending than it would reach under the Ryan budget; 3) permanently extend President Bush’s tax cuts; 4) enact new tax cuts on top of them, which the Urban Institute-Brookings Institution Tax Policy Center estimates would lose an additional $180 billion a year by 2015; and 5) require that the federal budget be balanced.

    Governor Romney hasn’t outlined cuts in specific programs.  But if policymakers exempted Social Security, as he has suggested, they would have to cut all other nondefense programs — including safety-net programs for the poor — by an average of 24 percent in 2016 and 35 percent in 2021 just to reach Governor Romney’s first four goals.  Furthermore, to balance the budget at the same time — which Governor Romney has said should be a constitutional requirement — policymakers would have to finance his tax cuts with even deeper budget cuts.  To meet all of Governor Romney’s budget goals — including balancing the budget — would require cutting all nondefense programs other than Social Security by an average of 54 percent by 2021.  And since policymakers surely wouldn’t cut Medicare in half by 2021, safety-net programs for the poor likely would be cut even more severely.  The ensuing increase in poverty and destitution would almost certainly surpass anything in our country’s recent history.

  • Even a cut of 24 percent — the smallest of the figures I’ve just mentioned — would have a devastating impact on safety-net programs. For example, the cuts in SNAP would throw almost 11 million low-income people off the program, cut benefits deeply — by over $1,500 a year for a family of four — or some combination of the two.  Cuts of 24 percent in compensation payments for disabled veterans, which average less than $13,000 a year, would shrink those payments — as well as pensions for low-income veterans, which average about $11,000 a year — by nearly a fourth.  Supplemental Security Income (SSI) benefits for the poorest elderly and disabled individuals in the country, which today lift impoverished elderly and disabled people living alone to only three-quarters of the poverty line, would be slashed — with these people pushed below 60 percent of the poverty line.
  • And while cutting low-income programs, Governor Romney would actually raise taxes on low-income families. According to the Tax Policy Center, the Romney tax plan would provide big tax cuts at the top of the income scale that average $140,000 a year (on top of the Bush tax cuts) for people who make over $1 million a year.  Yet it would increase average tax burdens for low- and moderate-income families.  The plan would do so by letting certain tax measures that benefit low-income families expire at the end of 2012 — including measures that reduce marriage tax penalties on working-poor families and help low-income students afford college — even as it made permanent all of the expiring tax cuts for wealthy individuals and abolished the estate tax.

Bernstein on Strengthening the Middle Class

February 1, 2012 at 5:24 pm

Testifying before a House Education and Workforce Committee hearing today on “Expanding Opportunities for Job Creation,” CBPP Senior Fellow Jared Bernstein outlined policies to strengthen the middle class.  Here’s an excerpt:

While the economy is improving and unemployment is slowly coming down, at current growth rates, it will take many years to reach full employment.  The following measures can help build on the momentum we have and accelerate the recovery:

  • Extend the payroll tax holiday and unemployment insurance. Policy makers of both parties have widely agreed on the need to extend payroll relief through the end of the year; failure to do so would add to the underlying fragility of the nascent expansion.
  • Invest in infrastructure investment. As part of the American Jobs Act, the President proposed a national program to repair and modernize the nation’s public schools and community colleges.  This plan is now a legislative initiative called FAST — Fix America’s Schools Today — soon to be introduced in both chambers.  FAST addresses three big problems: 1) the backlog of maintenance repairs in strapped school districts across the nation, 2) the high unemployment among construction workers and other laborers who do this type of work, and 3) the energy inefficiency in many public schools where billions of taxpayer dollars are wasted through bad roofing, aging boilers, and poorly insulated windows.  I urge legislators to give this idea a close look.
  • Manufacturing policy. In his State of the Union address, the President presented some ideas, including tax incentives and trade enforcement measures, to help incentivize the insourcing of manufacturing work in America.  In fact, manufacturers have added over 300,000 jobs over the past 21 months, and anecdotally, some producers say that perhaps they have overplayed the outsourcing idea and are interested in producing closer to where they sell (rising transportation costs and narrower international wage differentials may also be in play here).

    In this regard, policy makers could help tap this development by closing international tax loopholes that incentivize multinationals to build factories abroad.  The President’s most recent budget, recommended to the so-called super committee in September, proposes $110 billion in loophole closures that would both level the playing field for domestic manufacturers and help relieve our fiscal situation.

    Trade enforcement, including actions against countries that manage their currencies to artificially support their exports and block our imports, is another essential piece of this puzzle.

    Note that these measures simply level the playing field and are in no sense protectionist — they do not provide unfair advantages to American firms nor do they block imports.

  • Skills enhancement. This committee has a long history of interest in policies to ensure that the skills of American workers match those demanded by today’s employers.  Ranking Member Miller’s Pathways Back to Work bill supports a subsidized employment program targeted at unemployed adults, modeled on a successful Recovery Act program that employed over 250,000 workers in 2009-10 (TANF Emergency Fund).  This bill also provides work-based job-training for the long-term unemployed and summer jobs for younger workers.

    President Obama also stressed the importance of workforce investment through what is typically called “sectoral employment strategies.”  As opposed to generalized training that too often leaves participants unprepared for actual jobs, sectoral strategies link trainers, often through partnerships with community colleges, with local employers who provide granular information about future demand needs.  Research by Georgetown University professor Harry Holzer shows these programs to be far more effective than traditional training programs that are too often detached from what’s happening in local labor markets.

  • Improving workers’ bargaining power. As with international trade and taxation, the union organizing playing field is badly tilted against those who would like to exercise their right to collectively bargain.  A recent rule change by the National Labor Relations Board will help workers who’ve petitioned to form a union to have a more timely election.  In a climate where some employers who oppose unions can and do block elections with impunity, this new rule removes some of the above-noted tilt.

Click here for the full testimony.

Video: Jared Bernstein Answers Questions from His Readers

January 31, 2012 at 4:20 pm

Jared responds to questions from readers including:

  • “To what extent is inflation being driven by US policy as opposed to things beyond our control?”
  • “How will we know when we have a full self-sustaining recovery?”
  • “How and if do private equity firms contribute to the economy in terms of creating jobs and fostering economic growth?”