State Tax Policy: A Political Perspective. (Book Reviews).

David Brunori

Washington, DC: The Urban Institute Press, 2001. (156 pp)

The shift from a manufacturing economy to a service economy and the advent of the information age have revolutionized the way in which individuals and institutions interact with one another. The ability to purchase products and services from home with the click of a mouse has provided even the smallest of businesses access to national and global markets. State tax systems, which have remained fundamentally unchanged over the last 50 years, must now adapt to the realities of the new economy or risk undermining traditional revenue streams. As the slumping economy strains state budgets and the debate over remote sales taxation rages, David Brunori provides a timely analysis of state tax policy and offers sound advice to policymakers on how to meet the challenges of the changing economic landscape.

Brunori's analysis and recommendations hinge on five classic principles of sound tax policy: (1) provision of appropriate revenues, (2) neutrality, (3) fairness and equity, (4) ease and cost of administration, and (5) accountability. Ensuring adherence to these principles through research-based policy development will ultimately result in a more equitable, efficient state tax system, Brunori contends. The insightful discussion of these principles provides a framework with which to evaluate taxation at any level of government, and will serve as a useful reference to policymakers and administrators who routinely confront these issues. Brunori argues that state tax systems in general have performed adequately in terms of revenue provision, ease of administration, and accountability. However, the states have failed to attain either neutrality or equity.

Brunori labels targeted tax incentives--those that offer preferential treatment to specific companies in return for promises of capital investment and job creation--the "scourge of state tax policy." Not only do these subsidies distort market decisions, but they also promote inequity. Targeted tax incentives usually favor the largest and most profitable businesses, shifting the tax burden to individuals and smaller companies. There is little evidence that such incentives either significantly influence location decisions or increase state revenues over the long run. Because political reality all but guarantees the continuance of targeted tax incentives, Brunori recommends that states take a number of actions to protect the public interest. These actions include laws requiring the repayment of benefits if companies fail to meet standards for capital investment and job creation, as well as requirements for above-average pay and benefits.

As the book's title suggests, State Tax Policy: A Political Perspective examines the inherently political environment in which tax policy is made. Many candidates for public office are elected based on campaign promises to either raise or lower taxes--usually the latter. As such, electoral politics have a significant impact on the direction of broad tax policy. By contrast, legislative ...