Wednesday, August 12, 2009

Tax Everyone--Wherever They Live

The Wall Street Journal recently ran an article entitled "The Albany-Trenton-Sacramento"disease. Although the article addresses the specific issue of big government and taxes, it's worth a discussion which expands a bit on the underlying problem of government intrusion across state lines and Constitutional barriers.

California, New York and New Jersey were wealthy thriving states with healthy economies. Not true today. Each shared a common philosophy of governance. Big government, social welfare programs for everyone and everything. Each spent decades spending more than incoming revenue. All believe in grossly progressive income taxes which “soak the rich.” Each has a very high per-capita income. But today, each also suffers from high unemployment, low job creation, high minimum wage, heavy unionization, and most recently, mass emigration to states with healthier economies.

Studies which have been conducted since the beginning of the Cold War invariably showed that the bigger a country’s (or state’s) government portion of the economy, the slower the growth of its gross domestic product. The private sector must generate enough wealth to sustain both itself and the governments they are forced to support, since government can spend, but it can’t earn. The bigger the government, the larger its economic burden on the sole creator of wealth—the private sector.

Then Arthur Laffer came along and demonstrated that as government taxes decrease, actual revenue increases. The three states (and the Democratic national administrations) have never liked those facts, so they simply ignored them and plowed on with bigger government and bigger taxes.

Having run low on ways of taxing their own in-state private enterprises, the states turned to taxing businesses in other states. Since the Constitution specifically forbids one state to tax businesses in other states, you may begin to wonder how it’s possible. One way is easy. Wal-Mart has its headquarters in Arkansas. California, New York and New Jersey can’t tax that. But Wal-Mart is huge, and has facilities located in all fifty states. Those facilities make use of state services, and so the states are entitled to tax Wal-Mart locally for the use of those services (fire, police, sewers, use of state roads, courts, etc.).

But what of Mom-And-Pop-Mart, who has no stores, no warehouses, no trucks, no nothin’ outside of its home state of, say, North Dakota? But as a successful manufacturer of Acme Widgets, its fame has spread far and wide. So people all over the nation now order Acme Widgets from the Mom-And-Pop-Mart catalog. With the powerful philosophy of “leave no stone untaxed,” California, New York and New Jersey are not about to let Acme Widgets import privileges stand in the way of collecting taxes.

Direct state taxes by one state on the products of a company which has no physical presence in the taxing state are forbidden tariffs under Article I, Section 9, Paragraph 5 of the United States Constitution: “No Tax or Duty shall be laid on Articles exported from any State.” Article I, Section 10, Paragraph 2 goes on to say: “No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports.” And if such a duty or import is imposed with the consent of Congress, it must be for the purpose of encouraging interstate commerce, and turned over to the federal Treasury. So the states couldn’t use the money in any event. Where’s the fun in that?

But the big government states have found a way around this Constitutional prohibition. Instead of imposing direct taxes (duties and import fees), they simply change the name of the tax to “income tax.” The companies have no presence in the taxing states, impose no burden of any kind on the taxing states, and most importantly of all, have no voting rights in the taxing states. A Revolution was fought in large part to stop taxation without representation. Now isn’t that a silly concept when it gets in the way of a state getting something-for-nothing and raising the standard of living of the poor working folks in the tax-happy states? Mom-And-Pop-Mart must now pay for the immense privilege of having its products end up in a consumer’s hands in California, New York, or New Jersey. A rather dubious privilege, I’d say.

As recently as June, the U. S. Supreme Court was afforded the opportunity to fix this by hearing a case from Massachusetts upholding that state’s tax on out-of-state businesses. The Court failed in its duty, refusing even to hear the case (“denied Certiorari”). Some states are even more devious by declaring that the out-of-state business must pay a tax “equal to the amount” of business tax which would have been collected had such business been a resident of the state. So it isn’t a business tax, it’s an income tax merely equal to the exact amount of business tax which would have been paid otherwise.

Decisions (or rather non-decisions) such as the one mentioned empower states to follow California, New York and New Jersey in finding creative ways of taxing businesses they have no Constitutional right to tax. We can only hope that other states will first take a closer look at the financial status of near-bankruptcy in those three states before following them over the cliff. The Interstate Commerce Clause was written to encourage free trade and competition among “the several states.” Legislatures, including the federal jurisdiction, continue to find ways to tax businesses into oblivion by completely misapplying the underlying purpose of the Clause. Worse yet, we are not even free to rely on the restraining authority of the Supreme Court to protect us from paying taxes to states to which we have no residential connection.


LL said...

If the Federal Government could keep its rat claws out of all but what it's Constitutionally mandated to do and they'd let the States handle State issues the way they are supposed to do, everyone WOULD BE TAXED WHERE THEY LIVE.

Tennessee Jed said...

Excellent article Hawk - if people just looked at California, liberal Democrats would never win another election (taxman Mr. Geitner . . . taxwoman, Justice Sotomayor!)

Unknown said...

LL: Unfortunately, one branch of the federal government could have stopped unconstitutional state-to-state taxation, and it was the Supreme Court. The one area in which the states have encroached into a purely federal prerogative, and the Supreme Court sits idly by and allows it. Apparently, the philosophy is states' rights are bad, unless they are raising unconstitutional taxes.

Tennessee: That was my main purpose in using the pied piper image. People look at California, and they see what isn't there, and don't see what is. It's all wishful thinking, and it's crippling the entire nation. People are turning into rats, chasing after the "free" federal cheese.

StanH said...

But Lawhawk it’s for the children. Most politicians know nothing of the real world like hitting a payroll week after week. Navigating the rules and regulations that serve nothing, but to pilfer the small businesses around this country, in an eternal quest for some utopia that simply cannot be achieved when so many sit around and wait for their government check. The Blue state phenomena of taxing business into oblivion is slowly coming around and biting them, now we all have to suffer. This country is at the breaking point I fear for this great Republic.

Unknown said...

StanH: As a former HR exec, I used to have the philosophy that we should only hire or promote managers who had owned their own businesses and had to look their kids in the eye and tell them that Christmas was going to be slim or the vacation wasn't going to happen because you had to meet a payroll, pay your taxes, and it was a slow business year. Maybe we should make that a precondition for elective office as well.

AndrewPrice said...

Nice article Lawhawk. Interesting, the left has always said, "we can tax people because what are they going to do? Leave?" And then people started fleeing the high tax states.

So then they decided to start taxing businesses, as you note. And this time they said, "They can't leave because they want to make money here, where else are they going to go?"

And then businesses moved across state lines and close up shop, etc. The most recent prominent example was, which I understand terminated its relationship with various suppliers because the states in which they were located insisted on taxing Amazon through those suppliers. So Amazon just dropped them. Good for Amazon.

StanH said...

Been there, done that brother. If you haven’t met a payroll there is no way to understand the pressure week after week, year after year. A sixty hour work week is a short week for most business owners, and along comes Barry with the force of a gun and says more, more, more, it’s criminal.

Unknown said...

Andrew: If the Democrats put as much creative effort into producing an efficient government as they do into figuring out all new and different ways of robbing our bank accounts, everybody would be lot better off. Thanks for the info, by the way, I'll have to send a note of praise.

StanH: People who have never been on anything but the government payroll their entire adult lives have no idea where wealth comes from. They think it comes from the US Treasury, since they're the ones who print the money. That's why they don't understand that a $250,000 personal business income doesn't make you "rich" for tax purposes, since they have no concept of how income is earned. And they sure have no idea of how expenses reduce that income, since they can spend far more than is earned, and everybody calls them heroes for soaking the rich.

StanH said...

Andrew: Wal-Mart does the same thing, cause them to much trouble and they’ll leave, which by the way is a tax increase for the locals, everything is cheaper at Wal-Mart.

CrisD said...

LawHawk, Can I get a "fake" divorce and have a property in one state and buy a house in a better state so my college kid has residency?

Joking, but we are getting creative right about now.

From moving around the country we have come to the conclusion that each state "will get you" somehow or they'll just one fell swoop it from D.C.

Unknown said...

CrisD: There's an easier way. Just have your kid learn some Spanish, and tell the college administrators that he's here illegally. Automatic in-state fees.

The feds taught the states everything they know about taxation, and now the states are returning the favor. Incest is a nasty business.

AndrewPrice said...

Stan, Walmart is a fascinating company. I've spoken to people who hate them with the passion of the sun and people who love them beyond belief. I think that their generic drug policy is single-handedly responsible for cutting drug costs in this country.

Lawhawk, I have always been amazed that the democrats let their envy get in the way of their good will. If they would work to maximize the economy, they would actually have more tax revenue to spend on their favorite policies, but they seem more interested in punishing the "haves" than helping the "have nots".

Unknown said...

Andrew: The Democrats understand the Laffer curve (or at least some of them do). But they would lose half their voters if they admitted it and had to let go of their Marxist class warfare.

Monica said...

I decided to never, ever live in Oregon again after it made me pay income taxes - on what I made over the summer working in Alaska! When I protested, they told me if I didn't like it, I could move. So I did. States are sneaky with taxes.

BevfromNYC said...

CrisD: Your in-state question. My sister in law grew up in NY. To go to school on the cheap, she deferred a semester of college, moved to Texas to establish residency which takes 6 months and then attended UT undergrad and Med School as an in-state resident. UT is one of the top 25 public university systems and very inexpensive.

(Okay I'm alum, but if you knew what I paid to get a college education you would weep...)

AndrewPrice said...

Monica, I've run into that a couple times as well. And did you know that football players need to pay tax in every state in which they play a game? Talk about needing a team of accountants to do your taxes!

Unknown said...

Monica: You can run but you can't hide, I'll catch you on your escape ride, cause I'm the taxman.

Bev: Tell me about it. My tuition at UC Berkeley was $86.50 per semester, and I had a California State Academic Scholarship to cover that and dorm expenses, all of which totaled about $1,000 per academic year. My son attended UCLA starting in 1992. His totaled more like $12,000. Today, the fees at the two top UCs are about $21,000 per year for California residents and illegal aliens, and close to $40,000 for out-of-state residents. The quality of education has declined, and the increase in tuition and fees don't even come close to being accounted for by inflation.

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