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1 Chris Atkins, The Business Activity Tax Simplification Act: A Good Standard for Multi-State Business 1 (2006)

handle is hein.taxfoundation/ffgcxz0001 and id is 1 raw text is: r:OuU NDAT10N. July 24, 2006 The Business Activity Tax Simplification Act: A Good Standard for Multi- State Business by Chris Atkins Fiscal Fact No. 62 I. Introduction On July 25, the House of Representatives is expected to vote on H.R. 1956, the Business Activity Tax Simplification Act of 2005. This bill would forbid states from imposing a corporate tax (based on net income, gross receipts, net worth, etc.) on any corporation that has no physical presence (property or employees) in-state. On July 11, 2006, the Congressional Budget Office (CBO) released a revenue estimate of H.R. 1956.1 CBO anticipates that in the first year after passage, state tax revenues will drop by $1 billion and federal tax revenues will rise by $107 million. Some in Congress have asserted that because federal revenues are projected to rise after enactment, the bill as a whole must therefore be counted as a tax hike. But as CBO's cost estimates reveal, taxpayers would pay lower taxes overall under H.R. 1956. In 2007 alone, taxpayers would see net tax reductions of almost $900 million. Thus, H.R. 1956 should not be labeled a tax hike or opposed on that basis. II. H.R. 1956 from the Taxpayer's Perspective Currently, states can require companies to file and pay most corporate taxes just for selling products to state residents. This way of thinking about state tax liability is referred to as economic presence or nexus. A previous Tax Foundation report explained why physical presence is consistent with the benefit principle of taxation and is the more practical standard for reasonable tax enforcement.2 As the bill moves toward a vote in the House of Representatives, the always contentious issue of what tax changes should count as a tax hike or a tax cut has arisen. CBO estimates that H.R. 1956 will deplete state revenues overall but enhance federal revenues. The states would lose revenue because fewer firms would be paying business activity taxes; the federal government would gain revenue because corporations would have fewer state tax payments to deduct on their federal tax return. In subsequent years, CBO anticipates even greater state revenue losses and a corresponding boost in federal revenue.