February 2009 Archives
Alas, it is true. President Obama on Wednesday signed into law a massive new entitlement increase known as the State Children's Health Insurance Plan (SCHIP). To pay for this new entitlement, the bill raised the federal excise tax 156 percent $1.00 per pack from
$0.39 per pack.
However, lost in the discussion is how this will negatively impact thousands of small business owners who will have to pay the higher tax on their current inventory. This will crimp their cash-flow at a time when the recession is already crimping their cash-flow. So while we are debating a $900 billion dollar spendulus package, we hit small businesses with a huge tax increase. How's that for stimulus?
However, lost in the discussion is how this will negatively impact thousands of small business owners who will have to pay the higher tax on their current inventory. This will crimp their cash-flow at a time when the recession is already crimping their cash-flow. So while we are debating a $900 billion dollar spendulus package, we hit small businesses with a huge tax increase. How's that for stimulus?
Recently Governor Baldacci was sent a letter from the Council on State Taxation (COST) regarding a bit of arcane tax law with large consequences for Maine's economy. The issue deals with "Throwback" and "Throwout" laws buried in the Governor's recent budget proposal. COST states that:
"Generally speaking, throwout laws require a company, when calculating its tax in a state, to exclude from the numerator and denominator of the apportionment formula income earned in another state if that other state chooses not to tax that income or is prohibited from taxing that income by the U.S. Constitution or by federal law."
Adopting the throwout rule would again put Maine at the forefront of bad tax policy:
"Until recently, only two states had throwout laws: New Jersey and West Virginia. In December 2008, New Jersey Governor Corzine signed legislation which repealed that State's throwout rule, acknowledging that throwout is bad for business and that New Jersey needs to do everything it can to bolster the State's economy. With New Jersey's recent repeal, West Virginia will be the sole state with a throwout rule."
Perhaps that is one reason why West Virginia has an even smaller private sector than Maine's?
COST's conclusion:
"Throwout laws represent poor tax policy, discourge investment, and are constitutionally suspect. COST urges you to rescind the budget provision imposing thowout. Furthermore, COST encourages you to take a meaningful step toward improving Maine's business tax climate by repealing the current throwback law."
"Generally speaking, throwout laws require a company, when calculating its tax in a state, to exclude from the numerator and denominator of the apportionment formula income earned in another state if that other state chooses not to tax that income or is prohibited from taxing that income by the U.S. Constitution or by federal law."
Adopting the throwout rule would again put Maine at the forefront of bad tax policy:
"Until recently, only two states had throwout laws: New Jersey and West Virginia. In December 2008, New Jersey Governor Corzine signed legislation which repealed that State's throwout rule, acknowledging that throwout is bad for business and that New Jersey needs to do everything it can to bolster the State's economy. With New Jersey's recent repeal, West Virginia will be the sole state with a throwout rule."
Perhaps that is one reason why West Virginia has an even smaller private sector than Maine's?
COST's conclusion:
"Throwout laws represent poor tax policy, discourge investment, and are constitutionally suspect. COST urges you to rescind the budget provision imposing thowout. Furthermore, COST encourages you to take a meaningful step toward improving Maine's business tax climate by repealing the current throwback law."
I'm sure the Maine Revenue Service is closely watching this battle between Massachusetts and New Hampshire. Apparently, MA wants NH businesses to collect their sales tax for them when one of their residents goes cross-border shopping. Clearly this would be a violation of the U.S. Commerce Clause and will hopefully be bounced right out of court. From an economic standpoint MA should be careful, if Bay Staters cannot reduce their tax burden by cross-border shopping they may resort to cross-border migration. In fact, MA has already lost almost 300,000 residents to other states since 2000.
