June 25, 2008
Dubious BATSA Scoring from the NGA
At yesterday's hearing on H.R. 5267 (the Business Activity Tax Simplification Act or "BATSA"; see Joseph Henchman's post below for background), one of two groups testifying in opposition was the National Governor's Association. As part of its testimony, NGA resurrected its 2005 study on a similar bill, which estimated that BATSA would cost states $6.6 billion per year in business tax revenue.
As the Council on State Taxation pointed out back in 2005, the NGA study uses an imprecise methodology and is biased to overstate the BATSA revenue loss. Highlights of COST's takedown of the NGA study include:
- Though the study is based on a survey of state governments, only 34 of 50 states actually provided responses.
- States with similar business tax systems forecast widely divergent changes in revenue, suggesting that states were interpreting BATSA differently from each other.
- Kansas mistakenly interpreted the bill as requiring it to abandon combined reporting for corporate income, leading to a 28.8% revenue loss estimate, compared to 2% for California, another combined reporting state which interpreted the law correctly on this point.
- The study asked states to assume loss of revenue from many firms that would continue to qualify for taxation under BATSA due to "nexus" factors other than physical presence.
Most notably, the survey looks at revenue losses but fails to include significant offsetting revenue gains:
- NGA forecasts lost tax revenues as companies reduce the number of states where they have physical presences by switching to use of independent contractors. However, the estimate does not offset these losses with new revenues states would collect from those independent contractors.
- Additionally, the study does not consider new revenues that would accrue to 24 states and the District of Columbia, which use "throwback" rules to tax income earned in a state it was not subject to business tax. To the extent BATSA reduces the number of states taxing a given company, other taxing states with throwback rules will see their revenues rise.
These last errors are particularly egregious. Essentially, $6.6 billion is a gross revenue loss figure. Because NGA did not make an effort to estimate offsetting revenue increases, the $6.6 billion figure sheds no light at all on BATSA's net effect on state revenues. This provides a simple answer to John Conyers' question at the hearing, of what he should tell Gov. Jennifer Granholm about legislation that would reduce Michigan's tax revenue by $400 million: he should tell her that $400 million is a made-up figure.
