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On April 4, 2007, the Federal Reserve Bank of Chicago, the National Tax Association, and the University of lllinois's Institute of Government and Public Affairs brought together a distinguished group of state tax experts to discuss emerging trends in business taxation.
How should states tax business? Does business pay its fair share of the tax burden? And are state revenues growing fast enough to meet future expenditure needs? These were just a few of the questions discussed at the conference that convened at the Federal Reserve Bank of Chicago.
Tax principles and recent experience
William Testa, Federal Reserve Bank of Chicago, argued that a state's tax revenue system should be structured around time-tested principles. Otherwise, the end product will likely be flawed, while, with the passage of time, the tax system will become further distorted through political maneuve rings by special interest groups.
Two general tax principles fall under the rubrics of equity and efficiency. The most common notion of tax equity is the "ability to pay" which prescribes that the tax burden should vary directly with an individual's wealth or income. In this regard, general business taxes are often designed to extract payment from the well-to-do. However, Testa argued that general business taxes are ill-conceived to accomplish such equity. That is because business tax burdens are frequently shifted forward to consumers in prices paid for goods and services, while, in other instances, these burdens are shifted backward onto workers in the form of lower wages.
Also, empirical studies have not been effective in establishing "who pays" with any degree of confidence, making it unclear whether business taxes can be designed to achieve equity.
For these reasons, states should abandon the goal of achieving income redistribution or tax equity through general business taxation. Instead, those in charge of designing business taxation should focus on efficiency. In particular, state business taxes should be fashioned along the lines of the "benefit principle," which would require businesses to pay taxes in rough proportion to the amount of public services they consume. From an efficiency standpoint, a system run under the benefit principle would motivate the business sector to articulate its public service needs to state and local governments. This, in turn, would promote state economic growth...