State tax sources might wane amid technological, demographic shifts

Provided by Hannah News Service

E-commerce, autonomous vehicles and the graying of America's population stand to undermine state revenues absent policies to adapt to the disruption they'll cause to existing taxation schemes, a University of Tennessee-Knoxville economist told an audience Thursday at the National Conference of State Legislatures annual summit in Nashville.

William Fox, director of the university's Boyd Center for Business and Economic Research, explained how marketplace shifts and behavioral changes inherent among retirees will rearrange economic activity in a way that many sales and income tax statutes aren't set up to capture.

Fox said the U.S. Supreme Court's decision in Wayfair v. South Dakota, which allowed states to require sales tax remittance by online sellers, was far from a cure-all for sales tax woes related to e-commerce. The sales thresholds many states are setting as part of their remote sales tax compliance statutes – Tennessee's is $500,000 – results in a fairly narrow application, he said. With Tennessee making up 2% of the nation's population, a national company making $500,000 in sales into the state would be expected to have $25 million in annual sales, all other factors being equal. Relatively few businesses are that large.

"There are millions and millions of these companies out there. We've created a compliance responsibility for 1,000," Fox said.

Compliance language aimed at "marketplace facilitators" like Amazon and eBay – such language was included in Ohio's recent biennial budget – will help to ensure more sellers are remitting tax, he said. Two million vendors operate on Amazon, and 25 million on eBay, he said.

Enforcement will be a challenge, Fox said. "How does a commissioner of revenue sitting in Nashville, Tennessee see a company sitting in Salt Lake City selling $500,001 into Tennessee?" he said.

The sharing economy will erode the tax base further, and tax avoidance behavior will also be a challenge, he said. "If I had an e-commerce company, I would be dividing it into pieces to avoid a collection obligation in your state," he said.

The digital economy's shift toward sharing and shared assets also will exacerbate the narrowing of the sales tax base resulting from taxation laws that focus mostly on goods rather than services, he said.

Fox also highlighted autonomous vehicles as an example of how technology is altering the economy and the relevance of tax laws. Much of the disruption he forecasted relating to autonomous vehicles stemmed from the prospect that they'll largely be owned in fleets, rather than individually, as part of the move toward purchasing mobility as a service.

Aside from diminishing personal vehicle ownership, it will also have effects on the people who sell, insure and repair cars. Vehicle parts manufacturers will have to contend with the fact that an electric engine has far fewer component parts than a combustion engine.

While the transition period where autonomous and human-operated cars commingle in traffic could be a long one, he said attitudes might change more quickly.

"Five years from now, you realize that autonomous vehicles are going to be a reality. What's your willingness to buy a new car that you're going to drive yourself, that you're going to hold for five or eight or 10 years?" Fox asked.

Primarily electric vehicles will also upend the prevailing method of financing infrastructure construction and maintenance – fuel taxes.

And of course, people for whom driving is a primary or important job task are at risk of being replaced by machines.

"Minimally, what you can expect is the tasks that people do in their jobs will be radically changed by autonomous vehicles, and the caution is, are the states and local governments going to help those workers transition from the kind of things they're doing today to the kind of things they're going to be doing five and 10 years from today," he said.

Shifting to demographics, Fox described trends of an aging population, lower birth rates and relatively low immigration into the country.

As the share of the population over age 65 increases, state revenue collections will be affected by existing policies that tax investment income at lower rates and offer special tax treatment to other types of retirement income. Older people tend to spend less money as well, and the areas where they spend more money – meals at home, health care – often are exempt from sales taxation.

"Clearly in a world in which the working age share of the population slows, we're going to be challenged on the labor force side, and economic growth is kind of the growth in the labor force plus the growth in productivity. If the labor force part of that shrinks or grows really slowly, what you're really saying is economic growth is just going to be lower," he said. "If the labor force grows more slowly because of few births and low immigration, the economy will grow slower.

"You can imagine a world where we increasingly look like Japan or Russia or Hungary," he said.

 

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