Morgan Scarboro is a self-described “tax nerd” – she pores over legislation, especially at the state level, looking for bills that will impact businesses large and small. Scarboro, who’s a manager of tax policy and an economist at the firm MultiState, assists CEDIA’s Government Affairs department as a “early alarm system.”
Scaraboro’s been on the CEDIA Podcast twice (so far) over the course of the pandemic, and the most recent appearance came with some good news. “Back in March and April of last year, when COVID was really starting to shut things down, there were predictions that individual states were going to lose 40 to 50% of their revenue, which would have been just absolutely catastrophic,” she notes. “And unlike the federal government, states have balanced budget requirements, so they have to budget around these issues.”
The good news? The predictions were wrong. By quite a bit. “Not every state is the same, but the vast majority of states are in a fairly stable revenue position and are maybe down three to 4% of revenue. Now coupled with this huge federal stimulus stimulus bill, that's about to come in, which includes $350 billion for state and local governments, states are not going to be in a tough position.”
Does that mean less chance of an imminent corporate tax increase to offset losses? That depends on the state, naturally. “We've seen proposals to sort of increase the corporate income tax rate in states like Arizona, California, Connecticut, Hawaii, Kentucky, Massachusetts, New Mexico,” notes Scaraboro. But that’s not to say it's going to happen in all of those states, right?” If a state with a more conservative legislature isn’t forced to generate revenue, they likely won’t. “I think probably the two that I'm keeping my eye on most closely in terms of the corporate income tax rate are probably California and Massachusetts.”
States are loathe to raise taxes on their resident’s income – so it’s businesses that usually bear the brunt. West Virginia, in fact, has decided to look at eliminating the individual income tax entirely, according to Scarboro. “The idea is that everyone in the country will want to pack up their bags and move to West Virginia.” But the state will need to supplant that revenue, of course. “So this proposal in part relies on taxing services. The issue is that a lot of services are consumed by businesses. Economists across the board, on both ends of the ideological spectrum, all agree that you should not tax business inputs.
Scarboro outlines what happens next: “If you own a business and suddenly you're now paying tax on that service to your accountant, your cost goes up and more than likely you have to pass that on. That leads to something called tax pyramiding, where you end up just adding a tax on top of a tax on top of a tax. Ideally, we want our sales tax to be structured where you're only paying tax on the final product, not what goes into it. The West Virginia governor's proposal includes pretty explicitly taxing professional services. So we think about things like accounting, things like legal services, those are primarily consumed by businesses.” Long story short: There’s going to be drama in the West Virginia statehouse.
Data Really Is the New Oil
The Maryland legislature recently overrode their Governor’s veto of a bill instituting a digital advertising tax. Scarboro explains, “Essentially it taxes digital advertising services. If you have a certain amount of global annual revenue and a certain amount of revenue that is derived from digital advertising services in Maryland, you’ll get hit -- and that's really all I can tell you about the tax because they have not issued any other guidance about how you would source it; how it's going to work.”
The pandemic has also created some interesting tensions between executive and legislative branches at the state level; notably, the question of how much power a Governor should be allowed when it comes to emergency measures, from lockdowns to PPE distribution. “We’ve seen 22 state legislatures take this on, to look at what the governor's authority should really be. As you start thinking about emergency orders, there are a lot of legislatures that were pretty ticked and thought that their governor had overstepped their authority in issuing these emergency orders.” This has led to heated debates even in states where both the governor and a majority of legislators are from the same political party.
Another thing to keep an eye on? “States are eyeing the notion that if you collect and use personal consumer data, that you should pay a tax on that data.” This one keeps Scarboro up at night. “The reason I'm concerned about that is the proposals we've seen so far on this have been very, very broad to the point that you could argue if you’re merely a local corner store that collects your customer's addresses to send them flyers, that you could be liable for this tax.”
A final note: Although Scarboro does excellent work for CEDIA as an independent resource, the Association’s Government Affairs department is a one-man operation. That department’s director, Darren Reaman, works with a grassroots group of volunteers who alert him to any potential legislation – well beyond tax issues – that could impact CEDIA member firms. If you get wind of anything that could cause an issue where you live, let Reaman know: firstname.lastname@example.org.