Letter to U.S. Senate Finance Committee Regarding "Blank-Slate" Approach to Tax Reform

July 26, 2013

The Honorable Max Baucus
Chairman, Committee on Finance
United States Senate
Washington, D.C. 20510

The Honorable Orrin Hatch
Ranking Member, Committee on Finance
United States Senate
Washington, D.C. 20510

RE:  Senate Finance Committee’s “Blank-Slate” Approach to Tax Reform

Dear Chairman Baucus and Senator Hatch:

On behalf of the National Conference of State Legislatures (NCSL), we write to urge the Senate Finance Committee in its efforts to reform the federal tax code to maintain the fiscal viability and sovereignty of state governments. We respectfully remind you that federal and state tax systems are inextricably linked, and that any federal reform will likely have serious fiscal and administrative ramifications on states. However, we believe that comprehensive federal tax reform should only address those taxes enumerated in the United States Tax Code and not state tax issues such as the collection of sales taxes from remote transactions or state business activity taxes.
NCSL urges the committee to adhere to the following principles as you consider reforming the federal tax code:

  • Maintain the tax-exempt status of state and local government bonds for infrastructure and capital projects;

  • Preserve states’ abilities and discretion to tax certain revenue sources;

  • Protect the state and local income tax, sales tax and property tax deductions for federal income tax purposes;

  • Avoid the negative impact of retroactive application of tax changes and provide states with adequate transition time to implement and respond to new tax systems, preferably up to three or more years; and

  • Continue tax policies that reward work, specifically the Earned Income Tax Credit (EITC) and Individual Development Accounts (IDAs).

State and local bonds are the most beneficial and productive instrument for governmental infrastructure and capital needs purposes. The tax-exempt status of municipal bonds helps strengthen state and local economies, a goal each special provision or tax expenditure should adhere to as cited in your “Dear Colleague” letter. If the current status of municipal bonds is either modified or eliminated, economic development would be suppressed through increased costs and less investment activity.
The need to protect and preserve state and local tax deductibility is even more imperative when considering the adverse impact its elimination would have on state and local government fiscal conditions. During the Great Recession, state legislatures reduced state spending by over $500 billion in order to balance state budgets. Eliminating state and local income and sales tax deductibility could cause further harm to our still weak economy by limiting states’ abilities to fund vital programs to educate our children, maintain state infrastructure and ensure the health and safety of our citizens.
We appreciate the opportunity to provide recommendations on tax expenditures within the U.S. federal tax code, and welcome the prospect of working collaboratively with the committee in its efforts to reform the federal tax system.  For more information, please contact Sheri Steisel (202-624-8693; sheri.steisel@ncsl.org) or Jeff Hurley (202-624-7753; jeff.hurley@ncsl.org).


Senator Toi Hutchinson
Illinois General Assembly
Co-Chair, Budgets and Revenue Committee

Senator Ellen Roberts
Colorado General Assembly
Co-Chair, Budgets and Revenue Committee
Cc:       Members of the United States Senate Finance Committee
            Members of the United States Senate