The still-weak economy continues to squeeze state and municipal governments, which have less to work with as long-established revenue streams dry up in the prolonged recovery.
According to Tim Burley, partner in charge of the tax practice at WiserMazars LLP, in Edison, fixing antiquated tax loopholes like sales tax collection for online retailers will help bring the tax code more in line with the way the U.S. economy works, but can only be done at the federal level.
While the Marketplace Fairness Act is the latest in a number of bills introduced by Congress to apply current laws to so-called e-tailers, slow federal progress leaves states and municipalities behind to cope with the loss of revenue.
A study produced by the Bloustein School of Planning and Public Policy and the New Jersey Retail Merchants Association estimates New Jersey will lose nearly $300 million in revenue by 2015 without changes to the application of sales tax to online retailers.
Technology “has created this huge expansion of a digital economy,” Burley said. “And the advances in technology make the burden of complying with a state’s laws much lighter for a company … the economy has shifted.”
“This is an attempt for the states to try to apply their laws to the current commercial model,” he said. “They still tax a lot of old technology — they tax production and value of property versus consumption, and our economy is driven by consumption.”
Burley points to a municipal tax on telecommunications providers for placing telephone poles in towns. With many people no longer using land lines, in favor of mobile phones, that source of revenue has been diminished, he said.
“That system of taxation is archaic relative to the way telecommunications has evolved. What do you do? How do you catch up with that?” Burley said, adding that federal and state taxes have started to adapt, but municipalities don’t have the power to tax transactions.
William Dressel Jr., executive director of the New Jersey League of Municipalities, said municipalities in the state are relying almost solely on property taxes to fund municipal, county and school services. That stream of income has been diminished by the decline in home values, as well as increases in successful property tax appeals.
“Our neighboring states, New York and Pennsylvania, they’ve got an extensive hotel tax, luxury tax, they’ve got wage taxes, they’ve got in some states locally imposed sales tax,” Dressel said. “In New Jersey we don’t have that — the only broad-based revenue source local governments have is property tax.”
“In troubling times, the last thing you want to do is look at property tax increases,” Dressel said. “One way to cope with these challenging financial times is to grow yourself out of the economic doldrums and I think what towns are doing in many cases are working with the state and the private sector in not only working to retain the businesses in their community, but to attract new businesses.”
Dressel said communities like Voorhees and Plainsboro have used relationships with companies like Virtua and Novo Nordisk to expand their ratable base. Other municipalities like Orange and Perth Amboy are working on marketing their city’s economic development plans to business, and making business-friendly policy decisions, according to Dressel.
“There’s not a lot of hope coming from Washington or Trenton, so they’ve got to basically look at their communities and try to maximize their own fiscal position by working with the private sector and trying to market their own communities,” Dressel said.