The Fair Tax Act, Part XXII
Just to reiterate, it does not appear that any material differences exist between the 2005 version of the FairTax bill, and the 2007 version.
I am going to be working with the 2007 version from here on out, but other than some dates and timing considerations for the new Congress, there seems to be no need to compare the bills further.
So… on with Section 401…
(e) Limitation on Administration of Tax by United States- The Secretary may administer the tax imposed by this subtitle in an administering State only if–
`(1)(A) such State has failed on a regular basis to timely remit to the United States taxes collected under this chapter on behalf of the United States, or
`(B) such State has on a regular basis otherwise materially breached the agreement referred to in subsection (b)(2);
`(2) the State has failed to cure such alleged failures and breaches within a reasonable time;
`(3) the Secretary provides such State with written notice of such alleged failures and breaches; and
`(4) a District Court of the United States within such State, upon application of the Secretary, has rendered a decision–
`(A) making findings of fact that–
`(i) such State has failed on a regular basis to timely remit to the United States taxes collected under this chapter on behalf of the United States, or such State has on a regular basis otherwise materially breached the agreement referred to in subsection (b)(2);
`(ii) the Secretary has provided such State with written notice of such alleged failures and breaches; and
`(iii) the State has failed to cure such alleged failures and breaches within a reasonable time; and
`(B) making a determination that it is in the best interest of the citizens of the United States that the administering State’s authority to administer the tax imposed by this subtitle be revoked and said tax be administered directly by the Secretary.
The order of the District Court revoking the authority of an Administering State shall contain provisions governing the orderly transfer of authority to the Secretary.
This provides for the Federal government to take control of administering the FairTax within a state in lieu of a state tax authority, but with several protections for the state. The state would have to have failed to remit taxes correctly and on-time, received notice from the federal Treasury Department about said failings, and also failed to attempt to fix the situation, all of which would have to be proved in court, before it could lose its authority.
Back in town, and after reading this section and the previous one, I have two concerns.
First, under the Constitution, the Federal government cannot mandate or coerce any state into becoming the tax collector for the NRST. As the Supreme Court has repeatedly opined, the States and the Federal governments are both sovereign entities, acting in the same territory on the same citizens but with different responsibilities. The wording in the sections under review seem to me to indicate that the States are going to be subservient to the Feds in this matter of tax collection. This includes the portions of the law mandating timing as well as severe penalties for late payments, and trials by district judges to determine if a state is failing to do the job properly. If I were a State Treasurer, I might be inclined to tell the Treasury Secretary to stuff it!? And it isn’t at all clear to me how the Federal government might act as tax collector in the various States that decide not to become Administering States. Seems to me that the issue of trust between the Feds and States might need rethinking?
I do recognize that the States will receive a fee for administering the tax. But this leads to a second concern about fairness. Assume for the moment that the total revenue collected is $2.2 trillion (2007 estimate by BHI/Kotlikoff), then on average for the 50 states, a $5.5 billion fee (1/4 of 1%) will result in payments of $110 million per state or $274,000 per day. Sounds like a lot of money, doesn’t it. But there aren’t any “average” states. In fact, if the revenue collected is directly proportional to population density, the top ten states in population will receive 54% of the fee pot. Which means that Ca, Tx, NY, Fla, Ill, Penn, Ohio, Michigan, Georgia, and N.C. would receive $822,000 per day on average, and the other 40 states would get $169,000 per day. Carrying this “higher math” one step further, it turns out that California would get $1.67 million per day compared to $25,000 per day for Wyoming.
Now, my question is “Is that fair?” After all, each state has to set up a collection process, and once in place, simply forward the revenue collected from the retailers to the Federal Treasury Secretary. Is that really a $1.67 million daily task in California? What is going on to warrant this disparate sharing of the fee pot?
The Fair Tax Act does not coerce anyone into doing anything.
The bill explicitly states that a contract or agreement will be worked out between each state and the Federal government to administer the tax. This section details the government’s stance on breach of those agreements. The states would be subservient to the Feds under this agreement for the purpose of this tax only.
Failing the state administering the tax, the Federal government could set up its own tax authority within said State to administer the tax, or contract with another administering state to handle it.
As to ‘fairness’ between states, there is no such thing and there needn’t be. Each state will collect and remit only what is generated within that state. That is as fair as it is going to get on a state-per-state basis. Even the Constitution originally apportioned taxes by population level, and now does so on a per-individual basis instead per the 16th amendment (state apportionment no longer necessary).
Louisiana generates a lot less tax revenue than California, for simple economic reasons. That won’t change no matter what tax system you use. Louisiana is a terribly poor state, and California is a fantastically wealthy state. California also has a much higher population than Louisiana. The income tax today puts California very high on the list of taxpaying states, so your ‘disparate sharing of the pot’ happens under the current system, and I would imagine under virtually any system.
Could we come up with a system that made each state equal in tax revenue? Sure. Bankrupt most Louisianans or simply excuse Californians from 75% of taxes and we’re there. How fair is that?
The collection process should already be 95% in place for any state with state sales taxes. It requires merely one more line on those returns to delineate the FairTax.
Finally, what is most important is that it is fair to each individual taxpaying citizen, not each state Treasury Department.
The fee is not only for administration but for enforcement. Larger economy will require more enforcement agents to minimize fraud.