An Economist’s Guide to Money

Let the States Govern!

The Republican domestic policy agenda is dead in the water. Health care reform or deform, depending on your perspective, is kaput, as are the tax and infrastructure plans. The Republicans are too split between libertarians who think we should fend for ourselves and moderates who understand Phil Och’s best lyric, “There but for fortune may go you or I,” and partisanship has kept the Democrats from doing anything.

If we can’t count on Washington for economic reform, who can produce it?

The states.

There’s nothing preventing all or most state governments from joining together to enact collective policies. Consider health care. States could directly or indirectly require private insurers to offer coverage to all state residents. This would prevent insurance companies from pulling out of particular markets where they can’t make as much money. Large states, like California, could ban insurers who failed to provide coverage in other states. If all states did this, the private insurance companies, on which tens of millions depend, could no longer geographically cherry pick. That would keep Obamacare from imploding, something the president yearns to see, but state governors fear like the plague.

The states could also agree on collective tax filing. Such a reform would be of tremendous help to small companies that can’t afford to operate in all 50 states due to the costs of filing 50 sets of tax returns and other documents. As I’ve indicated in prior columns, I have a small personal financial planning software company. (I run it as a non-profit and don’t earn a penny.) We’re producing over $1 million in annual sales, but are just breaking even. Our sales and employment could be far higher were it not for the threat of nexus.

Nexus is a word that strikes fear into the hearts of small business owners like me. Nexus is a legal term that refers to laws requiring businesses that sell products or have sufficient dealings in states other than their home state to file sales taxes, state corporate income taxes and state franchise taxes in those states. Nexus can require a business to file an annual report and routinely interact with state unemployment and tax authorities. Needless to say, it's a hassle. The amount of time and effort involved in complying with nexus leads most small employers to avoid branching out.

What constitutes nexus can a very murky. Indeed, small businesses have to hire experts just to figure out if they have nexus in states where they have no employees.

From what I understand, entering into commission sales arrangements, including affiliation deals on the web, indeed, holding a single sales-related meeting in a state, can trigger nexus. Worse, once a state declares you have nexus, it can force a business to file tax and other forms not just going forward, but also for many years in the past. For a small business, this is a death sentence.

The nexus problem could be mitigated significantly by having all states agree to collective filing. Thus, a small business could file one corporate tax return, indicate the states where it has nexus, and then pay what’s owed to a state clearing house that divvies up the revenues among the states. States could also agree on a uniform and clear set of nexus rules so that businesses would know what they are facing.

Another area for collective state action is education. The states could jointly produce online courses that each school district could freely use to educate its children. If each school system allocated, say, half the day to uniform online learning, inequality in education would be reduced dramatically. The states could also contribute to a joint vocational education system similar to that in Switzerland. They could combine their Medicaid programs into a single national system that would permit poor people to have access to health care if they are working or traveling out of their state. They could also collectively petition to collect tax revenues for the federal government in exchange for a personal and business exemption from federal taxation.

We have a dysfunctional federal government. Collective action by states can constitute, in part, an alternative federal government. So, this month, don’t ask your members of Congress to fix things. They can’t and won’t. Ask your governors to elect one of their colleagues as the Unofficial President of the Collective States to lead our country to the promised land.

(Laurence Kotlikoff is a professor of economics at Boston University. His financial planning software company's website is www.economicsecurityplanning.inc. Readers can email questions to: kotlikoff@economicsecurityplanning.com. Questions of general interest may be addressed in future columns.)

(EDITORS: For editorial questions, please contact Reed Jackson at rjackson@amuniversal.com.)

More like An Economist’s Guide to Money