David D. Stewart 0:03

Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: state status report. As the year is coming to a close, we're taking a look at how states here in the U.S. altered their tax policies in response to the second year of the pandemic, as well as what might be key issues in 2022. Tax Notes senior reporter Paul Jones recently spoke with Carl Davis, research director with the Institute on Taxation and Economic Policy (ITEP). Paul, welcome back to the podcast.

Paul Jones 1:35

Thanks, David. It's always a pleasure.

David D. Stewart 1:37

So could you tell us a bit about what you and Carl spoke about?

Paul Jones 1:40

Sure. We spoke about states that pursued tax cuts in light of budget surpluses in 2021, as well as some that have moved to make more progressive tax reforms. We also discussed some tax policy debates he anticipates will be part of states' 2022 sessions, including responses to the potential passage of the Build Back Better package and taxation of digital services and cannabis.

David D. Stewart 2:04

All right, let's go to that interview.

Paul Jones 2:08

Hi, Carl. Thanks for being with us.

Carl Davis 2:10

Yeah, of course. Thanks for having me.

Paul Jones 2:12

Let's start with one of the most obvious developments due to the pandemic. There were a number of states that were obviously concerned that in light of the lockdowns, their revenue was going to suffer, but as it subsequently turned out, a lot of states actually enjoyed very healthy revenues and even surplus revenues. And there have been some that have actually debated cutting or actually enacted tax cuts. Can you talk about that trend and what's behind it, and whether you think it's going to continue in the 2022 session? And I'm also curious if you think it's prudent for states to react to these near-term surpluses by making long-term changes to their tax base.

Carl Davis 2:52

Right, yeah. So the situation with state budgets really has been remarkable. I mean, it's not difficult at all to imagine a situation where states were needing to make drastic budget cuts more in line with what we saw during other recessions and budget cuts that would have really, in a lot of ways, compounded the hardships that we saw during the pandemic. And instead, what we saw was the federal government intervene with a very robust policy response, thinking here, not just about direct aid to states and localities, but the economic impact payments and the enhanced unemployment benefits. What things like those did was raise incomes, raise sales for purposes of the sales tax, and you ended up with a stronger economy than almost anyone expected because of that. And how states responded to that impact on their budget outlook, it's varied quite a bit. A lot of states have used the money to strengthen their school systems or their infrastructure or public health programs, which we clearly see a strong need for now. But we're also seeing these examples, like you said, of states cutting taxes. Not really the sales tax as much, we haven't seen sales tax cuts, it's been mostly on the income tax side in terms of the larger tax cuts. And with the income tax, the question is, who's going to get those tax cuts? Because you really have the ability to fine tune an income tax cut to go to families at any given point on the income scale, or to do it broadly. And states have really taken very divergent approaches here. So in a state like Washington state or Maryland or Connecticut, the priority in their tax cutting was really for lower income workers and raising their standard of living through say, a larger earned income tax credit (EITC). Colorado, they did that as well, but there was also the funding of a child tax credit (CTC) that extends higher up the income scale, not just to low-income workers, but to middle income families as well. And then you also have states that, very clearly, prioritized tax cuts for their most affluent families. So the states coming to mind here would be New Hampshire, Arizona, Ohio, there are others. Typically those tax cuts are being marketed as a means of economic development. Think of it as the modern day trickle-down theory, with tax cuts at the top , finding their way to everyone else. I worry about that approach in particular. I don't know that the evidence bears that out, that at the state level, that kind of tax cutting is going to have a meaningful, positive impact on state growth. I think what we're going to see in a lot of cases over the long run, responding to this situation, you mentioned this, this rosy budget picture isn't going to last forever, but in a lot of cases, these tax cuts were written to last forever. And so you can end up with a situation where there are fewer resources to put into shrinking class sizes, expanding healthcare access, anything the other service. And instead what you might see is more upward pressure regressive tax sources. States turning to things like, higher sales taxes, higher excise taxes to pick up the slack long-run that's been created by these tax cuts. And what we tend to see when that happens is a shift toward more regressive state taxation in general. We have a report called "Who Pays?" that looks at the distribution of taxes by income level, and we find that states generally are taxing in a somewhat regressive fashion. And I think the income tax cuts we've seen in some states have the potential to make that worse , especially over the long haul.

Paul Jones 6:31

Right. And I know that there were also a couple of states that were actually at least discussing eliminating their income tax. I think Mississippi was one, and I believe the governor actually recently resurrected a proposal to get rid of that state's income tax. Do you think we're going to see more states move in that direction? Do you think those proposals are likely to advance next year? Or is that a bridge too far?

Carl Davis 6:54

Yeah. For the last decade, I think we've seen a state or two debate this almost every year, maybe every other year. It's really a tough thing to pull off in practice. For one thing, states have balanced budget requirements, so if you're going to outright eliminate one of your major sources of revenue, the cuts that you have to make to public services, to public institutions to make that happen, they have a large human toll and broadly, I mean, they create a lot of economic concerns as well. And what we saw in Mississippi was the business community who was not particularly enthusiastic about the income tax elimination plan. In some instances, there seemed to be outright hostility to it when they were looking down the road and saying, "well, what's this going to mean for our infrastructure? And what's this going to mean for our higher education system and our ability to attract highly skilled employees?" So the only state that ever actually managed to pull off repeal of abroad income tax was Alaska. They did it only after it became apparent they were sitting on enormous amounts of oil that could be used to fund their budget. So very different situation than Mississippi, or say, West Virginia finds itself in right now. In Mississippi, the current proposal from the governor, as I understand it, would not even offer any replacement revenue. A lot of times , an income tax elimination plan might be paired with, say, a higher sales tax. You can call that, may not for a lot of families, they may not even experience that as a tax cut on that. Typically what, if you have a lot of income, you'll probably get a large income tax cut. If you tend to have a more moderate income, your higher sales tax bill could very easily offset whatever income tax cut you might get. So it ends up being more of a tax shift than a tax cut. Well, in Mississippi, what they're talking about now is not replacing the revenue, not raising sales taxes , not doing anything like that. And I think to make that work, you're going to have to see really staggering budget cuts that I think would be extremely difficult to navigate through the legislature. One way they might try to deal with it is with a very slow phase-in of income tax repeal, maybe triggered, maybe not. What that would allow the legislature to do is really put off all the hard decisions until later. Maybe much, much later when the current crop of lawmakers aren't even in office anymore. I view that kind of approach, these long phases, is really a gimmick because it amounts to lawmakers sidestepping the central question in every tax and budget debate, which is around prioritization. If you do more of this, what are you going to do less of? In this case, there's gonna be more income tax cuts and less of, we don't know, because we're going to put that decision off for years or decades. So , I think to make the math work, we may see them headed in a direction like that. I don't consider it a prudent policy course and how it fares might depend on how the business community reacts to that kind of plan, but that may be where things are headed. And in generally, yeah, I do think we're going to be headed into another year where tax cutting, maybe shy of outright income tax elimination, but we're tax cutting is talked about in a lot of states. And what remains to be seen is, who's going to benefit from those tax cuts? How are they going to be designed and particularly at different points in the income scale, where will these tax cuts to targeted?

Paul Jones 10:22

And it sounds like, as you noted in your first answer, there are some states that are looking at cutting taxes specifically on lower income earners. And that might be seen as sort of more of a progressive reform, as opposed to the other approach where you have states cutting taxes with an eye towards reducing the tax burden, maybe across the board, but particularly on higher earners. We should note that there were some states that actually moved sort of in the opposite direction and looked at trying to make their tax codes more progressive. The states like Washington, which established a new capital gains tax. New York and Colorado, and I believe also the District of Columbia. Looking at that, what are some of the policy considerations that states should be considering when they're moving in that direction? And do you think there are going to be some states that sort of continue to push to improve the progressivity of their state tax regimes?

Carl Davis 11:16

Yeah, I do think this is going to continue to be a major item of debate. In the last several years, there's been a big boost in awareness around issues of inequality, both inequality in income and in wealth. And we have enormous gaps by both those measures. I mean, economic inequality and racial inequality in particular. And unfortunately in a lot of cases, those gaps seem to be solidifying or you can even find instances of them worsening. And I think that concern has animated the federal tax debate in a huge way. And it's been a big part of the debate over the last several months at the federal level. It's been a point of debate in the states even longer than that. In a state like Washington, what was really critical there was an acknowledgement that their existing tax system is overwhelmingly regressive. They're raising money, mostly through sales taxes, through gross receipts taxes. Its pretty clear cut those are regressive taxes that hit lower income families hardest. And so the Washington approach was to try to diversify away from those revenue sources, bringing some progressive options as well. And capital gains certainly represents a progressive option. Capital gains are overwhelmingly enjoyed by higher income families and so it's a way to add a little bit of progressivity into the mix, i nto what is still a regressive tax code in Washington. I think as we're seeing inequality rise over time, I think we're g oing t o keep seeing an interest on this topic and in making sure that the people who are fairing best and are enjoying a lot of success are chipping in to pay for the public services, the public institutions, that really a llows society to function, and that h ave created an environment where they can amass what are, in some cases, just huge fortunes. There's a really practical concern here for state budgets as well. And that's if we see people at the top continuously growing their share of income, their share wealth , taxing those families then becomes a really powerful and essential part of keeping state budgets funded. It makes less and less sense over time to rely on regressive taxes on the poor and middle class, when you see most money flowing to people at the top, that's where a bulk of new income growth is going. And so the really dramatic example we saw in the last year or two of this is California. California, the state budget fared quite a bit better than expected, in large part because the state does have a progressive income tax and it positioned it to capitalize on the fact that wealthy families in the state faired extraordinarily well during this bull market run- up we've seen, especially since March of 2020. In times of widening income inequality, progressive taxation becomes even more of a potent revenue raising tool. And I think California demonstrates that. And I think if inequality continues on its current trajectory, and I don't think this aspect of the debate is going to go away, one place I know where it's going to get attention next year is Massachusetts, voters are going to have a chance in about a year from now in November of 2022, to decide whether they want to add a second tier onto their flat tax, a higher tax rate for millionaires in particular. Outside of Massachusetts, I'm not aware of any more proposals like that, that are already guaranteed to be on the ballot, but I'm sure we're going to see this debate happen in other states as well.

Paul Jones 14:42

Right, and I know even in California, there has been talk of, for example, a wealth tax. I believe there was talk of a wealth tax in Washington as well, so that federal debate over inequality and new ways of taxing higher earners seems to be influencing at least discussions at the state level. One thing I should also note is that progressive taxes, particularly if they tax gains in the stock market, can be somewhat volatile. Is it important for states that decide to move in that direction to make sure that they have a good fiscal plan for sort of reaping the benefits of that type of taxation during the boom years and making sure that they don't lose sort of that revenue base if the stock market declines for a period of time?

Carl Davis 15:27

Yeah, absolutely, I think, you know, rainy day funds are an essential part of state budgeting. I think, that volatility, capital gains can be volatile. The most volatility tends to be in the energy dependent states like Wyoming or Alaska. So there's, volatility is something we see in a lot of states and it's something that can be managed through good budgeting practices. Another thing that on capital gains in particular, there are proposals at the federal level right now that would raise the overall tax rate on extremely high income families, say incomes over $10 million, or incomes over $25 million a year. A higher rate on those families is largely going to be impacting capital gains. And so one thing we're seeing the JCT (Joint Committee on Taxation) forecast, for example, is that we're going to likely see some acceleration of capital gains income into the last few weeks of this year, among high-income families that want to sell their stock before those higher rates take effect. So that could be another thing we see with capital gains trends. We might see a little bit of a run-up in capital gains realizations in this last month of the year. And that could have the effect of making state budgets in some places look even rosier . But the thing to realize then is this is really a timing issue. And so if we see capital gains spike over the last several weeks of this year, well then they're going to come down after that for a little while. And we may see depressed capital gains revenue, especially among very high income families, throughout the rest of 2022. So I think it's going to be important not to take, not to view what's happening with capital gains over these next several weeks as the indication of a long run trend, because we might be in for a little bit of a rocky road ahead on that income source in particular. Not a reason not to tax it, but you have to be prepared for that volatility and understand what's driving it.

Paul Jones 18:04

So let's look at another area of activity by states that we're probably going to see more focus on in the coming year. And that has to do with conformity. Obviously there was a lot of conformity legislation adopted by states that were directly addressing the CARES act and the Consolidated Appropriations Act, either conforming the various provisions or decoupling from them. But now there's the potential for the passage of the Build Back Better package that is supported by the Biden administration. And if that is approved, in something resembling its current form, how do you think that's going to impact states conformity considerations? I think you and I had previously talked about how that could affect the state's decisions to conform to corporate income tax provisions, excess business losses, GILTI (Global Intangible Low-Taxed Income), and potentially even the SALT cap, obviously.

Carl Davis 18:57

Right, yeah. There are some significant conformity issues here, fewer than there could have been though. I mean, if we had seen a serious effort at repealing stepped-up basis, for example, that would have presented conformity questions for states, but still, there are definitely definite implications for state tax codes here. I mean, one thing of course is improved tax enforcement would be part of the Build Back Better plan. And that could pay off for states over the long run. If we see the tax cap shrink, that could benefit state income tax revenues as well. I think that's a ways off, but that's something to have in mind. On the corporate income tax, there's talk of strengthening the anti-abuse rules administered through the GILTI regime. It's meant to deal with shifting of profits into lower tax jurisdictions. That could bolster corporate revenues a bit in the 20 or so states that are taxing GILTI now. And it could offer an extra inducement for other states to begin taxing that income as well, because they would effectively be leaving more money on the table if they continue not to tax GILTI, which was initially part of the 2017 tax law. So at this point it's moved to become a bipartisan provision initially enacted by Republicans and then strengthened by Democrats. Otherwise, pass-through businesses more important issue is around the limit on excess business losses. Again, this is another feature of the 2017 tax law initially. It was included to stop, temporarily, to stop pass-through businesses from using large business losses to offset other forms of income. Under the CARES act, the response to the pandemic that limitation was lifted for three years, but the legislation working through Congress now would finally allow that to take effect and actually make it permanent I believe. So states might find that to be an appealing item to conform to and in the places where that hasn't already happened. SALT cap, I think what we are likely to see is some kind of loosening of the cap . It seems like outright repeal is now off the table. Congress could choose to loosen it either by raising the dollar amount, taking it from say $10,000 up to $80,000, or they might decide just to lift the cap for certain families, say families below $400,000 of income, or maybe a level higher than that. From a strictly conformity perspective, that's relevant in 20 states or so, that have an itemized deduction for property taxes, or maybe even an itemized deduction for sales taxes or income taxes, though that's a little more rare. But 20 states or so have those deductions in a way where they've chosen to cap it at the same $10,000 as the federal level. And so if Congress decides to loosen that $10,000 cap, these states are going to need to decide whether they want to loosen it right along with Congress and take the revenue hit involved in that, or whether they want to keep the stricter $10,000 limit in place. So I'm thinking we'll see debates over that as well.

Paul Jones 21:56

Yeah. And actually to go back and tie this back a bit with our earlier discussion about some of the tax reforms that states have been making. Based on what's being discussed at the federal level, how might federal legislation impact states' conformity calculus with respect to the earned income tax credit and the child tax credit? Would that potentially offer an opportunity for states to make their tax codes less regressive?

Carl Davis 22:24

Yeah, definitely. Most states right now have an earned income tax credit piggybacked in some way on federal rules. Increasingly, we're seeing states depart from those federal rules in one way or another, but the backbone of those credits is still federal policy. And so, the federal change would extend for another year enhancements to the EITC for, for childless workers. The EITC was, the credits, it's far more generous for families with children than for families without children. And so, creates a little bit of a disparity there. And so for a while , this has been a topic of debate of creating more parody between families of different types, those with and those without kids. And that's what the federal proposal would do at least for another year, offer a larger credit for childless people and extend that credit to families that are currently ineligible, like childless workers under the age of 25 who are just trying to get a foothold in the job market or childless workers over the age of 65, who can't claim the credit now, but who may be stuck working late in the life because they don't have the funds to afford to retire. I think those are pretty, in my opinion, pretty clear cut improvements to the EITC, just broadening its reach to include populations that have really been left out of the credit. And so states will have to decide whether they want to pick those up in their own credits. A lot of states have actually, I shouldn't say a lot, but some states have started to already make improvements in this area and enhance their own , EITCs for childhood people. So in some ways the federal government is playing catch up , with a place like the District of Columbia, which has already done something along these lines. But I think states are going to want to decide whether they should do this. I think for simplicity reasons alone, it's probably worthwhile, the EITC can be a bit of a complex credit to claim. And I think, allowing the state credit to mirror federal rules as closely as possible, at least avoids adding additional complexity to that claims process for families who may not have a lot of resources and a lot of ability to access more complex benefits like that. On the child tax credit side, there's less of a traditional clear-cut conformity question here. Most states don't have child tax credits and the few that do, it's not even always directly coupled to the federal credit , sometimes it's a standalone program. But I think the federal CTC has been, it's popular enough and it's producing results in a lot of ways, really dramatically reducing child poverty by something like half. I mean, this is a transformative change. And I think that states are going to take notice of that policy shift at the federal level and want to see what they can do to build on that success. So we might be headed in a direction of more states wanting to pursue child tax credits just to , because the federal government is showing that it's an approach that can really benefit families, particularly lower income families who are struggling. And then, there's just so much evidence around child tax credits and what they can do for kids in vulnerable economic situations who are facing a lot of uncertainty and stress. That's just permeating the household when it's unclear if the family is going to be able to afford to pay rent or keep food on the table, or do any of these things. If you add a little bit of economic stability and economic certainty, through something like a child tax credit, it can really have big benefits for the kids. Over the long run, creating a more stable environment , it's been tied to better health outcomes, better academic outcomes. And so I think for that reason too, I think states are going to want to give it a close look and I'll definitely be watching how state policy evolves on that front next year.

Paul Jones 26:14

Yeah, that definitely fits in sort of with that larger theme of states looking at how they're going to approach their tax regimes from a standpoint of its impact on lower income people, higher income people, et cetera. I want to move on into a slightly different direction. And this one has to do with sort of an issue that's been percolating all year long, which is this idea of taxing digital advertising. And a lot of the news has focused on Maryland's law, that's gotten a lot of attention. Do you think this type of tax, so we've been discussing how states are looking at maybe taxing higher earners, but this is sort of an idea of taxing a new type of service or at least taxing that type of service sort of for the first time in its own way. Do you think more states are going to be looking at that? And more importantly, I guess, do you think that more states are actually going to pursue digital taxes on advertising? And if so, what are some of the political and legal obstacles that they're going to have to address and clear?

Carl Davis 28:26

Yeah, I'm not sure if we'll see more of these taxes enacted this year, but I absolutely think the debate's going to continue and what we will see is states refining and strengthening their proposals so that they can get at the core problem that's concerning the lawmakers in a way that can withstand legal challenges. So, on the legal front, the most obvious obstacles, the Internet Tax Freedom Act, which prevents states from singling out internet based services for special taxes that aren't applied broadly to other comparable services not offered through the internet. So how the Maryland proposals going to fare on that front is unclear. It's being challenged in the courts now, but regardless of the outcome of the Maryland law, I think there is a path forward on this general issue, probably more along the lines of what we've seen proposed in New York, which isn't even really an advertising tax. It would be more akin to say a royalty assessment, and a royalty assessment specifically on data collection, in all its forms, digital and otherwise, so there's no targeting of internet based services. And the rationale here is, the politics here are pretty interesting. We're seeing these proposals come from lawmakers with very different opinions on almost everything. The rationale that I find most appealing is one that's more in line with what we've seen under severance taxes on natural resources for a very long time. In this case, we're not talking about the extraction of oil or gas, but we're talking about companies extracting personal information from residents of a state. And then the purpose of a tax like this can be to ensure that the absolutely enormous profits that are being reaped based on that information are shared in some way, some amount of them are shared back to the people from whom that information is derived. So I think there is a legal path forward here, and I think there's a genuine issue here of concentration of power and doing right by people who are seeing their data harvested for these purposes. Oftentimes, maybe technically with their consent where they click yes on an extremely long form that nobody actually reads, but in practice , in ways that people don't have a lot of control over. I mean, honestly. So I think this debate is going to be worth following because I think there's a long run. I think there's real appeal here. I just don't know if we're going to see a state get one of these, other than Maryland, I don't know if we'll see another state get one of these across the finish line next year, but I'm looking forward to the conversation continuing.

Paul Jones 31:12

Right. And you mentioned the Internet Tax Freedom Act. This conversation is obviously being driven in part by states, but is it going to be necessary ultimately for this to be realized in a really practical way for there to be federal legislation or reform, for example, to the Internet Tax Freedom Act? And if that's the case, does that create a real serious obstacle to states moving forward or following Maryland's path?

Carl Davis 31:39

I would like to see the Internet Tax Freedom Act reformed, but I don't think that it's necessary for states. I think states can find a way to tax say, data collection, which is really more so the core issue than the advertisements that are being served themselves. It's the personalized data that underlies those targeted ads that's more of concern. And I would think if you can apply a levy on data collection generally and not single out digital-based data collection when it can be in all forms, I don't really see an Internet Tax Freedom Act problem there. So I don't know that states have to wait. And again, I don't even think the outcome of what we see with the challenge to the Maryland law is going to tell us a whole lot about this broader policy area and what's possible for states under say a data levy of a different design.

Paul Jones 32:32

Right. And moving on to our last topic, with respect to states not waiting for the federal government to take action first. We did see an increase in the number of states this year that legalized cannabis, with several approving recreational pot this year, including New York. So on that front, a lot of states have sort of created a trend, even though it's still federally banned, they're taking the initiative to legalize it and tax it. I wanted to get your thoughts on this trend. If you think we're going to see more states in the upcoming year follow suit. And also, with those states that have legalized marijuana, or that are considering legalizing it, do you think that there is a tax structure or model that is likely to work best over time, that states that have legalized marijuana should look at reforming their systems to emulate, and that states that are considering legalizing it should adopt from the top?

Carl Davis 33:32

Yeah. So this started out as really a Western states phenomenon. So Colorado, Washington, Oregon, Alaska, California, were among the first to legalize cannabis and to tax it. And since then, we've seen it move East. A lot of the East Coast, especially the Northeast and in parts of the Midwest, now have legal cannabis. And I think we're going to see this trend continue around the nation. Partly because we have states now like Rhode Island that are just surrounded on all sides by states where cannabis is already legal. And it doesn't make a whole lot of sense, in my opinion, to ban the sale of something when your residents can just hop over the border and get it right next door and pay tax to your neighboring state instead. So Rhode Island, Maryland, Pennsylvania, several other states are likely to see cannabis legalization and taxes on their ballot in November of 2022. So I think the trend is going to continue. And on the tax front, I think it is a pretty interesting debate, for a long time, the two dueling approaches were to tax the price of cannabis being sold, so like a sales tax you are used to paying on cars or furniture or anything else, or to do a more traditional excise tax on the quantity being sold, say the number of pounds or the number of ounces of cannabis being sold. Now that would be more like a motor fuel tax typically where it's a tax on the number of gallons or a cigarette tax on the number of packs sold. So you have these two competing approaches. The big difference there, I think, is that if we're headed toward eventual federal legalization, which I think we are, once that happens, state borders are going to open up and we're going to see interstate commerce in this market where it hasn't previously existed. And when that happens, the companies involved are going to be much larger. I think the growing of cannabis is going to start to take place more in places where it makes sense from a climate and environmental perspective, where can you grow it the cheapest on a large scale, particularly for edible products, where that would really lend themselves to large scale farming like that. And with interstate commerce and larger businesses involved, I think price is going to come down a lot. And compared to other agricultural products right now, cannabis is incredibly expensive. And so if we're going to be on a trajectory of declining prices over time following federal legalization, t hese states that have chosen to tax exclusively based on price, and basically they've hitched up their tax regime to a declining tax base. You might see more quantity being sold over time in the legal market, in fact, I'm sure we will. If the price is coming down a lot, it's really going to hold down, not only revenue growth , but also the deterrence effect of the tax. That's one of the main purposes of levying a special tax just on cannabis, it's to say, "keep it out of the hands of children," for example. Then raise the price enough where children can't afford to easily purchase it. And if you have a tax hitched to price, that to turn effect is just going to get chipped away over time as the price falls and the tax falls right along with it, it's just automatic tax cuts. We do have states, Alaska, California, Maine , where they include quantity-based taxes in their cannabis tax system to some extent, sometimes it's paired with the price tax, sometimes not. The new innovation is in New York where there's a potency-based tax, measure the number of milligrams of THC being sold, THC being the main intoxicant, and tax every milligram. Tax the amount of intoxicant being sold. I think that's another form of quantity tax, instead of weighing out the number of ounces you're counting up the number of milligrams. So it wouldn't be vulnerable to a price decline if you do it right. And it gets directly at the core issue of you're levying a special tax on cannabis because it's an intoxicating substance and that's why it gets a special, it's called a "sin tax" is traditionally what these have been called with alcohol and cigarettes, for example. So I think that New York approach, it's going to be really interesting to see how that plays out on the ground. I think it's got a lot of theoretical appeal, the main questions have always been around the science and how accurately and easily can you measure THC in different products. And I think that the science has gotten a lot better over time. And I expect that New York is going to be able to pull this off, but it's going to be interesting to have a concrete example, see if this tax type is workable in practice. And if it is, states might want to take a look at that system as something to replace a price-based tax regime that, like I said, is really built on what's going to be a declining tax base as prices collapsed.

Paul Jones 38:29

Yeah, I think it's interesting how this sort of underscores since the federal government isn't taking initiative with respect to marijuana legalization. How states are having to experiment sort of with their own approaches, both with respect to regulation and obviously with tax policy. And I think that sort of underscores how the state tax policy arena is really an area that people should follow to see sort of how different policy approaches to taxation, whether it's marijuana taxation, digital advertising reform of tax regimes in an attempt to maybe encourage business growth or try and reduce regressivity. How states come up with all these different approaches and allow us to sort of see in real time, some of the pros and cons and some of the consequences of the decisions that are made. Carl, it's been really interesting to get your perspective. I know that we'll all be looking at the 2022 session with interest and hopefully we can reconnect and sort of take stock of what happened maybe in the next six months or so.

Carl Davis 39:35

Yeah, absolutely, I'd love to. Thanks for having me. It was fun.

David D. Stewart 39:39

And now, coming attractions. Each week, we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what will you have for us?

Paige Jones 39:50

Thanks, Dave. In Tax Notes Federal, Benjamin Alarie and Kathrin Gardhouse use machine-learning models to evaluate the strength of the legal factors that determine the outcome of assignment of income cases. Alan Viard examines the federal tax deduction for state and local business taxes. In Tax Notes State, Rick Handel looks at the interrelationship of commerce clause nexus, due process nexus, and personal jurisdiction. Jeroen Lammers argues that media analysis and Google Trends data both indicate that public opinion has not been the primary reason why governments have taken legislative action to curb corporate tax avoidance. In Tax Notes International, Nana Ama Sarfo and Stephanie Soong Johnston interview members and observers of the OECD inclusive framework to discuss the momentum, creation, and inner workings of the organization, as well as its relationship to developing countries. Alvin Warren Jr. examines the argument of the Oxford International Tax Group that its proposal for a cash flow tax on domestic sales by domestic and foreign corporations is progressive. And finally, in Featured Analysis, Benjamin Willis and Ryan Dobens explain why it’s unlikely the House’s version of the Build Back Better Act will succeed in reversing President Biden’s earlier efforts to expand the section 1202 exclusion from 50 percent to 100 percent.

David D. Stewart 41:23

That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.