1. a. Does your state have an individual income tax? If so, how closely does it conform to the federal tax? Can one deduct the federal tax in computing the state income tax? List some specific ways that the federal and state tax bases differ. What problems, if any, do these differences create in computing your taxes?
b. What is the rate structure of your state income tax? Are the rates progressive, and if so, how does that progressivity compare to the federal income tax rate structure?
2. According to the “benefit principle” of taxation, a business’s tax in a state should be related to the benefits to the business from services provided by the state and local governments. Practically, a firm’s business activity or tax base is usually divided among states based on the state’s share of the firm’s capital, employment, and/or sales. Discuss how well each of those components of the allocation formula might correspond to service benefits. Does a firm with sales (through the Internet or mail order, perhaps) but no employees or capital in a state benefit from any state or local government services?
3. The two most important state taxes are income and general sales taxes, although states also make substantial use of excise taxes, direct business taxes (usually a corporate income tax), and others. List and discuss briefly four factors that might influence a state in choosing between an income and general sales tax. What is the relative reliance in your state on these two taxes? If the relative reliance in your state is different than average, speculate about why that might be so.
4. Suppose that the national government creates a grant program to provide funds to all local governments and, as a result, that all local governments nationally reduce property taxes proportionally. Discuss the economic effects of this property tax change. Which types of individuals are expected to benefit? Will the property tax change lead to a more or less progressive tax structure?