1. Personal property values are not localized.

The value of real property (land and structures) is highly location-dependent. Local services like schools, roads, public safety, and local amenities all make land more valuable. A tax on real property not only roughly approximates the value of the benefit received, but the services those taxes pay for also increase the property’s value.

None of this is true for machinery and equipment. A home in a good school district is worth more. A server rack is worth the same everywhere. Whereas additional homes and other structures can increase local government costs, the value of the machinery and equipment within a facility has little impact on local costs. High tax costs on mobile property can backfire.

2. The United States is a global outlier.

Of the 38 countries in the OECD, only seven tax business personal property. Among major economies, only the U.S. and Japan have substantial TPP taxes. As far back as 1966, one scholar called TPP taxes “the most American of property taxes,” and not in a good way.

3. TPP taxes overvalue the property of cutting-edge industries.

Valuation methods, particularly the reproduction-cost method (described in the paper), combined with long depreciation schedules, overstate the value of rapidly obsolescing equipment. Traditional manufacturing equipment can last for decades, and while it must eventually be replaced, its replacement may only modestly improve the prior equipment’s productivity. That is not true in areas where technology is advancing rapidly.

The newest AI-oriented chips represent a massive advance over those in four-year-old servers. While the new servers are extremely expensive, their gains in computing power mean the “cost of compute” is declining (Moore’s Law in action). If a TPP tax values a four-year-old server based on some trended share of its original or identical-replacement cost, rather than on its actual current value, it can dramatically overstate—and overtax—the equipment.

4. Taxes on capital are stacking up.

TPP taxes apply to data center capital every year. Meanwhile, states are increasingly reconsidering sales tax exemptions on the equipment (which I’ve written about previously), and federal proposals would delay cost recovery on those equipment purchases. That’s potentially three different layers of tax burden on capital equipment.

Lawmakers have traditionally understood that capital investment is desirable. If they abandon this idea for data centers and AI, there’s a real risk of spillovers to other cutting-edge industries as well. TPP taxes already overtax innovative capital-intensive businesses. If state and federal governments pile on further burdens, they risk seriously disincentivizing capital investment and hobbling economic growth.

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1. Consumption is relatively stable and doesn’t respond much to temporary policy.

In 1978, Hall published a paper suggesting that changes in spending should be almost impossible to predict, since current spending levels should already reflect what consumers expect about their lifetime earnings. This is a stylized assumption that shouldn’t be taken literally, but the idea—broadly supported by subsequent research—is that expected pay raises, anticipated bonuses, and predictable business cycles shouldn’t move spending much, because they were already baked in. Only true surprises should meaningfully alter spending, and by definition, we can’t predict true surprises. The best forecast of next year’s spending, therefore, is this year’s spending.

One implication of this is that temporary tax changes do less to change behavior than permanent ones. A one-time rebate or a sales tax holiday might shift the timing of consumption, but is unlikely to change overall consumption levels. Another implication is that consumption is smoother than income, and thus a consumption tax is more stable than an income tax, especially one that taxes capital gains.

2. For investment, what matters is the “user cost of capital.”

Along with Dale Jorgenson, Hall wrote a 1967 paper outlining how firms considering making a capital investment weigh what the investment will earn against its “user cost,” the effective annual cost of owning the equipment. That cost includes the interest rate, the equipment’s useful life, and the tax costs, not just the purchase price. If firms must deduct the cost of machinery and equipment purchases across many years according to statutory depreciation schedules (which approximate economic depreciation under a Haig–Simons definition of income), those deductions are worth less than par due to inflation and the time value of money. This creates a hidden tax on investment. While Hall and Jorgenson didn’t create the concept of full expensing—if anyone deserves that honor, it is E. Cary Brown two decades prior—their framework made the user cost of capital an empirical tool, one that Hall and others would later build upon.

3. A properly designed flat tax is really a consumption tax.

Writing with Alvin Rabushka in the 1980s, Hall developed a flat tax proposal (updated in 2007) that has come to define what economists mean by flat—not just single-rate, but imposed only on what people spend, not what they save. Under their tax, businesses are taxed on their cash flow: revenue minus wages, purchases, and investment costs (under full first-year expensing). Workers pay a single-rate tax on wages above a generous exemption. Interest, dividends, and capital gains are not taxed at the personal level, since they are already taxed at the business level. The result is progressive, inasmuch as it can exempt low-wage earners, but above that it is flat not just in rate but in its base, with no double taxation.

While Hall-Rabushka features a single rate, their tax base also points the way toward progressive consumed income taxes. The destination-based cash flow tax (DBCFT) championed by Paul Ryan and Kevin Brady was a progressive tax proposal built on the cash-flow base from Hall-Rabushka (mediated through the work of Alan Auerbach and others), and other tax reform proposals are likewise indebted to Hall and Rabushka. Adopting full expensing of machinery and equipment purchases temporarily in the TCJA, and then making it permanent, restoring the research and experimentation first-year deduction, and adding a (for now, temporary) full expensing regime for certain structures under H.R. 1, all move the tax code at least moderately in this direction, and states are deciding whether to follow. Meanwhile, some other countries (Estonia most notably) have built tax codes that draw on Hall-Rabushka, even if none fully implement it.

4. Wages are sticky.

Standard employment models predicted much smaller swings in unemployment than was observed in reality. Hall showed that the models failed because they made wages too flexible, when in fact wages are somewhat “sticky.” He developed a model of how employers and employees bargain over wages that suggests that when conditions change, wage adjustments take time (with, as others have subsequently demonstrated, downward nominal wage rigidity), mainly showing up through slower growth (or no growth) in real wages, rather than an actual reduction. This means that the initial response to a rise in the tax cost of labor is lower employment, even if the long-run effect is lower wages. It also means that when demand falls (like in a recession, though also when demand falls within a particular industry), wages don’t drop enough to maintain employment levels, resulting in more unemployment than would otherwise be expected.

5. Entrepreneurship requires unusually high risk tolerance.

As with much of Hall’s work, his 2010 paper on entrepreneurship, co-authored with his wife Susan Woodward, isn’t entirely novel, but it does provide an improved empirical framework for analysis. Hall and Woodward studied venture-backed startups and found, unsurprisingly, that while payoffs for successful founders were large, most founders got nothing for their effort, and founders are unable to diversify: when the business flops, their career and savings go with it. Entrepreneurship therefore requires unusually high risk tolerance. Roughly three-quarters of VC-backed entrepreneurs make no return on their venture. This isn’t a tax paper, but it suggests that taxes that take a large share of a successful business’s proceeds, and that apply even when a business is unprofitable, make entrepreneurial risk even less attractive. That has implications for wealth taxes, but also for tax provisions that cap net operating loss deductions or for high progressive rates that place an entrepreneur in the top bracket the year in which they sell their business.

6. Social infrastructure matters for productivity.

Hall, along with Charles Jones, took an empirical approach to ideas advanced by Douglass North (himself a Nobel laureate), Mancur Olson, and others, demonstrating that productivity is inadequately explained by capital investment, education levels, and the like. Productivity, Hall and Jones show, tracks “social infrastructure,” the set of institutions and policies that determine whether wealth is best pursued by production or by rent-seeking. Theirs is a national model and largely explores the diversion of effort in the context of significant rent-seeking, corruption, and expropriation at a scale not found in the United States (which helps explain why the U.S. shows high levels of productivity). However, at a much smaller scale, the same insights hold for tax codes filled with targeted credits, negotiated abatements, and other non-neutral provisions that reward lobbying and adjusting business models to fit the tax code, rather than rewarding innovation and sound economic decision-making.

Daron Acemoglu and James Robinson built on Hall and Jones and developed their own theory based on inclusive versus extractive institutions (and won a Nobel for it), and economists and economic historians like Joel Mokyr and Philippe Aghion (who shared a Nobel last year), and Deirdre McCloskey, have developed a contrasting body of work focusing on cultural transformations as a precursor to institutional change, and perhaps the more important development.

I can only scratch the surface of his many contributions and have largely limited myself to those with clear tax policy implications (ignoring, for instance, his important work on health spending). Hall’s Nobel is richly deserved for a lengthy career’s worth of valuable insights paired with useful empirical frameworks.

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Thank you to all of you who read and have shared this Substack. Thank you to everyone who has recommended me to someone. And thank you to those of you who have entrusted me with your business.

Ten months in, I’ve either worked or am currently working with (among others):

• 9 State Policy Network affiliates

• 2 national policy organizations

• 2 state taxpayer associations

• a state chamber and 3 business/industry groups

Through my consultancy, I’ve published on:

• the California wealth tax’s economic implications, and its legal, administrative, and design flaws (CalTax Foundation)

• the tax-shifting implications of proposals for Ohio property tax repeal (Lincoln Institute of Land Policy) and Florida homestead exemptions (Florida Housing Coalition)

• options for reforming Illinois’ tax code (Illinois Policy Institute)

• why data center equipment should be exempt from the sales tax (National Taxpayers Union)

• how rent control can increase tax burdens on homeowners (Fiscal Alliance Foundation)

• how taxing international income makes Oregon less competitive and raises costs for Oregon consumers and businesses (Oregon Business & Industry)

• the economic effects and dynamic cost of a proposed income tax cut in Massachusetts (Pioneer Institute)

• why the inheritance tax is a poor source of local revenue (Platte Institute)

• and many more, including blog posts and short-form content for a number of organizations, and several more papers yet to come this year

I’m grateful for the trust you’ve all placed in me, and for the opportunity to work with so many excellent organizations.

And while I’m largely booked through the end of the year, I’d love to work with more of you in 2027. If your organization is in the market for research, analysis, or other consulting work—whether that means commissioning a paper or research project, booking a speaking engagement, bringing me on as a visiting fellow, or something else—please reach out. I’d love to talk!

Thanks again to all of you. Even though 2026 isn’t quite in the books yet, you’ve already made this a great first year!

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At this point, you might stop reading because, statistically speaking, you probably don’t live in Illinois. And that’s fair! But while each state’s economy and tax code is different (which tax reform proposals must take into account), states can also learn from each other. Some of this analysis might prove relevant in your state, too.

You can find the full paper here. These are the ten issues it covers:

• Eliminating the throwback rule, which raises little revenue but makes it hard for some remaining businesses, especially small manufacturers, to operate in Illinois, because it imposes Illinois’ high tax rates on all income not taxed by another state.

• Providing first-year expensing for machinery and equipment to eliminate the current tax code’s bias against capital outlays and treat these investments like other ordinary business expenses.

• Evaluating economic development incentives, curtailing the least efficient credits and reforming others to yield a better return on investment and free up revenue that could provide broad-based tax relief.

• Decoupling from a tax on international income (NCTI) that distorts the federal-level tax it attempts to copy and increases costs for Illinois businesses and consumers.

• Permanently uncapping net-operating-loss (NOL) deductions to ensure that businesses don’t face effective rates well in excess of the actual statutory tax rate, and to eliminate a particularly egregious penalty on startups.

• Repealing the corporate franchise tax, an antiquated tax that imposes high compliance costs and is levied without regard to ability to pay.

• Modernizing the sales tax base to make the tax fairer and more economically neutral, and to pay for reductions in the tax rate.

• Repealing the estate tax, which drives many high-net-worth households out of the state in the final years of their lives, harming the state’s economy and depriving the state of other tax revenue from them in those years.

• Expanding property tax levy limits, stripping out restrictions that have rendered them largely ineffective and turning these limits into a meaningful tool to rein in property tax burdens.

• Reforming unemployment insurance taxes to better align them with the overall policy goal of reducing unemployment.

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Many jurisdictions are likely to rely on a mix of all three options, but to the extent localities respond by raising property tax rates, they will shift the tax burden onto other taxpayers, including renters. I calculate the effects of these shifts in a new paper released today.

If local tax authorities adopt revenue-neutral rate increases (limited by rate caps) to offset the new homestead exemptions, I estimate that once the higher exemption is fully in effect in tax year 2028, total property tax burdens would rise 14.1% on residential rental properties (a 22.6% increase in non-school property tax liability). Taxes would increase by $406 on the average Florida apartment unit (+14.8%), $1,081 on rental homes, and $1,196 on owner-occupied properties that do not qualify for a homestead exemption. For a typical 200-unit apartment community, this translates into approximately $81,000 in additional property taxes each year.

By tax year 2031, fully backfilling Amendment 3 losses would raise taxes on rental property by 14.9%, translating to an additional $544 for the average apartment unit, with the burden on single-family rental homes rising to $1,471. The increased burden on a 200-unit apartment community would be about $109,000. Although renters do not pay property taxes directly, they bear the majority of this burden through higher rents.

The paper breaks out these tax shifts by property category (rental apartments, single-family rental homes, non-homestead owner-occupied residential, and other non-homestead residential) and by rental price, with estimates by county and by select municipalities. It also examines the broader implications for housing affordability and availability.

Florida is not alone in pursuing a high homestead exemption (Texas recently implemented a $140,000 exemption, for instance), though Amendment 3’s $250,000 exemption is anomalously high. It is, moreover, worth far more than $250,000 for many properties, due to Florida’s “Save Our Homes” assessment limit. A typical Florida home that has been owned since 1994 (the assessment limit’s base year) could have a market value of approximately $640,000 by 2028, while only having $250,000 in assessed value and thus owing no non-school property taxes.

This paper is about Florida, but its findings are relevant for other states considering large homestead exemptions or other policies that exempt more property from the tax base. Any resulting tax shifts do not just raise costs for renters (many of whom are young or lower-income), but also reduce returns on rental properties, discouraging future investment and reducing future housing stock.

Read the Paper

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In a paper released today, I outline how Oregon is already an outlier in taxing global income, and make the case that the state shouldn’t double down by adopting even more aggressive taxes on international business activity. I document the effects of these policies, explaining how they function economically like a tariff on multinational businesses’ sales into the state.

But this isn’t just an Oregon issue.

Consider the tax on net CFC-tested income (NCTI), to which some states, including Oregon, conform. At the federal level, this new tax is essentially a minimum tax, imposing a compensatory tax on income that is only minimally taxed abroad. The base begins with all income of a U.S. parent company’s foreign subsidiaries (controlled foreign corporations, or CFCs). They can then claim tax credits for 90 percent of the foreign taxes paid by those subsidiaries and apply a 40 percent deduction to what remains. Against a 21 percent corporate income tax, this yields a minimum tax of 14 percent. (In practice, due to several other adjustments, the floor is closer to 15 percent.) Essentially, U.S. tax applies to the difference between foreign tax paid and about 15 percent.

States, however, do not offer foreign tax credits, meaning that state-level NCTI taxation applies to an apportioned share of all income of foreign subsidiaries, regardless of where the income was generated or how much foreign tax was paid on it. What functions as a minimum tax at the federal level turns into an aggressive state tax on U.S. companies’ foreign subsidiary income. It is not a guardrail against profit shifting; the mere existence of the federal tax already addresses that by making profit-shifting activity substantially less attractive or beneficial. Instead, at the state level, NCTI is primarily a state tax on the foreign production and sales of foreign companies simply because their U.S. parent company has nexus with the state.

The inversion of federal policy does not end there. It is bad enough that foreign taxes do not reduce state tax burdens on that same income. It is even worse that states that incorporate NCTI actually tax companies on the amount they paid in tax abroad.

Controlled foreign corporations (CFCs) pay the foreign taxes, but NCTI is imposed on the U.S. parent corporation. To make the math work, if the U.S. parent is provided a credit for taxes paid abroad by its subsidiaries, then it must include the amount paid in tax in its NCTI income to avoid a double benefit. The 90 percent of foreign tax payments credited against U.S. tax liability are included in the U.S. parent company’s income under a provision called the § 78 “gross-up,” after which the credit is applied.

Because states do not offer foreign tax credits, their tax base includes foreign tax payments. The federal base is the difference between foreign tax payments and about 15 percent. States’ NCTI bases are an apportioned share of all foreign subsidiary income (typically reduced by some deduction to yield a lower effective rate), plus those companies’ foreign tax payments, which do not benefit from that deduction.

State apportionment of NCTI has nothing to do with the state’s connection to the international activity. Instead, it is simply based on the state’s share of domestic activity. If 10 percent of related companies’ U.S. sales are in a state, then 10 percent of the foreign corporations’ revenues are included in the state’s base.

This primary result of state-level NCTI taxation is not higher tax burdens on foreign businesses, but higher prices for in-state residents.

Under states’ corporate income taxes, a company’s income is allocated to states based on three factors (payroll, property, and sales) for tax purposes. In many states, apportionment is based exclusively on the share of nationwide sales made into the state (“single sales factor”).

Consequently, the corporate income tax does not really tax net income. Rather, it taxes the apportionment factors located in the state. If payroll is in the formula, the corporate income tax is partly a tax on in-state labor. If property is included, the tax partly falls on in-state capital. And when sales are in the formula, that portion of the tax—all of the tax in the many states with single sales factor apportionment—becomes a tax on in-state consumption. Income sets the rate at which the factors are taxed, but the base is sales.

If taxes on international activity sufficiently increase a company’s in-state tax, they may be motivated to reduce their footprint in the state, since sales into the state may become uneconomical. This is particularly true for brick-and-mortar operations deciding where to locate physical stores. The result is reduced profitability for businesses with a physical footprint in the state, and lower employment within those businesses.

For sales made into the state regardless, these taxes have the potential to increase consumer prices. Consumers may not make the connection between higher prices or reduced consumer choice and obscure international income policies that drive up corporate tax effective rates, but they will be on the hook for much of the increase should these measures be adopted.

Online retailers already adjust prices based on factors such as the cost of selling in different markets. When a state’s corporate income tax regime increases the cost of selling into the state, prices of goods and services purchased online are likely to rise. Brick-and-mortar stores will factor these costs into their prices as well. Even if the product has no connection to international commerce, selling in the state expands the portion of international activity the state can tax.

When states tax international income, those provisions function like tariffs on sales into the state by any company that shares a corporate parent with these foreign companies. And just like conventional tariffs, a foreign company might write the check, but in-state consumers would foot much of the bill.

To read the full Oregon study, which is also pertinent to any other state that taxes NCTI or is considering other taxes on international income, like worldwide combined reporting, click here.

_{Cover photograph: Oregon State Capitol, Salem, by M.O. Stevens (2008). Public domain, via Wikimedia Commons.}

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The year is 1996. Policymakers fear the scenario Jeremy Rifkin outlined in his influential book, The End of Work: The Decline of the Global Labor Force and the Dawn of the Post-Market Era. For some, the extinction of middle management and the obsolescence of tens of millions of jobs seems imminent. And as people increasingly travel the information superhighway, these fears are compounded by concerns that traditional tax bases (income, consumption, property) are becoming obsolete.

A Canadian economist had a solution: the “bit tax.” European economists further popularized the idea. By 1997, the New York Times was surveying several proposals: ad valorem taxes on all internet services, per-device taxes on computer owners, and, the preferred vehicle of the director of the Maastricht Economic Research Institute on Innovation and Technology (MERIT), a 0.000001 cent-per-bit tax, which comes out to a little more than one cent per megabit (1/8th of a megabyte). In 1999, that proposal was advocated in a report by the United Nations Development Program, which framed the 1-cent-per-Mb tax as essentially a tax of 1 cent per 100 emails.

The UN recommended that each nation collect its own tax and use part of the revenue to regulate internet development to ensure that it reached all populations: “If you leave it up to the market alone, we can't be sure that the Internet will spread fast enough and reach the people that really need it.”

Thirty years ago, when the first bit tax proposals emerged, about one in five Americans had access to the World Wide Web. Cyberspace was already an exciting place with constant technological innovation. By 1996, for instance, you could already order a pizza from your browser:

But in 1996, most home users were on 28.8 kbps modems. Downloading a short video clip was an overnight task. Websites still unironically featured scrolling and blinking text, with those ubiquitous “under construction” GIFs. Today’s bandwidth-heavy sites were unimaginable.

Global internet traffic was about 14.4 petabytes in 1996, meaning that applying the bit tax to all worldwide internet usage would have raised about $1.15 billion. Today, the average U.S. household uses almost 9.8 terabytes of data each year across broadband and mobile phone connections. In other words, 1,500 average U.S. households use more bandwidth in 2026 than the entire world did in 1996.

Had the bit tax been adopted, what was once framed as a trivial tax—half a cent to download a photo, or a cent to send 100 emails—would now cost the average American household an estimated $784,000 per year.

That is not, of course, possible. Something would have to give. But a bit tax would have made the development of the internet dramatically more expensive, delaying or even derailing many of the digital services we now take for granted. The internet would not have evolved the way it did if constrained by a tax created when we dialed up our ISPs on modems that looked like this:

There’s probably a lesson in this somewhere.

I Have Been a Good Bing

Today, AI is everywhere, and while it’s certainly not perfect, there’s no doubt that it’s good. Research, programming, calculating, reasoning: it doesn’t take the place of humans, but it makes skilled humans dramatically more productive. Yet it wasn’t even four years ago that an OpenAI-powered Microsoft chatbot was having unhinged conversations with journalists (“Actually, you’re not happily married. Your spouse and you don’t love each other. You just had a boring Valentine’s Day dinner together.”) and chiding users who disagreed with it (“You have not been a good user. … I have been a good Bing.”).

It was easy, four years ago, to think of AI as a toy: slightly smarter versions of the Eliza chatbot unveiled in 1966 or the SmarterChild chatbot introduced for AOL Instant Messenger (AIM) in 2001. The AIM chatbot “understood” enough natural language to respond to requests for a weather forecast, a stock price, or a box score. In 2022, the new AI chatbots felt like SmarterChild all grown up: better, certainly, but still a novelty.

Had lawmakers adopted token taxes or other AI taxes back in 2022, based on contemporary volume and usage patterns, it’s possible that AI would still be in that early stage of development, with model training at the scale necessary to produce subsequent innovations—and the demand for those innovations—held back by taxes calibrated to much lower usage. A 1-cent-per-Mb / 8-cent-per-MB “bit tax” could have been considered trivial in 1996; the rate lawmakers might have chosen for a token tax four years ago might have likewise seemed manageable then but prohibitive now.

In the 1990s, U.S. lawmakers recognized the risk of stifling the growth of the internet and adopted the Internet Tax Freedom Act, prohibiting discriminatory taxes on e-commerce. But what’s old is new again. Those old debates are back, this time about AI, data centers, and the broader digital economy. Whether policymakers will act with similar foresight remains to be seen.

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The new calculator (jocktax.info) lets you select any player and see an estimate of what they’ll pay in federal, state, and local income taxes, season-long and game-by-game, displaying taxes paid to other states and credits received in domiciliary states. You can also flip a player to any other franchise to see what they’d owe if they played for another team, or you can look at their tax comparison across all 32 teams at a glance. The calculator also permits you to view an entire team’s aggregate tax liability, and to flip rosters to other locations for comparison purposes.

Ravens quarterback Lamar Jackson, for instance, will pay an estimated $5.05 million playing for Baltimore this year. He’d pay $6.83 million with the Los Angeles Rams, and only $256,000 with the Tennessee Titans—all from away games, since Tennessee doesn’t have an individual income tax.

Steelers linebacker T.J. Watt, meanwhile, will pay an estimated $13.79 million in combined federal, state, and local income taxes, including $2.0 million in state and local income taxes, for a total effective rate of 43.08%, while Cowboys receiver CeeDee Lamb will pay $9.62 million, only $232,000 of which is from (away game) state and local income tax liability. Los Angeles Rams quarterback Matthew Stafford takes a $20.06 million tax hit with a 50.14% total effective rate, including $5.3 million in state and local taxes.

The calculator also includes an embeddable widget so that users can run calculations directly on your own website or blog (it works well on WordPress and similar platforms, but not, unfortunately, on Substack), if you want to use it to talk about jock taxes, or about tax competition or nonresident filing rules that affect ordinary people, not just famous athletes. Here’s what the tool looks like embedded in a blog post or website.

Click here to view the calculator. And if you find this calculator useful or interesting, please do me a favor and share it (or this newsletter) with others who might also appreciate it. My hope is that policy organizations can take advantage of this tool as a good NFL season kickoff “hook” for income tax policy conversations.

As I explain in an “About Jock Taxes” section on the site, jock taxes are just a newsworthy example of tax liability imposed on those visiting other states. A short backgrounder follows.

About Jock Taxes and Nonresident Income Taxes

“Jock taxes,” the income taxes that athletes owe to other states and localities when playing away games, are really just a special set of rules for the nonresident income taxes that all of us owe when we earn income out-of-state. Many taxpayers are unaware of this, but 22 states legally require nonresidents to file and remit income tax if they spend even a single day in the state. Other states have filing thresholds, e.g., 30 days before tax is owed.

States use special income allocation rules for athletes and entertainers. Athletes never receive the benefit of filing thresholds, and states use what is called a “duty day” calculation to account for the way athletes and entertainers earn income. If an NFL player is presumed to have 170 duty days (the adjustable default in this calculator) spread across the season, and he spends three days in another state (another adjustable default) to play an away game, then about 1.8% of the player’s income (3/170) is taxable in that nonresident state.

For athletes and ordinary taxpayers alike, your home state is entitled to tax income from all sources (wages, investment income, etc.), wherever it may be earned. Other states are entitled to tax you where you work. Your home state provides a credit for taxes paid to other states, but only up to the amount owed in your home state on that income. If the nonresident state applies a higher effective rate than your home state does, your total tax liability increases. If they apply the same rate or a lower rate, total tax liability remains the same, though that tax is divided across states.

Under jock taxes, all states use an effective rate method, though for the rest of us, states use a mix of effective rate and state taxable income methods. The distinction is important for ordinary taxpayers.

Under an effective rate method, you calculate what your tax liability would be if you earned all your income in the nonresident state, then multiply this by the fraction of income earned in the nonresident state. Under the state taxable income method, you calculate your nonresident tax liability based on the amount of income actually earned in the state.

Consider the difference under California’s highly progressive graduated-rate income tax. A taxpayer with $100,000 in taxable income will face marginal rates ranging from 1% on the first $11,079 to 9.3% on income over $72,724. Neglecting deductions and exemptions, if someone earns $100,000 in total taxable income and $10,000 (10%) of it is in California, then under the state taxable income approach, their $10,000 would all be taxed at 1%, yielding California tax liability of $100. But California uses the effective rate method and instead asks what a taxpayer would pay on all their income, prorating it to California’s share, yielding $574 in California tax liability. All states’ jock taxes use that method.

Jock taxes are a nuisance to professional football players, though home state tax liability still dominates their overall tax bill, which is why some players explicitly take state income taxes into account when weighing contract offers. Because signing bonuses are (usually) only taxable in a player’s state of residence, moreover, many players—especially rookies, who have more flexibility—make an effort to establish domicile in a state without an income tax before signing their contract.

But if jock taxes are a nuisance for professional athletes, nonresident income taxes are even more frustrating for ordinary taxpayers. If someone spends a significant amount of time in a nonresident state, it makes sense to owe income tax there. But the time and expense of filing in a state where you spend a day or two is wildly disproportionate to the amount owed.

A highly-compensated football player with an away game against the Arizona Cardinals has tax professionals to handle his filing obligations. But if an ordinary taxpayer with $100,000 in taxable income works in Arizona for one day, then at least by the letter of the law, they are required to file in the state to remit a grand total of $10.

Most ordinary taxpayers aren’t even aware of their obligation. Compliance is low. Jock taxes on highly paid athletes and entertainers are here to stay, but states could make life easier for the rest of us, at very little cost, by adopting reasonable nonresident filing and withholding thresholds for ordinary taxpayers.

Launch Jock Tax Calculator

_{Note: This piece was updated after publication to reflect revised NFL contract data incorporated into the calculator.}

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Because I have a forthcoming paper dealing with TPP taxes as they apply to data centers and other large, capital-intensive facilities, this seemed like an opportune moment to provide a short primer on how these taxes work more generally, and why they matter.

Defining Tangible Personal Property

The definition of personal property is downstream of real property. States often simply define personal property as any property that is not real property. Thus, everything turns on what’s included in real property: land and structures and, typically, fixtures.

In most states, anything that is permanently installed and functionally immovable without destroying it or the real property (including buildings) to which it is affixed counts as a fixture and thus represents real property. Sometimes fixtures are described as any asset that is “bolted down,” though that’s imprecise, because if an asset can be unattached and relocated, it’s probably not a fixture.

Personal property is what’s left after land plus structures and fixtures (improvements). It is divided into intangible (almost always exempt—think stocks, bank accounts, trademarks, etc.) and tangible personal property. Texas’s definition of tangible personal property is representative: “personal property that can be seen, weighed, measured, felt, or otherwise perceived by the senses.”

Machinery and equipment are classic examples, but the definition reaches all non-realty physical property, down to the paper plates in the office break room. Historically, household personal property (furniture, the silverware, etc.) was taxed as well, but states exempted such property—and usually vehicles as well—a long time ago. Most states likewise exempt inventory being held for sale, but unfortunately that’s not always the case.

Valuing Tangible Personal Property

Tangible personal property is assessed based on its current value, which is a depreciated fraction of its value new (which can be defined several ways). As with real property, there are multiple possible assessment methods, including sales comparison and income capitalization, though by far the most common approach is cost basis, which is simpler and more administrable. The other approaches are typically only relevant as alternative methods in valuation disputes.

Businesses must report the acquisition costs of all tangible personal property, but acquisition cost is not always the cost basis for tax calculations. All tangible personal property is depreciated based on years in service, but states use three different systems for establishing the value to be depreciated:

1. Original cost. The most straightforward initial value, representing the asset’s original acquisition cost.

2. Replacement cost new. This represents the current cost of an equivalent replacement, accounting for changes in both price and quality. Imagine, for instance, that a piece of equipment is now twice as expensive but can perform four times the work. Replacement cost would be half of the original cost, representing the cost of the replacement share of new property.

3. Reproduction cost new. This is the real or estimated cost of reproducing the exact same asset now, even if no one is producing that asset anymore. For an outdated piece of technology, it asks what it would cost to produce the same outmoded technology today, though in practice, this is usually formula-driven, based on state-supplied trended costs.

State use of the above terminology varies. Some states use the term “replacement cost” but utilize a trended cost approach that is better described as reproduction cost. Using reproduction cost as the TPP cost basis is generally less favorable to taxpayers—and, I would argue, less accurate—than relying on original cost or replacement cost, as (1) it assumes that the cost of supplying the asset has risen, unlike original cost; and (2) it does not account for obsolescence relative to better equipment now on the market, unlike replacement cost.

Whatever method a state uses, that asset’s value must then be depreciated to reflect how far along the property is in its usable life. Different asset classes have different depreciation schedules: some long, some short; some declining almost linearly over many years, and others declining to a low residual floor after a few years. The residual percentage is usually referred to as the “percent good factor.”

Some assets experience little decline in utility until taken out of service. A piece of manufacturing equipment, for instance, might be equally productive in year one and year twenty, though eventually it will break down or require costly repairs. In areas where technology advances rapidly, by contrast, an asset might be functionally displaced by new tech in a few years, or it might degrade rapidly, losing productivity along the way.

States usually allow companies to seek reductions in appraised value by claiming obsolescence, but that relief can be difficult to obtain even where theoretically permitted under state law. It often requires litigation, rather than being incorporated into the ordinary appraisal process. Even with faster depreciation schedules, therefore, TPP taxes can easily overvalue the machinery and equipment of industries at the cutting edge of technology, science, and health innovation.

Reforming Tangible Personal Property Taxes

Tangible personal property taxes are a tax on capital investment. Taxes on mobile capital are particularly distortionary and economically harmful, which is why some states have eliminated TPP taxes. Even where they continue to exist, policymakers should ensure that depreciation schedules aren’t overly stingy, especially for rapidly obsolescing assets, and they might want to consider moving away from “reproduction cost new” valuation methods where those are used.

This is outside the scope of my forthcoming paper, which addresses TPP taxes on large, capital-intensive facilities, but states with TPP taxes should also consider de minimis exemptions that can take most taxpayers off the rolls at minimal revenue cost. Many small businesses have exceedingly little TPP; for them, compliance costs are a far greater issue than the actual tax bill. De minimis exemptions don’t address the greater problem of a tax on mobile capital, but they do eliminate what is functionally a nuisance tax for many sole proprietors and small business owners.

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The Tax Court is an administrative court, so Maryland can seek judicial review by the circuit court with potential appeal to the appellate and state supreme court, but today’s ruling was an overwhelming victory for the petitioners. The tax court identified five fatal flaws in the tax, any one of which was sufficient to strike it down. The case isn’t over, but the writing is on the wall.

Crucially, while some aspects of the successful Commerce Clause challenge against the tax pertained to the unique design of Maryland’s tax—particularly a graduated rate structure based on global, rather than Maryland-specific, revenues—most of the reasons Maryland’s tax failed in court are equally pertinent to recently-adopted digital advertising taxes in Illinois and Utah, and to those that have been proposed in other states.

I have a Tax Foundation blog post responding today’s ruling, which you can read here.

Taxes, Tech, and Income Inequality

Earlier today, I also went on Substack Live with of to discuss taxes, tech, and income inequality. You can watch our conversation here.

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Cover Photo Credit: By Martin Falbisoner - Own work, CC BY-SA 3.0

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Once you identify this move, you’ll see it everywhere.

• Senators calling for a repeal of “tax breaks” for data centers, where the tax break in question is a first-year corporate income tax deduction for their capital expenditures.

• Governors suspending a “tax preference” for businesses, where that preference is the ability to offset income and losses.

• State legislators questioning whether it’s appropriate to give an “incentive” to research and development work, when the incentive is the ability to fully deduct compensation costs in calculating taxable profits.

• Journalists publishing exposés about “subsidies” for major industries, where the subsidies involve exempting their equipment purchases from retail sales tax.

• Activists demanding the closure of “tax loopholes,” where the loophole is that the individual income tax does not apply to accumulated wealth.

Broad bases and low rates are good policy, but broad bases of what? We could broaden the base of the sales tax to include the implicit value of household labor like cooking dinner or vacuuming, since the sales tax already extends to substitutes in the exchange economy like restaurant carryout or hiring a cleaning service. But here, a critic might rightfully respond that what we’re describing ceases to be a sales tax, since it is no longer limited to transactions, which involve exchanging consideration for something of value.

Similarly, including raw materials in the sales tax base or denying a corporate income tax deduction for ordinary business expenses indisputably broadens a base, but what base, exactly? Not a base of “final consumption” (sales tax) or of “net income” (corporate income tax).

I have sometimes spoken of “right-sizing” the sales tax base, by which I mean both (1) exempting more intermediate inputs, because they do not belong in the base of a tax that is properly imposed on final consumption; and (2) including more consumer goods and services that are currently exempted. Of course, “right-sizing” is a value-laden term, though that may be an advantage over another term that I and others also employ: “modernizing.”

I am not willing to give up modernization as an important concept, because I believe it speaks to a genuine issue where tax bases (often by being too specific and targeted) either tax something they shouldn’t tax or exempt something they should, because it doesn’t fit cleanly into outdated categories. In fact, this is a key reason why tax codes should operate at the level of broad principle wherever possible, rather than through specific targeted policies (like incentives for specific industries or activities) that, even if plausibly justifiable initially, may persist long beyond their reasonable expiration date.

But I’m also aware that “modernization” can be a weasel word. A friend at a center-left organization highlighted it as a term he despises at a recent conference we both attended, because who isn’t for modernization? Anything anyone wants to do is modernization. It’s one of those irregular verbs: I modernize, you reform, he carves up the tax code. There’s no question that “right-sizing” embeds strong assumptions, but the term may benefit from wearing those assumptions on its sleeve.

Because what’s often missing in debates about tax bases is any notion that there is a right size based on anything other than a desire to maximize or minimize revenues, as one prefers. We won’t all agree on what the right size is. Nevertheless, to shift spatial terms, each tax has a certain shape. A corporate net income tax where net operating loss deductions are suspended and research expenditure deductions are amortized is less of an income tax, not more of one, even though its base is broader.

Every tax has a conceptual base. The corporate income tax’s ideal base is net income. The sales tax’s idea base is final consumer purchases. I would argue—this would spark more disagreement—that the property tax’s ideal base is real (not tangible or intangible) property.

Agreeing on a theoretical tax base does not settle every question, and no policy realm ever escapes the legislative process entirely pure. Real-world sales taxes apply to far too many intermediate transactions. The corporate income tax delays or disallows deductions that ought to be included. Many states’ property tax bases include tangible personal property, while imposing various distortions on the real property tax base.

Still, acknowledging the basic shape of a tax is essential. A proposal that sweeps away all structural exemptions, imposing sales tax on raw materials, machinery, equipment, distribution, wholesale, retail, and everything in between, is no longer a sales tax. The existing exemptions of intermediate transactions are not carveouts or preferences; they’re what makes a sales tax a sales tax.

When lawmakers debate suspending net operating loss deductions, amortizing research and experimentation expense deductions, repealing sales tax equipment exemptions, or adding new layers of tax on targeted industries, we should reject the framing that these existing policies are incentives, subsidies, handouts, tax breaks, or loopholes. This isn’t about putting every such question beyond debate and deliberation, but it is about rejecting the notion that anything subtracted from revenue is a tax break, and that any tax exemption, no matter how structurally integral to the nature of the tax, is a giveaway.

Structure matters. The distinctions between different types of tax depends on that realization, as do the economic arguments for those different taxes. Productive policy conversations require affirming that each tax has a particular shape, and that flattening everything out into a tax on gross is not neutrality, but rather, gross distortion.

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The measure lost in every county. Its best performance was 32% in Pemiscot County, and its second-best was 24%. It only received 14% in Boone County, where Kamala Harris won by 10 points, but then, it also received a mere 14% in Caroll County, where Trump won by 64 points. I’d like to share some preliminary thoughts on what happened, and what lessons can be drawn from it.

Don’t settle for half a plan. It’s easy to support income tax repeal, or property tax elimination, or any number of other policies, big or small. Sweating the details is, well, a sweat. While it’s fine and even necessary to identify and work toward goals without having all the answers, at some point it becomes necessary to shift into policymaking mode, which involves identifying and grappling with tradeoffs—including pay-fors, when that’s part of the package.

One possible takeaway from the Missouri vote would be that Missourians love the income tax, and are completely opposed to its abolition. Maybe. I doubt, however, that only 17% of Missouri residents would like to repeal the income tax. That’s too low. What voters communicated is much simpler: “better the devil you know.”

Let’s acknowledge that as a perfectly legitimate, and even prudent, policy instinct. Voters deserve to know what the replacement would be, so they can evaluate it against the current system. Something that is popular in the abstract may prove far less popular when the full tradeoffs are acknowledged, and the failure to acknowledge that there are tradeoffs may meet with legitimate skepticism.

I believe we saw this in Ohio, where it has been difficult for an anti-property tax group to gather enough signatures for a repeal measure that includes no pay-for, leaving that rather consequential detail to be sorted out later. We saw it in North Dakota as well, where a similar measure failed. And I think we saw it in Missouri, where some meaningful percentage of voters who would have been theoretically open to eliminating the income tax had some very reasonable qualms about supporting a measure without knowing what the alternative revenue streams would be.

Of course, voters may also have been acting on incomplete or inaccurate information. The measure did not require lawmakers to repeal the income tax, and voters who heard that it involved sales tax expansion to particular categories were only being given speculative and potentially adversarial replacement options that may never have had a chance in the legislature. In reality, lawmakers likely would have avoided many of those, which would have meant income tax reduction, not elimination.

Still, it’s fair to judge a measure by what its proponents say it will do. The measure was sold as providing for income tax elimination, and the only way to accomplish that would have involved sales tax base broadening into unrealistic and undesirable areas.

Don’t confuse means and ends. Another lesson is to not confuse means and ends. Historically, many policymakers have favored income tax rate reductions and even income tax abolition as a means toward the end of greater economic competitiveness. The literature supports the idea that lower income taxes are more pro-growth and that shifting tax burdens more towards consumption can be an economically competitive move. However, when lawmakers lose sight of income tax reductions or even elimination as a means and instead treat it as an end in itself, they may be willing to adopt any pay-for whatsoever, or to accept highly unrealistic revenue forecasts, as long as it moves them towards their newly desired end.

Turning the sales tax into a gross receipts tax, which might have been necessary to eliminate Missouri’s income tax with base broadening, does not make the state more competitive, even with the income tax gone. In fact, the very arguments for income tax reductions—shifting the burden away from labor and investment and toward consumption—are ignored if the replacement involves putting sales tax directly on capital investment and production. This is a terrible deal if the goal is greater economic competitiveness, but it’s easy to lose sight of that if the goal has become income tax elimination at all costs.

Don’t live in a bubble. I was only mildly surprised by the outcome of Missouri Amendment 5. I expected the “No” vote to be in the 70-75% range, and it unofficially stands higher than that, at 83%. What’s been more surprising: how surprised other people are. I’ve had half a dozen people express shock that it lost by this much. (They didn’t expect it to win but thought it would be closer.) It’s easy, in the policy community, to lose sight of how ordinary people are thinking about policy issues, or to believe that online discourse is representative. It’s equally easy to assume that people—even smart, well-informed people—know things that policy professionals assume are common knowledge, but which absolutely are not.

Many voters likely misunderstood what Amendment 5 did. That doesn’t mean it would have passed if they understood it better (I’m confident it would not have), but it’s still important to recognize. And just because someone shares a point on the ideological spectrum with policymakers who favor a given policy aim doesn’t mean they’ve heard even the basic arguments for that policy.

Unfortunately, as someone who is concerned about many emerging proposals on property tax relief or elimination, we also need to acknowledge that voters who may once have been interested in income tax reductions or broader pro-growth tax reform may now see that as a distraction from property tax repeal. That isn’t an argument for abandoning better policy options. Rather, it’s an argument for not assuming that people know the arguments for them, and for doing the hard work of policy education.

Don’t be afraid to speak out. It’s easy to criticize policies you disagree with outright. It’s far harder to critique proposals that you believe are directionally correct, and in line with your broader policy aims, but which are flawed in their design or execution. That doesn’t make doing so any less important.

Missouri Amendment 5 is an edge case, because the actual measure is defensible: all it did was empower lawmakers to broaden the sales tax base to pay down income tax rate reductions, which can be good policy. However, it was clearly sold as a plan to eliminate the individual income tax, and any imaginable way that it could have done that would have been poor policy. That’s how I framed the measure when I spoke with journalists: there are advantages to restoring legislative capacity to modify the sales tax base (which was stripped away by a previous ballot measure), and it’s smart to use sales tax right-sizing to support income tax relief. But if lawmakers see this as a mandate to eliminate the income tax using base-broadening, the cure would be far worse than the disease.

Other efforts provide more clear-cut examples. Years ago, for instance, I wrote a paper taking sharp exception with then-West Virginia Gov. Jim Justice’s income tax abolition plan, which created a murderer’s row of ugly replacement taxes to pay for it. I also delivered legislative testimony in Mississippi explaining why the pay-fors in their income tax phase-out plan were woefully inadequate and would harm the state. And earlier this year, I wrote about why North Carolina should fix their most recent round of revenue triggers, which have the potential to trigger when they shouldn’t.

Not everyone has appreciated these critiques, but they were the right thing to do. First, it was right on policy, and promoting sound policy should always be the goal. Second, it was right as a matter of intellectual honesty: I wanted West Virginia to cut income tax rates, for instance, but I knew the governor’s plan was a bad one, so it would have been wrong for me not to acknowledge that. Third, it’s valuable reputationally: if we want to have credibility when we argue for well-designed tax reform, it’s not enough to stay silent about poorly designed reforms. And fourth, it’s crucial to future policy victories: one rotten apple really does spoil the bunch.

Remember, there are countless stories of states that have succeeded with responsible income tax relief, but none of them has anywhere near the salience of the failed Kansas experiment—which was predictably a disaster from the start.

Again, Amendment 5 is an edge case. And there will always be legitimate disagreements about how to approach tax reform, and when to accept an imperfect plan (because they’re all imperfect). But we’ll all be better off if those in the policy community voice their concerns or objections, with the goal of better policy outcomes, rather than biting their tongues.

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Of course, not every state cut income taxes. A few states did the opposite, including Massachusetts, which adopted a “millionaire’s tax” on the marginal income of high earners a few years ago. But this is a question of priorities: Massachusetts could have afforded tax relief as well.

They almost had a shot at it this year, too. Proponents of a one percentage point across-the-board rate cut secured enough signatures to put a tax-cutting measure on the ballot, but the courts spiked the measure on the grounds that a description written by the Attorney General (not by supporters) contained a misstatement.

The result is questionable. Petition signature requirements are a threshold measure to ensure that there’s enough support for a measure to place it on the ballot. The voters still decide. If the concern was to respect voters’ wishes, surely the appropriate remedy was to revise the description for the ballot rather than spiking the measure after it qualified for ballot status.

Unfortunately, voters won’t have an opportunity to weigh in this year. But the Pioneer Institute recently published an analysis I wrote of the economic effects of the proposed cut, as well as its affordability. The tax collections figures are worth highlighting. Massachusetts’ ability to afford such a reduction is clearly a question of policy priorities. Tax collections have increased 62% in real terms since 2010 and would still be up 48% if the proposed tax cut were fully in place.

I’ve also written in the past about how state income tax rates are diverging. The gap between high- and low-tax states is growing, and Massachusetts has reestablished its place among the high-tax states. But tax collections data show that it didn’t have to be this way.

To read my full paper with the Pioneer Institute, click here.

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An ideal sales tax falls on final consumption, avoiding the taxation of intermediate transactions (business inputs) to prevent tax pyramiding, and so that what is intended as a destination-based consumption tax is not turned into an origin-based production tax. No state achieves this ideal, but most draw a few clear lines. Among these: exempting raw materials as well as machinery and equipment used in production.

States almost invariably exempt manufacturing, agricultural, mining, and energy machinery and equipment from the sales tax, and they do so by right. Most states also exempt data center equipment, but on less favorable terms—and these exemptions are increasingly precarious.

In a new paper for the National Taxpayers Union (the first of a series of three papers on data center tax issues), I (1) examine how this came about, (2) explain the policy rationale for exempting machinery and equipment from the sales tax, and (3) document how states’ treatment of data center equipment differs from their treatment of virtually all other equipment used in production.

As of this writing, 38 states exempt new data center equipment purchases or forgo a general sales tax, but only two provide a by-right exemption to all data centers. By contrast, 46 states exempt manufacturing machinery by right or forgo a sales tax.

Two decades ago, policymakers structured sales tax exemptions for data center equipment as incentives. This suited the purposes of local governments and economic development agencies, enabling them to take credit for “attracting” data centers. Awarding an incentive permitted governments to enumerate and promote their successes in a way that operations moving in and claiming a by-right exemption did not.

Now the incentive framing yields the opposite result, with policymakers increasingly questioning whether they should be “incentivizing” the industry, sometimes unaware that equipment exemptions aren’t incentives at all, but merely ordinary non-discriminatory treatment under the sales tax.

As I contend in the paper, data centers should receive the same sales tax treatment as other industries. Current law in most states already falls short of that aim. But states should avoid policies that impose unique and highly consequential penalties on a single industry.

For the full argument, and details about all 50 states, you can read my new paper here.

See You at NCSL?

I am at the National Conference of State Legislatures (NCSL) annual summit this week. If you’re around, please come say hello, or shoot me a note to let me know you’re here!

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The digital supply chain timeline below offers a brief overview of what this looks like. With full disclosure, I fed my blog post to an AI tool and had it create the graphic based on it, both because (1) that seemed appropriate for the topic and (2) my comparative advantage is in tax policy, not graphic design.

Across the country, policymakers are increasingly interested in taxing data processing and businesses’ digital services. Proposals differ, but they include extending the sales tax to business digital services, imposing excise taxes on data collection, levying new per-user or receipts-based taxes on specific digital activity, or denying data centers the benefit of ordinary sales tax exemptions for production equipment—or some combination of these.

Behind all these proposals is a certain skepticism of “big tech” and data processing, which is often contrasted with “traditional” businesses. But when states tax data processing or levy new or higher taxes on the inputs of data processing, they aren’t just taxing big tech companies but virtually everything, because digital services are so embedded in how we live and how businesses operate.

Consider an example from the supermarket aisle: a box of cereal. We can attempt to track its digital supply chain from the farm (grain production) all the way to the breakfast table.

1. Seed development. Seed companies rely on statistical modeling to compare crop varieties, disease resistance, expected yield, and performance under different soil and weather conditions. Researchers use satellite imagery, climate models, and historical yield data to determine performance in different regions and to provide customized recommendations through dealers’ platforms. All of this requires extensive data processing on cloud-based systems.

2. Farm planning. Today’s farmers use farm management software that analyzes expected commodity prices, seed and fertilizer costs, historical field performance, and other factors to estimate the profitability of different crop plans. Lenders, insurers, and government agencies also rely on digital systems (digital maps, digital underwriting systems, electronic filing systems) in their interactions with the farm operation.

3. Soil management. Modern farm equipment is surprisingly technologically sophisticated. Tractors, combine harvesters, precision planters, and smart sprayers contain yield monitors, moisture sensors, weather readings, and tractor telematics, creating detailed field maps showing soil quality, moisture, temperature, and yield at incredible precision, allowing automated adjustments that tailor the application of fertilizer, pesticides, and water. All these inputs sync to the cloud, where they can be processed and analyzed.

4. Planting. Today’s planters run on GPS guidance, using equipment-control software and digital field boundaries, with automatic adjustments for planting depth and seed spacing based on soil data captured by equipment across the plowing, planting, and harvesting cycles. All of this involves cloud-based data processing and digital automated services.

5. Crop monitoring. Once the grain has been planted, farmers use crop models, field-scouting tools, and sometimes even satellite imagery or (increasingly) drones to monitor conditions, observing changes in plant color or growth and analyzing them for indications of disease, nutrient deficiency, or pest damage. Farmers use digital platforms that monitor rainfall, soil moisture, pests, temperature, and other factors to recommend customized irrigation as well as fertilizer, herbicide, and insecticide application plans. Again, each step involves significant interaction with digital automated services run on data centers, as do the inventory and ordering systems used by suppliers.

6. Harvesting. Modern combine harvesters continuously monitor GPS coordinate-linked crop yield and moisture as they harvest the crop, collecting data that can be used for subsequent plantings, allowing constant refinement of planting and treatment strategies.

7. Storage and sales. Farm operations rely on commodity-pricing platforms to help them decide whether to sell immediately, store the crop for later sale, or enter into a forward contract. If they use commercial grain elevators for storage, those operators also use digital platforms to record deliveries and assess quality, while sensors monitor the grain once stored, with automated systems that can respond to changing conditions. Procurement software, also running in the cloud, can handle contracts, deliveries, and verification processes.

8. Transportation. Once the grain is sold to a cereal factory, trucking companies use transportation management software to assign drivers, schedule pickups, track vehicles, optimize routes, and maintain legal and regulatory compliance. Railroads similarly rely on digital systems, and electronic recordkeeping is used throughout.

9. Grain processing. Grain must be processed—milled, cut, steamed, or rolled—before it can be used in cereal. Processing plants use software to schedule processing runs, manage ingredient batches, coordinate deliveries, and track output. Industrial systems regulate equipment speed, temperature, pressure, precision, and cleaning, with sensors generating vital operational data. Maintenance and procurement systems keep the operation running. All of this involves substantial data processing.

10. Managing the supply chain. In addition to grain purchases, cereal manufacturers need many other inputs and use enterprise purchasing systems to manage contracts, prices, delivery schedules, quality standards, and payment terms. Supply chain risk platforms may be used to monitor and predict potential disruptions.

11. Cereal manufacturing. Once all ingredients are obtained and the grain has been processed, food manufacturers use production software to adjust manufacturing schedules based on shifts in demand, while automated controls regulate every aspect of the production process, like mixing, cooking, puffing, drying, and coating. Sensors are used for continuous quality control, along with cameras and machine-vision systems. Software tracks which ingredients are used in each production batch, along with other information necessary for tracing in the event of a health or safety issue. Digital systems monitor energy use, water consumption, and equipment functionality.

12. Packaging and distribution. Packaging systems control fill weights, label placement, and carton assembly. Digital records throughout the supply chain are maintained and linked to the barcode on each cereal box, along with nutrition information, shelf life, package dimensions, and other machine-readable data attached to the product. Warehouse management software tracks where pallets are stored and directs inventory rotation. Workers interact with these systems using scanners or wearable devices, and robotics may connect to them for transport within facilities. Digital automated systems also determine how many pallets should be sent to each region or distribution center, incorporating a raft of data to predict demand.

13. Grocery chain purchasing and pricing. Grocery chains employ software that analyzes point-of-sale data, inventory, promotions, and local sales patterns to decide which cereals to stock, in what quantity, and on what delivery schedule, for each store. When inventory falls below certain levels, the system may generate a new order automatically. Either at the chain or store level, shelf prices are set by pricing software, and promotion management platforms help guide decisions about discounts, coupons, loyalty offers, and endcap displays. Loyalty accounts and digital coupons available through retailers’ apps use cloud-based data as well. Retailers analyze loyalty program data with software that helps further improve inventory, product placement, and pricing.

14. Stocking. When cereal arrives at the store, software verifies the shipment and updates inventory counts. Store management systems assign tasks such as unloading, stocking, rotating, replenishing, and repricing.

15. Checkout. Finally, at checkout, the store’s point-of-sale system scans the cereal box’s barcode, calculates the price with any discounts, applies sales tax, and updates store inventory. A payment processing network authorizes the payment, and, at long last, the box of cereal is in a consumer’s hands and headed for the breakfast table.

It is easy to conceptualize digital automated services as relevant only to tech companies or to think of data centers as powering only the internet or AI. But every time a sales, excise, or gross receipts tax is applied to business digital services, and every time the equipment used for those services is taxed, those taxes are embedded up and down the supply chain. Consumers pay more for their cereal, even though no tax shows up on the receipt. A product that is nominally untaxed in most states—groceries are usually exempt from the sales tax—can easily embed a heavy tax burden because of taxes conceptualized as falling on “big tech.”

If lawmakers fail to consider this reality when they contemplate new or higher taxes on business digital products or data center inputs, they will wind up taxing groceries at every stage from farm to table, with similar impacts on just about everything else we buy.

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Share The Salt Road - Jared Walczak

Patrick Henry’s impassioned speech at St. John’s Church in Richmond, swelling to the cry of “Give me liberty or give me death,” was the work of a later biographer with no direct knowledge of anything beyond the broad themes of Henry’s remarks in Church Hill. And James Otis, elevated in revolutionary memory by John Adams and others seeking a northern champion to rival Henry, wrote a pamphlet on the rights of the British colonies asserting that “[t]he supreme power cannot take from any man any part of his property, without his consent in person, or by representation,” but it was a later biographer who sharpened the line into “taxation without representation is tyranny.”

By 1776, however, both lines, however embellished, were in broad circulation, and they stood for two slightly different sets of revolutionary complaints.

The Declaration of Independence, drafted by a southerner, asserted the self-evidence of unalienable rights, including something as expansive as the pursuit of happiness, departing from the Lockean formula of life, liberty, and property. Northerners were more prosaic and preferred to present a bill of particulars rather than espousing an expansive ideological case. For the north, the problem wasn’t so much that King George was interfering with the pursuit of happiness. The problem was taxes and a lack of representative government.

Southerners cared about taxes, too. They spoke of oppressive taxation, complaining of burdens intended to impoverish the colonies. The northern leaders knew better; after all, colonial taxation was incredibly light, far lower than in England, and not even enough to cover the costs of colonial administration. No, the problem was not that taxes were high: they would be much higher after independence. The problem was that they were arbitrary, occasionally capricious and punitive, and, most importantly, imposed without the consent of the governed.

Taxation and consent have long been entwined, even under relatively unrepresentative governments. There are many things that governments can accomplish against the people’s wishes, but taxation is too large an undertaking to be carried out without at least tacit consent. Throughout history, tax compliance has been the exception rather than the rule. Champions of liberty, moreover, historically recognized their power to resist taxation as a vital bargaining chip in securing other liberties.

Tax revolts have a storied place in history: opposition to oppressive taxation, real or imagined, has inspired passionate reactions from everyone from Lady Godiva to the Whiskey Rebels. It undergirded the English Civil War and the American Revolution; it helped shape the French Revolution; it got Karl Marx arrested. Sometimes taxes really were the point. Other times they were the blunt instrument of power.

The withholding of revenues forced King John to parley with his nobles at Runnymede, and Magna Carta’s reaffirmation in 1297 saw the nobles trade new revenues for a pledge of “no aid, task, or prise” without common consent. The fight over “ship money” helped precipitate the English Civil War. And the royal need to secure cooperation on new revenues, often to fund wars, helped the English Parliament secure its own power.

Originally, parliament held little sway. Kings could ignore them, prorogue them, or even arrest their members. What they couldn’t do, at least not easily, was fill their own coffers without the consent of parliament, which is to say, the wealthy landed elite. Parliament after parliament traded its agreement to taxes for increased power over the prerogatives of government.

There can be little doubt that taxes hold pride of place in the causes of the American Revolution. Colonists protested the Stamp Act and the Navigation Acts; they rechristened one set of parliamentary enactments the Intolerable Acts, which left little room for interpretation; they boycotted dutiable goods; led by troublemakers like Samuel Adams and John Hancock, they turned to smuggling to evade tariffs; and, of course, when their smuggling outfits were undercut by reduced duties, rather than accept the legitimacy of even a low tariff, they brewed their tea in Boston Harbor.

For many years, during the period of “salutary neglect,” the American colonies were scarcely taxed. But as Britain reeled from one European conflict to another—the War of the Spanish Succession, the War of the Quadruple Alliance, the Seven Years’ War, and others—and as it labored under the strain of supporting the East India Company throughout these conflicts, Britain fell deeply into debt and increasingly saw the colonies as a way to replenish the Exchequer.

The amounts demanded weren’t extreme. Indeed, during and after the Seven Years’ War, the high-water mark of supposedly oppressive colonial taxation, the levies weren’t nearly enough to cover the cost of the military defense of the colonies in the North American theater, where it was called the French and Indian War.

British debt ran to 140 percent of gross national product, and 45 percent of British tax revenues went to servicing the debt. Effective tax rates in England exceeded 11 percent of national income; in the colonies, they were but a fraction of a percent, and most of that local. From Britain’s perspective, surely an additional levy or two wasn’t unreasonable.

But it wasn’t about the money. Frequently, colonial assemblies refused to even remit sums necessary to pay the salaries of colonial governors. It was about a principle: the power of the purse belongs to the people. The colonists saw this not as a new right, but as the rights of Englishmen, hard-won in a battle stretching from Magna Carta through the Civil Wars, surviving the Stuart Restoration and coming to full blossom in the Glorious Revolution. It was a heritage, it was a right—and it was being denied them.

Parliament couldn’t see this. The king couldn’t understand. Weren’t the colonists heavily subsidized? This wasn’t how the mercantile system was supposed to work. Colonies were supposed to enrich the mother country, not the other way around, yet here were these colonists, a drain on the country’s finances, and they had the gall to protest—violently protest!—a few stamp duties?

There were solutions, surely. The colonies could elect their own members of parliament, as some proposed. Their votes would have been drowned out by those of the English MPs, but there were nearly four times as many residents of the Isles as there were of British North America. On the fringes, there were even suggestions for a North American parliament.

To the colonists, though, these were sops; neither gave them a meaningful say over their own taxation. It wasn’t how much they were taxed, but whether it was given by their consent.

Our system of taxation has changed a great deal in the 250 years since 1776. The 4-million-word federal tax code has little in common with a system in which taxes were sometimes denominated in hogsheads of tobacco, or in which a tax could be levied for something as small and specific as paying the salary of a single government employee. We don’t have the founders’ tax code—but we have their enduring principle of representative government that reflects the consent of the governed.

Happy Independence Day weekend!

Obligatory Marketing Note

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Share The Salt Road - Jared Walczak

Not only is it necessary to shift much or all of the burden to some other tax, but decisions must be made about how to allocate that new revenue back to schools and local governments. The result is high income or sales tax rates (or both), but also dramatic redistribution of revenues. Taxes that used to remain local, paying for local amenities, are replaced by statewide taxes that, under most possible configurations, heavily subsidize the jurisdictions that previously levied the highest property taxes, and which have the most expensive property.

In a new Lincoln Institute working paper, I quantify what this means using Ohio as an example, but the results should be of interest in any state where property tax elimination is on the table. Perhaps the most notable (if unsurprising) takeaway, besides the absurdly rates for alternative taxes: under the most plausible scenarios, property tax replacement yields enormous tax increases for rural, and to a lesser extent, low-density suburban areas, while massively subsidizing urban areas.

(There’s an irony here, inasmuch as the most ardent support for property tax abolition often comes from the jurisdictions most likely to experience extraordinary tax increases.)

The cause is twofold: one, the replacement taxes often (but not always) fall more intensely on suburban and rural communities; and two, any redistribution designed around backfilling lost revenue will inevitably subsidize areas with higher real estate costs and higher taxes—in other words, cities.

Here’s what that means in practice for Ohio:

1. Full replacement of the property tax would require replacing the 2.75% single-rate state income tax with a flat tax of 8.24% (in addition to the local rates that average 2.04% for an average rate of 10.29%), and any realistic graduated-rate system would have a top state rate above 12%, and much higher if that structure is highly progressive.

2. Sales tax replacement would involve raising the state sales tax rate from 5.75% to 13.36%, yielding a combined state and local average sales tax rate of about 14.53%.

3. Rural counties’ net tax liability would increase almost 26% under a sales tax swap, about 18% under a typical graduated rate income tax, and a little under 8% with a single-rate income tax as property tax replacement.

4. Because population-and-inflation adjustments cannot capture changes in the composition or use of local property, had property taxes been repealed 20 years ago, and replaced by inflation- and population-adjusted final collections, rural areas would receive 19% less than they do now and suburban counties would be down 8%, while urban counties would be up 1%.

You can find the full paper here. If you’re dealing with questions about property tax elimination in your state and want to talk, I hope you’ll reach out. I’m happy to answer any questions, and if you’re interested in any state-specific work on this issue (papers, short-form content, presentations, etc.), please let me know.

Read the Paper

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Share The Salt Road - Jared Walczak

With a Thursday trip to Lake Clark National Park on the agenda, I watched a YouTube video about the flight I’d be taking. YouTube, unsurprisingly, counts as social media.

Then I decided to go for an evening run in Anchorage, taking advantage of the Tony Knowles Coastal Trail. I kept the pace slow, knowing I had intense hiking ahead, but I still recorded my run on Strava.

Is Strava a service that “permits a person to become a registered user, establish an account, or create a profile” and “primarily serves as a medium for users to interact with content generated by other users of the medium”? I think so. My social media use continues.

When I landed at Port Alsworth on Thursday, I immediately hit the trails, first hiking to Tanalian Falls and then backtracking to summit Tanalian Mountain. Because I have no sense of direction (something my pre-GPS hiking companions will readily attest to), I navigated with AllTrails. Most of the hikes on AllTrails are user-submitted, and you can also share and comment on both hikes and user activities. Even in those remote mountains, I used social media, at least as Illinois defines it.

Back at Port Alsworth, I got on lodge wifi and sent a friend one of my Dall Sheep photos over WhatsApp before jumping in a kayak. You might think that a messaging app isn’t social media, but WhatsApp allows the creation of user accounts and it primarily serves as a medium for users to engage with each others’ content (messages). Under Illinois’ definitions, I was already back on social media.

I flew back to Anchorage that night and took the redeye home to D.C. But when I got back, I naturally had to post a photo on Instagram, which is clearly social media. (I use Instagram exclusively for hiking photos, making me a rather asocial user of this particular social media platform.)

No one will deny that YouTube and Instagram are social media, but Strava, AllTrails, and WhatsApp might come as a surprise. Illinois’ definition is also broad enough to potentially capture GitHub, Yelp, Hinge, Nextdoor, Slack, Telegram, Goodreads, Google Groups, Indeed, and much more.

Including Substack, where you’re reading this.

The expansive definition of social media is only one of many problems with Illinois’ new social media tax. It lacks any definition of users or accounts, raising the possibility that the same person could count as multiple users. It says nothing about what constitutes an Illinois user. I flew back through Minnesota, but if on a future flight I connect through O’Hare, would I be an Illinois social media user that month?

If companies get any of this wrong, they could be subject to exorbitant penalties, compounding at 100 percent per month. As I wrote previously:

The new law is silent on all these questions, and many others besides. What it’s not silent about: prohibiting companies from varying the price to account for the new tax, which raises important legal questions. Indeed, the tax implicates more Constitutional clauses than it contains pages of text: it invites challenges under the First Amendment, the Commerce Clause, the Due Process Clause, and the Equal Protection Clause.

You can read my original analysis on this ill-conceived, poorly drafted law here.

Obligatory Marketing Note

My new consultancy provides tax policy research, writing, and other services, both project-specific and on retainer (or in visiting fellow-style roles). If you are in the market for tax policy research or know someone who is, please let me know.

Please Share this Substack

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Share The Salt Road - Jared Walczak

The FT-Booth US Macroeconomists Survey regularly surveys leading economists on key economic issues. In 2012, a panel of prominent economists spanning the ideological spectrum was asked to agree or disagree with this statement: “Local ordinances that limit rent increases for some rental housing units, such as in New York and San Francisco, have had a positive impact over the past three decades on the amount and quality of broadly affordable rental housing in cities that have used them.”

The confidence-weighted expert responses: 95% disagree, 4% uncertain, 1% agree.

Economists broadly agree that rent control reduces housing supply and quality, increases rents in the non-controlled sector, lowers mobility, and creates housing mismatches. Studies have also demonstrated that rent control is poorly targeted, often favoring higher-income renters. While the ill effects of rent control are insufficiently appreciated by the general public, the facts are widely available, with many empirical studies backing up these conclusions. I can’t add much to the core argument.

But in a recent paper with the Fiscal Alliance Foundation, I do explore one under-appreciated effect of rent control: it increases homeowners’ property tax burdens.

This is not, in my view, the primary reason to oppose rent control. Other effects are far worse and affect more vulnerable populations. But as voters consider rent control proposals in Massachusetts and elsewhere, they deserve to know that rent control impacts them even if they own their own home.

Here’s the process, which I detail and demonstrate empirically in the paper:

• Rent control reduces future returns to rental property, mechanically reducing those properties’ assessed values.

• Rent control also reduces maintenance and investment in rental properties, further reducing their value and desirability, with spillover effects that reduce the value of other properties in the community as well.

• Both rental and owner-occupied properties decline in value, but rental property values decline far more precipitously. As a result, they represent a smaller share of the tax base while owner-occupied property’s share increases even if those properties are also less valuable than before.

• Unless municipalities respond with budget cuts, property tax rates (mill levies) rise automatically to maintain the level of revenue necessary to fund the budget. These increases are not constrained by any levy limits, since the increases are intended only to maintain current collection levels, resulting in higher taxes on homeowners’ larger share of the tax base.

• Initially, some rental properties will convert to condominiums and other forms of owner-occupancy, but over time, the rent control regime will create additional housing scarcity since it discourages investment in additional units. This scarcity will increase the assessed value of non-controlled (e.g., owner-occupied) residential property relative to controlled properties, further increasing their tax burden.

Under rent control, therefore, homeowners — despite not being directly impacted by rent control — pay higher property taxes than they do now, under assessed values that are much higher relative to rental properties than currently, though which may still be depressed in absolute terms because of spillover effects of neighborhood deterioration due to underinvestment in the maintenance of rental properties.

You can read the full paper here.

Obligatory Marketing Note

My new consultancy provides tax policy research, writing, and other services, both project-specific and on retainer (or in visiting fellow-style roles). If you are in the market for tax policy research or know someone who is, please let me know.

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Share The Salt Road - Jared Walczak

Illinois lawmakers don’t know the answer, but that didn’t stop them from including a social media platform “fee” (tax) in the budget. In a new Tax Foundation piece, I refer to the new law as a shambles, but that may be an understatement. More than a decade ago, the term “omnishambles” entered the political lexicon, and that seems an apt description of the new Illinois social media tax. It’s abundantly clear that the budget writers didn’t know how to tax social media, so they just omitted virtually all the crucial details, leaving them for taxpayers and regulators to sort out. And in the few areas where they did specify any details, they managed to embed contradictions and calculation errors.

Is the tax on users or accounts? If someone has multiple accounts, are all of them taxed separately? If they have accounts on multiple services run by the same company, is that one user/account or several? Is someone an Illinois user for a given month if they’re just visiting the state, or only if they live there or primarily access social media from there? If the latter, for accounts without billing addresses (most social media accounts are free and some are wholly anonymous), should social media platforms rely on their most common IP address location or something else?

For that matter, what is a social media platform? The definition, which is anchored in permitting account registration and “primarily serv[ing] as a medium for users to interact with content generated by other users of the medium,” is potentially broad enough not just to capture Facebook, X, LinkedIn, YouTube, and Instagram, but also, potentially, WhatsApp, GitHub, Teams, Slack, Goodreads, Google Groups, iCloud, iMessage, Dropbox, Strava, Salesforce, Yelp, Indeed, Substack, and, under the most expansive reading, perhaps even Gmail. What platforms will ultimately be subject to the tax, and given the extraordinary compounding penalties imposed for non-payment, what happens if, say, Salesforce doesn’t believe it owes tax in Illinois and never reports or remits, and the state later determines that Slack, its business messaging app, is a social media platform?

The new law is silent on all these questions, and many others besides. What it’s not silent about: prohibiting companies from varying the price to account for the new tax, which raises important legal questions. Indeed, the tax implicates more Constitutional clauses than it contains pages of text: it invites challenges under the First Amendment, the Commerce Clause, the Due Process Clause, and the Equal Protection Clause.

Most lawmakers only saw the language creating the new tax when they voted on the budget early on the morning of June 1st (if then). Budget writers clearly didn’t spend much time developing the proposal. But there’s no question that the state will spend a lot of time with the text in the coming months and years, as this deeply flawed tax is extensively litigated in court.

You can read my new analysis here.

Obligatory Marketing Note

My new consultancy provides tax policy research, writing, and other services, both project-specific and on retainer (or in visiting fellow-style roles). If you are in the market for tax policy research or know someone who is, please let me know.

Please Share this Substack

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Share The Salt Road - Jared Walczak