By Larry Jones
August 7, 2006

Facing strong opposition from state and local officials, leaders in the House of Representatives decided to pull a measure scheduled for House floor considerations July 25 that would prevent state and local governments from taxing certain business activities. In a July 24 letter, Conference of Mayors Executive Director Tom Cochran urged House Speaker Dennis Hastert (IL) and Minority Leader Nancy Pelosi (CA) to oppose the bill because it would impose a huge unfunded mandate on state and local governments. He cited a July 11 analysis prepared by the Congressional Budget Office (CBO), which estimates the bill would result in revenue losses for state and local governments of more than $1 billion in the first full year after enactment and grow to $3 billion annually by 2011.

Supported by the business community, the Business Activity Simplification Act (H.R. 1956) would preempt state and local taxing authority by setting a national standard for when state and local governments can impose a business activity tax on an out-of'state company. Under current law, states set their own standards and generally require out-of-state companies to pay the business activity tax when they send workers to their states who generate company income within their borders.

Under H.R. 1956, a company would have to be physically present (for example send workers) in a state for 21 or more days before it would be required to pay the business activity tax. This 21-day physical presence standard exceeds all state standards. And the bill would also allow certain industries such as banking and media to exceed the 21-day standard with no obligation to pay the business activity tax. These provisions would cause state and local governments to lose huge sums of revenue.

The National Governors’ Association compiled a report that estimates how much revenue each state would lose if the changes in H.R. 1956 were enacted. It estimates that states would lose a total of $6.6 billion, which is more than two times the amount estimated by the CBO. Further, it points out that 14 states stand to lose more than $100 million each. The NGA report was widely circulated to members of House before the scheduled vote. It was followed up by calls from state and local officials who discussed the impact of the bill and urged their Representatives to oppose it. This caused a growing number of Representatives from both political parties to weigh in against the bill until the House leadership finally decided to pull it from the schedule.

Kevin Madden, a spokesman for House Majority Leader John A. Boehner (OH) said the bill was pulled to clear up some misperceptions of its effect on states. But Representative Doc Hasting (WA) from one of the states that stands to lose $100 million or more said he was pleased the bill was pulled and “I hope it will be pulled permanently.”