The election of Donald Trump for a second term as President, alongside the creation of the Department of Government Efficiency (DOGE), has put a spotlight on government efficiency in the national agenda. While most of its recommendations will focus on reforms at the federal level, states and localities should not tune out of the discussion. American taxpayers and consumers would likely welcome additional efficiencies in the government entities they interact with the most. Amongst the plethora of welcomed measures government entities could take is streamlining its tax collection schemes. They could easily do so by centralizing administration of local taxes at the state level, which would have valuable downstream economic effects.
As commerce has increasingly moved to digital platforms, businesses that serve a single locality are becoming increasingly rare. The physical boundaries that constrained how far or fast a business could expand have been greatly reduced. Businesses are now able to serve areas that would have been impossible to think of in decades past. This has resulted in massive success for entrepreneurs, who have more chances of seeing their ventures take off.
However, these market expansions usually come at a significant cost. Once businesses expand to new jurisdictions, they might face new local taxes. They also must file and pay taxes to each locality individually. This “patchwork” approach means that tax compliance costs can add up quickly. Suddenly, these businesses become victims of their own success, unnecessarily paying for multiple tax services.
The tourism industry is one of the most affected by this patchwork. With the rise of aggregator websites or short-term rental platforms, it has become increasingly common for companies with nation-wide operations to serve multiple localities within multiple states. While these companies provide a valuable resource for travelers that can easily find lodging accommodations in smaller unknown towns, servicing these areas usually means that they must file tourism or lodging taxes with those localities.
These compliance costs could erase the benefits inherent with their digital-first service. Normally, the allure of digital commerce is that making an additional sale or securing a contract is a nearly costless venture for the platform. Unlike a travel agency, making a sale does not require the time and labor from an agent to secure a sale. However, if making that additional sale would then lead to increased compliance costs, those efficiencies are negated. This would disincentivize platforms from providing their services in smaller, more remote areas, as the cost of complying with an additional locality might not be worth the limited revenues they could draw from those areas.
Centralizing these local taxes by tasking state governments to collect these taxes instead of each individual locality, would bring much needed relief for businesses and the localities themselves. Unlike other sorts of local taxes, sales taxes are commonly centralized by states nation-wide. This has provided e-commerce platforms with a single resource to verify the local tax rate and reduce the amount of paperwork as they have to file these taxes only to the state. The state then is in charge of distributing these tax revenues to the localities. The complexity burden shifts off of businesses and localities.
Most of the fears of state governments abusing this centralization are unfounded. One need only look to sales taxes to see how such a system might play out. Just as with sales taxes, state administered taxes do not even make it to the state budget. On the contrary, state administration of local taxes has often resulted in increases in revenue thanks to increased compliance and decreased administrative costs.
As the country discusses methods to modernize and optimize government operations, states and localities should take the initiative and look for ways of improving its systems. Streamlining tax collection has been proven to be a catalyst for economic growth and tax revenue. A simpler, more straightforward scheme where businesses have only one collector to address will make any state more business-friendly. By doing so, localities will be rewarded by this pro-growth measure with higher revenues. It is an easy win-win policy to kick off the new year.
