9
U. S. 298) prohibits states from collecting use taxes on goods purchased from out-of-state
vendors for use inside the state. Further, Congress has barred states from taxing Internet access.
One study estimates that states and sub-state governments lost revenues of $15-16 billion on
Internet sales in 2003 alone (Bruce, Fox and Tuttle 2004).
The aging of America affects state budgets on the expense side, as an aging population
requires more and more expensive health care. The aging population will also contribute to a
loss of state tax revenues. Current state tax structures contain preferences for capital gains
income, and offer exemptions, deductions or credits that are more generous for the elderly than
those under 65. State tax revenues will also be affected by the changing mix of income for the
elderly, which includes a higher proportion of pension and Social Security income that is now
taxed at a lower rate or excluded from taxation entirely (Lav, McNichol and Zahradnik 2005:28-
30).
Graduated rate structures in many state income tax systems have not adjusted tax
brackets to keep pace with increases in taxable income, and many states have instituted flat taxes
or have no broad income tax system. The lower boundary of the upper tax bracket is greater than
$30,000 in less than half the states (22). The result is that state income tax systems are
effectively flatter and less progressive by failing to adjust brackets in graduated rate structures to
extend up the taxable income scale (2005: 34-35). Modernization of tax systems are also
delayed because of constitutional restrictions, such as supermajority requirements (2005: 48).
Lav, McNichol and Zahradnik (2005) suggest that states can improve their fiscal
positions by addressing structural deficits, and argue that more progressive revenue streams will
allow states to more ably navigate the public policy choices ahead. State budget structural
deficits are under-investigated factors with respect to current Medicaid funding shortfalls. We
Convention