Out here in Oregon, I’ve been diving a bit more deeply into the question of taxation at the state level. In earlier posts, I’ve highlighted the excellent work by CTJ on the regressivity of state taxes, especially in states that rely more on sales versus income taxes.
Well, if there’s a regressive idea out there, be assured some supply-side, trickle-downer will pursue it. And so here’s my CBPP colleague Liz McNichol on the recent push to replace state income and corporate tax revenue with sales taxes.
Proponents claim that eliminating income taxes and expanding the sales tax would make tax systems simpler, fairer, and more business-friendly, with no net revenue loss. In reality, they would tilt state taxes against middle- and lower-income households and likely undercut the state’s ability to maintain public services. Specifically, they would:
- Raise taxes on lower- and middle income families while businesses and high-income households would pay less. That’s because repealing the income tax would disproportionately benefit high-income families (since they generally face higher tax rates), while a sales tax hike would hit low- and middle-income families the hardest (since they pay a bigger share of their incomes in sales tax than wealthier families do).
- Require huge sales tax hikes…Sales tax rates would have to be markedly higher than they are now to make up for the revenue lost from eliminating income taxes.
- Create an unsustainable spiral of rising rates and widening exemptions. A large expansion of the sales tax would spark furious efforts to exempt many purchases from the tax. But if a state granted such exemptions, it would have to compensate by raising the sales tax rate even higher. The ultimate result, most likely, is that the new tax would fail to meet its revenue-neutral promise — forcing cuts to education, transportation, and other essential services to meet state balanced-budget requirements.
- Fail to boost state economies. Replacing income taxes with an expanded sales tax would do little or nothing to improve a state’s business climate or economic performance. On the contrary, the resulting high sales tax could hurt in-state businesses as residents shift purchases to neighboring states or the Internet.
- Make state revenues much less stable. By making a single tax a state’s sole significant revenue source — rather than the mix of sources now utilized — these proposals would deprive a state of a balanced revenue portfolio and jeopardize its ability to collect enough revenue for future needs.
Still, sales taxes are not necessarily all bad. Economists like their efficiency, simplicity, and the fact that they incentivize saving over consumption. But in order to offset their inherent regressivity, they need to be the third leg of a stool that has progressive income and corporate taxes in place, along with exemptions for necessities or a rebate for low-income households.
I like the idea of devoting the sales tax revenue to a tangible service that means a lot to people, like education, or health care, kind of like what Gov. Brown recently did in CA (with education). We need a good conversation in this country about what it is we want in terms of public services, public goods, and public investments and what we’re willing to pay for them.
So, should OR think about a sales tax, a question I was asked a few times today? Not, IMHO, until they deal with corporate tax breaks that are too regressive and would thus put too much of a revenue-raising burden on the sales tax.
This requires a quick dive in the state corporate tax weeds: beware the single sales factor tax (SFT), a hefty tax dodge by companies that locate in states where they have few sales. Nike recently got the state to lock in this break for the next 30 freakin’ years!
Apportioning corporate taxation at the state level is—or should be—a balancing act between factors of production in the state—payrolls and property—and sales. But under an SFT, a company only pays taxes on its in-state sales, not on its payroll or property in the state. Nike has always had this advantage in OR but this new legislation locks it in for decades to come.
How large of a tax break is it? Look at this little example from OCPP, using conservative guesstimates about the apportionment factors (such information is not reported). Relative to an equally weighted formula, the SSF provides a 95% tax cut.
So, I wouldn’t reject a sales tax as part of the mix at the state level, but if you don’t have the other parts—income and corporate—in place, the state system will invariably end up either too regressive or too limited in terms of the revenues it can raise.