Mike Kueber's Blog

January 27, 2013

A sales-tax revival

Filed under: Economics,Issues,Politics — Mike Kueber @ 1:59 am
Tags: , , , ,

An article in yesterday’s NY Times reported that the sales tax is taking on increased importance in several states across the nation.  The movement is being led by Republican governors in LA, NE, and KS, and although Democrats traditionally oppose the sales tax because it can be regressive, the article suggests that the experience of these states might have federal implications when Congress finally attempts to effect tax reform. 

According to Times reporter Richard W. Stevenson, “Taxing consumption has the potential to lift economic growth by encouraging more savings and investment. But the shift could also increase inequality by reducing taxes predominantly for the wealthy, who spend a smaller share of their income than middle- and lower-income people.”  If these states experience relatively more economic growth, the states with high income taxes will be pressured to move in the same direction in order to prevent residents and businesses from voting with their feet. 

The Times article contained the following nuggets of sales-tax info:

  • Nationwide, sales taxes account for about 46 percent of state revenues, and personal and corporate income taxes for about 42 percent.  (Considering that many big states, like TX and FL, don’t have a state income tax, I am surprised that 42% of state revenue comes from an income tax.  Too bad for CA and NY.)
  • States with relatively low income tax rates like Louisiana, which raises about $3 billion a year from its personal and corporate income tax system, can more easily shift toward a sales tax-only system than states with much higher rates, like New York or California.  (NY and CA are facing hard times.)
  • Louisiana already has the nation’s third-highest sales tax, after Tennessee and Arizona. Combined state and local sales taxes average 8.84 percent, according to the Tax Foundation.  (We’re at 8.25% in San Antonio.)
  • And just as President Obama has raised income tax rates on upper-income families, Democratic governors including Martin O’Malley of Maryland, Jerry Brown of California and Deval Patrick of Massachusetts have supported or put in place income tax increases on the wealthy.  (Watch out for people like Phil Mikelson voting with their feet.)
  • Nearly all other wealthy countries have some version of a national consumption tax.  (I suspect their consumption tax is in addition to, not in lieu of, an income tax.

I’m a long-time fan of shifting from an income tax to a consumption tax, although, as I’ve previously blogged there would be a danger of rich people figuring a way to avoid paying taxes.  Further, as Mitt Romney warned in his book No Apologies, there would be a danger that our economy would be significantly disrupted as people reacted to a dramatic change.  Both of these dangers, however, could be ameliorated by a gradual shift from one tax to the other.

Good luck, LA, NE, and KS.

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