THE E RET RETAIL AIL SA SALES LES TAX AX IN IN A NE NEW W EC ECONOM ONOMY Munic nicipal al Financ nance e Confer ferenc ence Washin hington on, , D. C. July ly 16, 2018 John L. Mikesell Indiana University and Sharon N. Kioko University of Washington
So Some e Ret etail ail Sa Sales les Tax x Backg ckground round • Great eat Depression epression Desperat speration ion – property tax was largest state tax source, fell by 11.4 % from 1927 to 1932, by another 16.8 % from 1932 to 1934. • The In Innov ovators ators: Mississippi converted gross receipts tax (GRT) to retail sales tax in 1932, West Virginia adopted free-standing retail sales tax in 1933. • If If you can make e it there, re, you can make it anywh wher ere: Produced revenue even in poorest states. Ten more adopted in 1933.
Earl rly His istor ory y of State te Gene nera ral l Sale les, s, Ind ndiv ivid idua ual l Inc ncome, me, and nd Pr Propert rty y Tax Re Reli lianc nce, e, 1902 - 1950 1950 • Five states levied individual income taxes Figure 1. National Shares of State Tax Revenue from Property, before first general sales taxes, but trivial General Sales, and Individual Income, 1902 - 1950 revenue. Revenue surpassed property tax in 0.600 early 1940s but still behind general sales. 0.500 • Property tax reliance consistently declined. 0.400 • General sales reliance jumped from 1933, rapidly to 1936, then somewhat more 0.300 gradually through the period as more states adopted the tax and the economy improved. 0.200 • General sales tax reliance exceeded property 0.100 tax reliance in 1936. 0.000 1902 1913 1922 1927 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 • But these general sales tax data include both RST and GRT data and there is no Property General Sales Individual Income feasible way to separate. But it is possible for 1970 and onward.
Some me Stru ruct ctur ural al Carr rry-Overs vers fro rom the he Earl rly Adopti ption ons • Tax base is mostly goods, not services • Retail focus on finished products; exempt inventory purchases but less attention to exempting other input purchases • Tax added on purchase, not embedded in sticker price
Impo port rtant ant Stuff uff for or State ate Finance ances: s: Reta tail Sale les s Tax x (RST ST) ) and d Indi divid vidual ual Income come Tax (IIT) IT) Across ross the e Indi dividual dual States ates Since ce 1970 70 (Standa tandardi rdized zed RST T Data) ta) • National Aggregate: Individual income tax (IIT) collections in FY Figure 2, Mean State Retail Sales and Individual Income Tax 2016 $333.5 B vs. RST collections Reliance Across the 45 Sales Tax States, 1970 - 2016 $288.5 B. 0.4 • BUT BUT: At individual state level, mean retail sales tax reliance is 0.35 greater than individual income tax reliance (although individual income tax reliance has been increasing). 0.3 • State fiscal al policy icy is made by 0.25 indiv ivid idual ual states, , not as a cohes esive ive national ional whole ole. 0.2 • Political and economic obstacles to greater use of alternative revenue 0.15 sources (CIT, IIT, PIT, sel exc, user 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 charges) Retail Sales Individual Income
Cha hall llenge nges s End ndogenou genous s to Stat ate e Po Poli licy cy Makers rs • Excl clusi sion ons: s: base definitions that omit important portions of household consumption expenditure, purchases of services notably • Exemp empti tions ons: freeing from taxation of identified transactions because of their nature, usage, buyer, or seller. • Over er-reac reach: h: inclusion of transactions that are not household consumption expenditure in the taxable base. • To coincide with ideal consumption base standard for transparency, efficiency, growth, and non-discrimination: tax all household consumption purchases and exempt all business input purchases
Th The Big ig Excl clus usio ion: n: Ser ervic vices es Pu Purc rcha hased by Hous usehol eholds • State sales tax statutes often exclude services from definition of taxable transactions. Some services may be added selectively to general coverage of purchases of tangible personal property. • Some States Have Expanded Service Coverage, But Not Broadly • 1971: 26 states exclude, 17 selectively tax, and 2 generally tax services • 2018: 3 states exclude, 38 selectively tax, and 4 generally tax services • Problems Selective coverage of minor service classes • Coverage of services almost exclusively purchased by businesses • And even selective coverage is difficult to add (e.g., Kentucky in 2018 over veto) •
Taxing ng Servi rvices ces Co Could d Mitigate ate Some e of the Disapp sappearing earing Ba Base Probl blem em (BE BEA Data) a) Sales Tax Base Relative to Personal Income: Current Typical Base, Current Base Plus Untaxed Household Service, and Base Plus Services Except Health Care and Education (Relative to 1970) 1.4 1.2 1 0.8 0.6 0.4 0.2 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Typical Base Typical Base Plus All Services Typical Base Plus Services Exc. Health and Education
Adding Exemptions: 1971 - 2018 • States have narrowed coverage of goods purchased by households • States have not flocked to the better targeted, more efficient, and less expensive credit / rebate approach • Now appearing as Maine Sales Tax Fairness Credit, Kansas Food Sales Tax Credit, Oklahoma Sales Tax Relief Credit, Idaho Grocery Credit Refund, Hawaii Refundable Food / Excise Tax Credit, and Wisconsin Child Sales Tax Rebate. • Expanding exemptions contributes to the implicit “narrow base – high rate” tax policy
House usehold hold Consum nsumpt ption on Exe xempti mption ons s in Indi dividua vidual State ates, s, 1970 70 and 2018 18 (E = ca catego tegory ry is exe xempt mpt; RR = ca catego tegory ry is taxe axed d at reduce duced d rate; te; T = cate tegory gory is taxe xed at standard andard rate te) Status in 1970 Status in 2018 Food for at-home E: 16; RR: 1; T: 28 E: 32; RR: 6; T: 7 consumption Clothing E: 4; E-children: 1; T: 40 E: 7: T: 38 Prescription medicines E: 26; RR: 2; T: 17 E: 44; RR: 1 Gasoline E: 38; T: 7 E: 36; RR: 6: T: 3 Cigarettes E: 15; RR: 6; T: 24 E: 2; RR: 3; T: 40 Sales tax holiday No states One holiday: 10 states; two holidays: 5 states; 3 holidays: 1 state; 4 holidays : 1; zero holidays: 28
The Heart of the Retail Sales Tax Dilemma: Maintaining Reliance With Disappearing Base and Means Rising Rates • Continued retail sales tax reliance Retail Sales Tax Reliance, Breadth, and Effective Rate, State • Sales tax base has persistently Aggregate Relative to 1970, 1970 - 2015 declined as portion of economy (measured by personal income). 1970 1.8 mean = 0.544; 2016 mean = 0.373 1.6 • Sales tax rates have persistently increased to maintain yield in face of 1.4 declining base. Mean increase 1970 – 2016 is 2.06% (Range from 0 to 5%). 1.2 • Implicit narrow rrow base e / high gh rate te 1 strategy not part of anyone’s tax policy program, but that’s what we 0.8 have 0.6 Breadth – Rate Trade-off: 0.4 RT = 0.044 + 0.170 REL*** – 0.114 BR*** 0.2 AdjRSq = 0.96 0 BR = 0.376 + 1.350 REL*** -8.293 RT*** 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2002 2003 2004 2010 2006 2011 2012 2014 AdjRSq = 0.95 Reliance Breadth Rate
Endogenous Challenges are Substantial • But dealing with them is within the power of state lawmakers. • Fixing the regular base should be the first step in preparing state retail sales taxes for the new economy.
New Eco cono nomy my Cha hall llenge nges s Exogenou genous s to State te Po Poli licy cy Makers rs • Internet and Remote Vendors • Sharing Economy • Zappers and Phantomware
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