The Squeeze on the Sales Tax Presented by Matthew N. Murray The University of Tennessee September 17, 2007
State General Sales Tax Collections 1977–2005 40.0% Share of Total Taxes Share of General Revenue, Own Sources 38.0% 36.0% 34.0% 32.0% percent 30.0% 28.0% 26.0% 24.0% 22.0% 20.0% 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 Source: U.S. Census Bureau. Matthew N. Murray • UT Center for Business & Economic Research • September 17, 2007
Sales Tax Base as a Percentage of Personal Income: 1979 to 2006 55.0 U.S. 53.0 SHARE OF PERSONAL INCOME (%) 51.0 49.0 47.0 45.0 43.0 41.0 39.0 37.0 35.0 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 Matthew N. Murray • UT Center for Business & Economic Research • September 17, 2007
State Sales Tax Rates 1967 and 2007 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% AL AZ AR CA CO CT DC FL GA HI ID IL IN IA KS KY LA ME MD MA MI MN MS 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% MO NE NV NJ NM NY NC ND OH OK PA RI SC SD TN TX UT VT VA WA WV WI WY Sates without sales tax: Alaska, Delaware, Montana and New Hampshire. Source: CCH, Inc. Matthew N. Murray • UT Center for Business & Economic Research • September 17, 2007
Business Share of Total State & Local General Sales Tax Collections: 1989 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% AZ LA CA IN KY MN ME IA AR CO MD NE ND SC SD ID MA NC TN GA MO PA NY OH OK VA HI NV WA FL NM TX WY VT CT MI RI US NJ UT MS KS IL AL WI WV Source: Ring, R., “Consumers’ Share and Producers’ Share of the General Sales Tax,” National Tax Journal , Vol. 52, 1999, pp. 79-90. Matthew N. Murray • UT Center for Business & Economic Research • September 17, 2007
Business Share of Total State & Local General Sales Tax Collections: 2003 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% LA OK SD NE NY CO AZ KY CA MO MN GA ND OH MD MA NC IA PA ME VA TN SC IN AR ID WA NM WY CT RI TX KS US IL NV VT NJ MS AL UT FL HI MI WI WV Source: Ernst & Young, 50-State Tax Model for 2003. Matthew N. Murray • UT Center for Business & Economic Research • September 17, 2007
Challenges to Expanding the Scope of Business Exemptions This would be good policy, but… Perceptions of corporate welfare Perception of diminished capacity to export taxes Practical problem of shoring up revenue losses Political opposition from those who would bear the new burden Matthew N. Murray • UT Center for Business & Economic Research • September 17, 2007
Things We Don’t Know � Little evidence on pyramiding � Excess burdens � Effects on investment, job creation, etc. � Vertical integration � Direct burden is not final incidence: Who bears the burden of the sales tax on business inputs? � Immobile land and labor? � Mobile business capital? Matthew N. Murray • UT Center for Business & Economic Research • September 17, 2007
2007 State Sales Tax Holidays State Items Included - Maximum Cost 1st Year 2007 dates Days Alabama 3 clothing - $100 2006 Aug 3-5 computers - $750 school supplies - $50 books - $30 Connecticut 7 clothing - $300 2001 Aug 19-25 Connecticut 389 weatherization products June 1, 2006 - June 30, 2007 Dist of Columbia 9 clothing - $100 2004 Aug 4-12 school supplies - $100 Dist of Columbia 9 clothing - $100 2004 Nov. 23 - Dec. 2 Florida 10 clothing - $50 2007 Aug 4-13 school supplies - $10 Florida 12 hurricane supplies & equipmt 2007 June 1-12 Georgia 4 clothing - $100 2005 Aug 2-5 school supplies - $20 computers - $1,500 energy efficient products - $1,500 Georgia 4 energy efficient 2005 Oct 4-7 products - $1,500 Iowa 2 clothing - $100 2000 Aug 3-4 Louisiana 10 all TPP - $2,500 2007 Aug 3-4 Massachussetts 2 all TPP - $2,500 2007 Aug 11-12 Matthew N. Murray • UT Center for Business & Economic Research • September 17, 2007
State Items Included - Maximum Cost 1st Year 2007 dates Days Missouri 3 clothing - $100 2006 Aug 3-5 computers - $3500 school supplies - $50 New Mexico 3 clothing - $100 2005 Aug 3-5 computers - $1,000 school supplies - $15 North Carolina 3 clothing - $100 2001 Aug 3-5 school supplies - $100 computers - $3,500 other comp. - $250 sports equip - $50 Oklahoma 3 clothing - $100 2007 Aug 3-5 South Carolina 3 clothing 2000 Aug 3-5 school supplies computers Tennessee 3 clothing - $100 2006 Apr 27-29 school supplies - $100 computers - $1,500 Tennessee 3 clothing - $100 2006 Aug 3-5 school supplies - $100 computers - $1,500 Texas 3 clothing & backpacks - $100 1999 Aug 17-19 Virginia 3 clothing - $100 2006 Aug 3-5 school supplies - $20 Virginia 4 energy efficient products - $2,500 2006 Oct 5-8 Source: Federation of Tax Administrators <http://www.taxadmin.org/fta/rate/sales_holiday.html>. Matthew N. Murray • UT Center for Business & Economic Research • September 17, 2007
Sales Tax on Groceries: 2007 Exempt Taxable No sales tax Source: CCH, Inc. Matthew N. Murray • UT Center for Business & Economic Research • September 17, 2007
Sales Tax on Clothing: 2007 Exempt Taxable No sales tax Source: CCH, Inc. Matthew N. Murray • UT Center for Business & Economic Research • September 17, 2007
Sales Tax on Clothing: 2007 CA Exempt: new children's clothing sold to nonprofits; used clothing sold by thrifts to benefit chronically ill CT Exempt: clothing & footwear items less than $50 each; employee safety apparel and bike helmets ID Exempt: clothing, footwear purchased by nonsale clothiers to be given to needy MA Exempt: clothing & footwear items less than $175 each Taxable: athletic, protective use clothing NJ Exempt: clothing, footwear Taxable: athletic clothing NY Exempt: clothing & footwear items less than $110 each PA Exempt: clothing, footwear Taxable: accessories, fur items, formal wear, athletic clothing RI Exempt: clothing, footwear Taxable: athletic or protective clothing VT Exempt: clothing & footwear items less than $110 each and steel or Kevlar footwear Taxable: athletic or protective clothing is taxable Source: CCH, Inc. Matthew N. Murray • UT Center for Business & Economic Research • September 17, 2007
Sales Tax on Prescription Drugs: 2007 Exempt Taxable No sales tax Source: CCH, Inc. Matthew N. Murray • UT Center for Business & Economic Research • September 17, 2007
Some Options for Expanding the Consumer Sales Tax Base � Health services � Education services � Residential construction services � Personal services � Amusement and recreation services � SSTP-expands the effective base by expanding the scope of the use tax Matthew N. Murray • UT Center for Business & Economic Research • September 17, 2007
Challenges to Expanding the Consumer Base � General concerns over fairness � Sales tax is a poor mechanism to promote fairness � Should human capital investments be taxed? � Revenue yield for many personal and amusement services is modest � Administration/compliance � Construction, personal and amusement services will be prone to noncompliance Optimal tax theory: if you cannot tax output, it may be appropriate to tax inputs Matthew N. Murray • UT Center for Business & Economic Research • September 17, 2007
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