Since advocates of a national sales tax first unveiled their "Fair Tax" plan more than a decade ago, the most durable (and unfortunate) feature of this debate has been that its advocates have persisted in using misleading estimates of what the sales tax rate would have to be under their regressive scheme. The bill's authors routinely describe it as a 23 percent tax, but ITEP's widely-cited analysis has shown that, in fact, the national sales tax rate would almost certainly have to be somewhere north of 40 or even 50 percent.
Now this debate is playing out again at the state level, where the Missouri House has shown more than a polite interest in a plan that would repeal the state's personal and corporate income taxes and state sales tax, and create a new sales tax on virtually everything individuals buy, from new homes to your monthly rent to health care to day care. The plan's sponsors claim that it would raise enough revenue to pay for a gigantic sales tax rebate designed to offset the sales tax on spending up to the federal poverty line, while leaving the total revenue collected unchanged. According to the bill's sponsors, this could all be accomplished at the low, low sales tax rate of 5.1 percent.
House members liked this idea enough last year to actually pass a similar bill – even though the official fiscal note indicated that the numbers just didn't add up. Cooler heads ultimately prevailed in the Senate.
Now the idea is back, and its sponsors still insist that a 5.1 percent universal consumption tax can pay for a rebate and repeal of the personal and corporate income taxes.
But a new ITEP analysis shows that, in fact, the state sales tax would have to be more than 11 percent in order to make such a plan revenue-neutral – and the result would be a disaster for tax fairness.
ITEP's analysis, submitted as testimony before a House committee on Wednesday, shows that the poorest ninety-five percent of the income distribution would see a tax increase under this plan, while the very best-off five percent of Missourians would see a substantial tax cut. For more on this issue, visit the Missouri Budget Project.