States Seek to Increase Sales Tax Revenue Without Changing their Tax Rates


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Across the nation, state lawmakers wary of further increasing their general sales tax rates are looking (sensibly) for ways of broadening the tax base in order to maximize their "bang for the buck" from the existing tax rates. As a recent New York Times survey documents, half a dozen states are thinking seriously about expanding their sales tax to include previously untaxed services, from haircuts to hot-air-balloon rides.

From a policy perspective, this approach is a slam dunk: a good first principle for sales tax design is that your sales tax liability should depend only on how much you spend — not on what you buy. However, proposals to tax services in Maryland and Michigan have recently run aground because of politics, not policy.

But there is a much more straightforward (and more politically viable) sales tax base broadening strategy that virtually every state can tap right now. Interestingly, even the Wall Street Journal found it difficult to argue against a growing effort by states to enforce collection of their "use tax" (a companion to the sales tax that is designed to apply to goods and services purchased in other states).

From a policy perspective, this is every bit as sensible as taxing services: if you buy a book, the sales tax should be the same whether you buy it in a store or on-line. But the politics are substantially more promising in this case: among the parties most aggrieved by the use tax loophole are small, "bricks and mortar" businesses that collect sales taxes on all their purchases and face a clear tax-based disadvantage compared to Amazon.com and other Internet-based retailers.

In the wake of recently passed legislation in Colorado designed to encourage more taxpayers to pay the use tax on their own, more states will likely seek to replicate Colorado's approach.

 

 

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