NCPA - National Center for Policy Analysis

Sales Tax Neutrality

May 24, 2011

The typical state sales tax has two major features that prevent it from being a broad-based tax on consumer spending, says Alan Viard is a resident scholar at the American Enterprise Institute.

  • First, the typical sales tax exempts, or provides preferential rates for, groceries and other necessities.
  • Second, the typical sales tax applies primarily to sales of goods and exempts many types of consumer services.
  • The two features may overlap for some items; for example, housing and health care may be exempt from sales tax because they are necessities or because they are services, or for both reasons.

The exemption of necessities from sales tax is intended to serve the legitimate goal of easing the tax burden on low-income households.  This policy turns out to be an ineffective and undesirable way to promote that goal, but nevertheless, the policy clearly has a coherent motivation.  In contrast, the failure to tax consumer services has no defensible policy basis, despite its venerable pedigree in the history of sales taxation.  The disparate treatment of goods and services has been uniformly condemned by tax policy scholars because it creates economic inefficiency and complexity, says Viard.

Source: Alan D. Viard, "Goods versus Services: A Call for Sales Tax Neutrality," American Enterprise Institute, May 16, 2011.

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