NCPA - National Center for Policy Analysis

Trend No. 4: Sales Tax Increases

June 26, 2012

First adopted in the 1930s during the Great Depression as property tax collections plummeted, the base of sales taxes have eroded over time.  Except in a few states, sales taxes generally apply to goods and not services, and often exclude even a significant number of goods (groceries, clothing, medicine, gasoline, sales tax holidays, etc.), says Joseph Henchman, an attorney and policy analyst at the Tax Foundation.

Because of these exclusions and exceptions, sales tax revenues as a function of personal income have dropped precipitously.  Consequently, states have routinely increased their sales tax rates in order to make up for the diminished bases.  This trend has continued through the recession.

  • Among all state governments, roughly a third of their revenue is raised from sales taxes.
  • Professor John Mikesell, however, has found that sales tax base breadth has declined from 55 percent of personal income in 1970 to just 35 percent today.
  • States have responded by raising sales tax rates: 13 states increased sales tax rates between 2007 and 2011.

While sales taxes can be reformed by broadening bases and lowering rates, this has proven politically difficult.  Many of the sales tax exemptions and exclusions are popular precisely because they are so widely-used and make up a large share of spending.

The difficulty in reforming sales taxes by broadening the base (in lieu of a rate increase) can be seen in the experience of Maryland.

  • In Maryland in 2007, officials proposed expanding its sales tax to a number of services in addition to the standard taxable goods.
  • However, they deliberately excluded some of the more politically powerful ones (such as legal services, accounting services, medical services and housing sales).
  • This prompted representatives of other service industries to rush to Annapolis to make the case that their services were just as vital as the excluded ones.
  • In the end, the sales tax expansion became just a new tax on computer services, which in turn was repealed after industry pressure.
  • In 2011, a Georgia proposal died after similar controversy.

This example illustrates the fact that general rate increases remain much more politically viable than base-broadening efforts.  Therefore, this trend will likely continue through the near future.

Source: Joseph Henchman, "Trend # 4: Sales Tax Increases," Tax Foundation, June 12, 2012.

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