Tax Analysts Blog
The Best Tax Policy Proposal of the Year
Posted on Oct 21, 2015
I spend a lot of time criticizing bad state tax policy. And my writings are usually imbued with negativity. Not today. There is a proposed regulation in Iowa (ARC 2178C) that should give hope to those who care about the principles of sound tax policy. It would expand the number of purchases that are exempt from sales tax in the state. The importance — from a good policy perspective — of this proposal cannot be understated.
State tax systems are fraught with laws that defy economic sense. I will spare readers the litany of bad tax policy. Yet, be assured that the sales taxation of business inputs is one of the most significant tax policy failings of the last century.The sales taxation of business inputs is rarely, if ever, a good policy. The sales tax should fall on final personal consumption.Taxing what business entities buy is wrong for two important reasons. First, businesses will try to pass the tax they pay on to their customers in the form of higher prices. Almost all succeed. The customers incur the tax burden without knowing it. That’s wrong. Even for those companies that don’t pass the tax along to customers, some person is unwittingly paying the tax. Second, when consumers pay higher prices, they are sometimes subject to tax. Thus, the sales tax is imposed on a value that includes previous sales tax. You may know it as cascading or pyramiding. But it’s wrong.
And that’s why the Iowa proposal is so refreshingly right. It would expand the types of business purchases exempt from sales tax. My understanding is that there is a debate in Iowa about whether the Department of Revenue can expand the number of exempt business purchases administratively. I don’t know the answer to that. I do know that the proposal represents sound tax policy.
It also illustrates some bold thinking on the part of the DOR. Taxation of business inputs developed cynically over the last 90 years. Politicians like taxing business this way precisely because the burdens are obscured. Moreover, the reliance on business sales taxes (50 percent of all sales tax receipts nationwide) has gotten costly. The Iowa proposal will cost the state about $40 million a year. Politicians who like hiding the burdens of paying for government are already complaining about the costs.
That political cynicism that defines sales taxation of business is difficult to overcome. Kudos to the DOR for trying.