Tax Analysts Blog

Eliminating the Sales Tax Is a Very Good Idea

Posted on Oct 23, 2013

There is much talk in Rhode Island about repealing the state's 7 percent sales tax. It is a very good idea. Eliminating the sales tax would likely draw customers from the rest of tax-happy New England and spur retail investment. That could lead to an overall economic boom.

To be sure, the sales tax is a good tax. Administration and compliance are easy. It raises a lot a of money (nearly $800 million in Rhode Island alone). And people are used to paying it; it is ingrained in our purchasing psyche. Moreover, economists have long favored consumption taxes over income and capital taxes. But the general sales tax has problems. It suffers from a shrinking base. States do not tax most services, real estate, intangibles, and so-called necessities -- indeed, only about half of what we consume is subject to sales tax. Then there is the problem of remote sales and e-commerce. Trying to tax online purchases will never be easy. Finally, and most importantly, the tax is decidedly regressive. Poor people pay more of their income in sales taxes than rich people.

Repealing the sales tax will be difficult. Bad subnational taxes (like those on corporations and estates) that raise little money are difficult to repeal. Eliminating a not-so-bad tax that raises a lot of money will be a challenge. But ending a tax that preys on the poor and is increasingly difficult to collect may provide the economic boost Rhode Island needs.

Read Comments (3)

emsig beobachterOct 23, 2013

I disagree with your diagnosis of the shrinking base of the sales tax. The
shrinkage is partly due to changing demographics but primarily due to inertia;
and, a wish to relieve the low income families of a tax burden.

As a number of economists have observed, the sales tax base is shrinking
because of the difficulties involved in imposing use tax on items purchased
through catalogues, online, etc. where the seller has no nexus in the state.
Another factor in the shrinkage of the sales tax base is overcoming the inertia
of not taxing services purchased by consumers. Consumption of services is an
increasing share of household consumption expenditures and exempting these
purchases shrinks the tax base. Furthermore, a number of states, in their
attempt to reduce the tax burden on low income households by exempting food
purchased for home consumption from sales taxes. While this a significant
benefit for low income households, it also relieves non-low income households
of the sales tax on their tinned caviar. Remember, law in all its majesty,
prevents the rich and poor alike from stealing bread and fuel and from sleeping
under bridges. Exemption of food purchased for home consumption makes the
middle income and upper income groups "free riders" in the attempt to relieve
the low income groups of a tax burden. In addition, the exemption of food
purchase for home consumption usually results in an increase in the rate on
other consumption expenditures -- an upward spiral in tax rates.

I'm not sure I necessarily agree with your position that the sales tax is a bad
tax because of its regressivity. First, the low income households should pay
some taxes so that they realize that government services and benefits are not
free. Also, does the exemption of the items listed in your blog from the sales
tax base help the low income families more than inclusion of all or most of
those items in the tax base and the additional revenue being used to fund
services and programs that help low income families? If the loss of revenue
resulting from narrowing of the sales tax base results in increases in personal
and corporate income taxes then the economic harm could be significant to the
state could be significant.

In conclusion -- I do have other things to do -- I would not fret that the
sales tax itself is regressive if the overall state tax system is proportional
or slightly progressive; and, that the revenues are spent efficiently and there
are programs and services in place to aid the low income population.

1. Expand the sales tax base by eliminating many exemptions and exempt business
to business sales.
2. Use additional proceeds to aid low income families3. Implement a new tax
whereby all adult females will self assess themselves on their charms and pay a
progressive tax accordingly. All adult males will self assess themselves on
their virility and also pay a progressive tax accordingly. Through the magic of
electronics, the results could be made public. The drawback to this tax scheme
is that it would compete with private online personal matching services. But,
these services are not taxed anyway.

Your avid reader,

Emsig Beobachter

David BrunoriOct 25, 2013

Emsig, I agree! We should tax services, remote sales, (and necessities). And
personally, I would expand the base and then repeal the income tax. But if you
can't fix the sales tax, we should think about jettisoning it.

emsig beobachterOct 27, 2013

David, the problem with almost complete reliance on income taxes as the main
source of revenues for state governments is the volatility of these taxes
coupled with the statutory and/or constitutional requirements in most stats to
balance their budgets on an annual or biennial basis. I doubt that state
legislators have the political will to allocate a significant portion of their
general fund revenues to "rainy day" funds to assure that services can be
provided without drastic cuts when recessions hit.

Your devoted reader,

Emsig Beobachter

P.S. Tell Marty Sullivan I enjoyed reading the article about him in the
Business section of the Sunday Washington Post

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