August 9, 2013

Policy Shop: Time to Tax Services, Not Just Sales

media mention

Original Post

by David Callahan
August 9, 2013

It’s no secret that sales taxes are a regressive way to raise revenues. And the heavy reliance on such taxes across the country explains why state tax systems tend to clobber the poor while asking little of the rich. 

But here’s something that most people don’t know: Even sales taxes themselves are designed unfairly, taxing the sale of products but not the sale of services. If you go to Walmart and buy a flat panel TV, you’ll pay sales taxes on top of the price. But if you go to a dentist to get your teeth whitened, you won’t pay any tax on that service. 

Sales taxes were first imposed in most states during the 1930s through the 1950s in an era when the modern service economy did not yet exist. It’s fair to say that most policymakers back then never imagined that Americans would spend so much money on stuff like cosmetic surgery, pool maintenance, massages, lawyers, landscaping, pet grooming, life coaching, and on and on. 

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Apply similar math across other states, and you start to understand the recurrent fiscal crises faced by governors over the past two decades. You also understand why, in some states, low-income residents literally face twice the tax rate as the affluent. As a report by the Institute on Taxation and Economic Policy found earlier this year:
The average overall effective state and local tax rates by income group nationwide are 11.1 percent for the bottom 20 percent, 9.4 percent for the middle 20 percent and 5.6 percent for the top 1 percent. 
In some states, the poor pay four times the rate. Again, the problem is not just over-reliance on sales taxes by states. It’s the narrow and archaic way those taxes are structured. 
 

Read the rest at Demos website.


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