An unusual new report from the Trump administration’s Council of Economic Advisors (CEA) suggests that states consider drastically raising their sales taxes and using those new revenues to pay for repealing taxes on corporate and personal income.
The plan, if enacted by every state, would represent the single largest legislated transfer of wealth from the working class to the rich in the nation’s history. Working-class families would face dramatic tax increases while the nation’s wealthiest families would see their state tax bills plummet.
Under the CEA’s proposal, states would repeal their corporate income taxes, personal income taxes, and the portion of any sales tax paid by businesses, all under the guise of pursuing a trickle-down theory of economic growth. The report generously acknowledges, however, that “states have to collect tax revenue somehow,” and suggests they do this by drastically reworking their sales taxes to apply to a wide range of purchases that are nearly always exempt from tax today—like child care, medical care, and education.
Simply put, the CEA is recommending that states saddle young families with new taxes on their child care bills and seniors with new taxes on their out-of-pocket medical expenses, along with a host of other everyday purchases, and then use that revenue to drastically cut taxes for corporations and individuals with very high incomes. At its core, the plan is entirely at odds with the affordability concerns that the American public desperately wants to see its leaders address.
In the CEA’s telling of things, its plan could be realized with a headline sales tax rate in the range of 6.2 to 8 percent. If this sounds too good to be true, that’s because it is.
The right-leaning Tax Foundation, which is cited repeatedly in the report, was quick to issue a rebuttal pointing out that the math underpinning these estimated tax rates is deeply flawed. Of particular note, the CEA assumes that states would begin illegally taxing a wide range of purchases they are prohibited from taxing under federal law, such as airfare and internet access, as well as transactions that are not feasibly taxable such as free services provided by nonprofits.
ITEP has rebutted similarly flawed analyses bubbling up from the states on occasion, but it is jarring to see this error repeated in a report by the body that has traditionally housed the finest economic minds serving in a presidential administration.
Putting aside any controversy over the exact sales tax rate that would be needed to replace personal and corporate income tax collections, there is no question that this tax swap would lead to dramatically higher taxes on working and middle-class families.
While very affluent families have the luxury of tucking away most of their incomes into savings, low-income and middle-class families spend most or all of their income making ends meet. This is why taxes on consumer spending, such as sales taxes, tend to ask far more of working-class families than the rich. ITEP research has shown that middle-income families nationally pay more than nine times as much of their income in state and local sales taxes as the richest 1 percent.
At the state level, the U.S. faces an epidemic of inequitable tax policy tilting in favor of the rich and against the working class. In roughly 40 states, high-income families are already being taxed at lower rates than everyone else. The CEA’s plan would supercharge this imbalance, significantly raising taxes on most Americans to pave the way for a tried and failed trickle-down theory premised on deep tax cuts for the rich and large corporations. With this proposal, the administration is doubling down on its tariff policy to raise costs for everyday Americans. If, as the president has suggested, the affordability crisis is a “hoax,” his administration seems intent on making it a reality.
