During several panel discussions at this year's National Taxpayers Conference, policy experts advised state taxpayer associations about common problems associated with the sales tax, and urged states to be wary of so-called "reforms." The annual conference, held this year in Washington, D.C., is comprised of 23 state taxpayer associations, including CalTax.
Dr. John L. Mikesell, a professor at Indiana University and an expert on sales tax, said the biggest problem with the tax is that "you don't know how much sales tax you pay." He explained that tax pyramiding and other problems make it difficult for consumers to understand how much they pay. Dr. Mikesell said states have incorrectly defined their sales tax base – states have narrowed the tax base too much and have set rates that are too high, he said.
Many states "act like Soviet central planners" with exemptions and decisions about "good" vs. "bad" business purchases, Dr. Mikesell said. He also noted that when states choose to enact sales tax holidays and exemptions for food and clothing, they erode their base, and as a result, many states have had to increase the tax rate to generate the same amount of revenue.
Dr. Mikesell said the sales tax should have the broadest possible base, and once the base is defined, the lowest possible rate should be levied. The sales tax, he argued, is a reasonable standard to measure consumption, because in a market system individuals decide what they can spend.
With regard to imposing sales tax on services, Dr. Mikesell opined that sales tax should not be applied to business inputs, and that services purchased by households may be something to consider. Other tax experts at the conference argued that a sales tax on services is wrong in theory and impractical.
David Brunori, professor of public policy at George Washington University and a contributor to State Tax Notes, argued that when states began imposing the sales tax during the Great Depression, it was meant to be temporary. However, states have continued to rely on the tax, and as they seek to raise additional revenue by taxing services, economic distortions take place.
Professor Brunori said typically, most professional services and business inputs will be exempt from taxes on services. What tax administrators are left with are household services and small businesses, many of which are cash-run businesses. He said these businesses are much more difficult to audit, because it is easier to manipulate cash records. The professor also opined that state tax auditors may face physical harm when entering certain cash businesses, such as tattoo parlors and motorcycle repair shops.
Lowell Kalapa, president of the Tax Foundation of Hawaii, noted that the rate of Hawaii's general excise tax, which is similar to a sales tax, is only 4 percent. However, because the sales tax applies to business inputs – such as rental leases and cash register tape – the tax has a pyramiding problem that increases consumers' costs. He estimated that if the higher costs were factored into the rate calculation, the rate would be closer to 9 percent.
In other news:
Top MTC Official Says Some Arrangements Still Linger Between California and MTC. It appears that California still has some lingering arrangements with the Multistate Tax Commission (MTC), according to the commission's top official. During a forum discussion at the National Taxpayers Conference, MTC Executive Director Joe Huddelston said that while California is no longer a dues-paying member of the commission, the state must determine if it still will participate in various MTC programs, such as the commission's nexus program.
The Franchise Tax Board is expected to address this issue at its September 5 meeting. According to FTB, there are two types of involvement with the MTC – "sovereignty members," which financially support the purposes of the MTC through dues; and "associate members," which share purposes and goals of the MTC and participate in certain programs for a fee. MTC still considers California an MTC associate member, despite California's withdrawal as a dues-paying sovereignty member.
August 31, 2012
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