The Logic of Sales Tax vs. Income Tax
I believe that those of us who are fortunate enough to enjoy relatively high incomes should pay a greater share of public expenses.Most Democrats believe, almost as an article of faith, that an income tax accomplishes this purpose. Forty-nine percent (49%) of Missouri’s revenue is generated by the income tax. We assume that those with higher incomes are being taxed relatively more than those with lower incomes.
But in order for higher-income Missourians to shoulder a larger share of the tax burden, the income tax must be progressive––that is, the rate must rise as incomes rise. Missouri’s tax rates do rise with income, from zero to 6%.
What most people do not realize, however, is that any family making more than $9000 annual taxable income is taxed at the same rate of $315 plus 6%. By most definitions, that is a “flat”, regressive tax. If you make $1000 taxable income, you pay $16. If you make $9000 taxable income, you pay $315 in income tax. But for every Missouri family with taxable income of more than $9000, the same tax rate—$315 + 6%—is applied. In 2007, 13% of Missouri families made less than $20,000 in total income (or roughly $10,000 in taxable income). As a result, approximately 85-90% of all families are subject to exactly the same tax rate.
If we look at the amount of state sales tax paid in 2007, we find that 6.3% of the incomes of those earning the lowest 20% goes to pay sales tax, while those with an average income of $100,000 pay only 2.7% of their income in sales tax. The current sales tax is definitely regressive. This regressivity could be eliminated or lessened by rebating or “prebating” the sales tax paid by Missourians below the poverty level.
Finally, if we look at Missouri’s total tax burden—including income, sales, excise, and property tax––the tax burden currently falls most heavily on those at the bottom of the income ladder. Those with low or moderate incomes pay a larger proportion of their total incomes in state taxes. In 2007, the bottom 40% of families (with incomes under $30,000) paid 9.6% of their income for all state and local taxes, while the top 20% (making more than $77,000) paid less than 8% of their family income in taxes. Even more importantly, the top 1%–those families with incomes over $387,000 and averaging over a million dollars per year––paid only 5.8% of their income in taxes. Warren Buffett hit the nail on the head: he certainly pays more taxes than his secretary, but the rate that his secretary pays is higher!
The argument for tax progressivity—that those with higher incomes should pay disproportionately more––is based upon the concept of discretionary income. A family with a modest income must spend all of its money on necessities, while a high-income family can cover necessities and still have enough money (or in some cases, a lot of money) for discretionary or luxury purchases. I support the argument for taxing discretionary income at a relatively higher rate than “necessity” income.
To summarize, the current income tax structure in Missouri is not progressive. The current sales tax is definitely regressive. And lower-income Missourians pay a larger portion of their total income for combined state taxes than do higher-income Missourians. My conclusion is that the tax structure in Missouri is in serious need of revision.
So why would I consider replacing Missouri’s income tax with a sales tax?
I believe the idea is worthy of consideration IF certain conditions can be met. I do not believe that all questions have been answered or that all implications are as yet understood. However, my long-standing belief that it is possible to move toward a sales tax-dominated revenue stream remains intact. However, to replace the 49% of Missouri’s revenue, currently generated by the income tax, the sales tax would have be extended to virtually all retail goods and services.
The sales tax is a tax on consumption, not on work. Those who spend more money and buy more things pay more taxes. The absence of personal and corporate income tax provides an incentive for businesses to move to Missouri, thus creating more jobs. A sales tax is understandable; it is much less prone to fraud and abuse than an income tax; it is easier to manage; and it would be universal—applied to virtually all retail sales and services. It would eliminate exemptions and loopholes. It would tax illegal or hidden income when that income is used to purchase goods or services. It would decrease tax cheating, which currently deprives the state of substantial revenue. And…if it includes an appropriately crafted, monthly (p)rebate to low-income Missourians, it could indeed be more progressive than our current state income tax.
For these reasons I remain committed to studying the potential for replacing the state’s income tax with an expanded sales tax. HB318, which I sponsored and which passed out of committee, would have directed the Department of Revenue to study seventeen separate issues and to submit a report to the general assembly by January 1, 2011, detailing the methods by which a sales tax could replace other state taxes. This bill would have laid the groundwork for the measure to go to a future vote of the people and transition to a sales-tax-only revenue mechanism.
My bill was different than the bill ultimately passed by the House (HJR36) and sponsored by Rep. Ed Emery. HJR36 doesn’t study the possibility of replacing the income tax––HJR36 does away with individual income, corporate income, and estate taxes and it sends it directly to a vote of the people. It replaces all other state taxes with a sales tax of 5.11%, subject to a one-time rate adjustment to insure its revenue neutrality. It includes a sales tax rebate based on the number of members in the family and the federal poverty level guidelines to offset the sales tax on basic necessities. It also prematurely places the issue on the November 2010 ballot.
That being said, I did vote in favor of HJR36. My rationale? To have a seat at the table with a credible hand to further develop its provisions, should it ultimately pass the Senate and move to a vote of the people or be re-introduced next session.
I have three overarching concerns with HJR36 as passed out of the House:
- A measure of such importance should not go to a popular vote so quickly without the necessary time and study to understand its intended and unintended consequences.
- As the bill is written, the sales tax rate would be calculated on a one-time-only basis to be revenue-neutral, meaning that it would raise the precise amount of revenue generated by income and other taxes at a given point in time. This provision could become a permanent mechanism to starve the state of future revenue to serve its citizens.
- A sales-tax-only revenue stream should include a monthly—not annual––(p)rebate to low-income Missouri families to offset the higher proportion of disposable income they pay for necessary goods and services. HJR36 does not address this issue in sufficient detail nor does it insure it to my satisfaction.
Where does HJR 36 stand?
The bill passed the House on a 149-65 largely partisan vote and was sent to the Senate. If passed in the Senate, it would go to the voters in November 2010 (or earlier if the governor calls a special election).
As per the resolution, the ballot would read:
A “yes” vote will amend the Constitution of the State of Missouri to eliminate individual and corporate income tax, and state sales and use tax and to enact a single, revenue-neutral sale tax of 5.11% on new purchases of goods and services, and to exempt property purchased for business or investment from the sales tax, and to provide each qualified family with a sales tax rebate to ensure no state sales tax is paid on purchases up to the federal poverty level.