Governors Weighing Sales Tax & Income Tax

Posted on January 28, 2022

Governors Weighing Sales Tax & Income Tax

It’s not only taxpayers who are thinking about how to deal with taxes, but governors are also. They are brainstorming towards simplifying the federal tax system, and more importantly, looking to shift the tax system from that of income to consumption.

Both charging tax on income or on consumption has advantages and limitations. Even if taxing consumption encourages savings and investment, it is advantageous for the wealthy who earn much more than they spend. The NYTimes explains:

“The question of whether we should tax income or whether we should tax spending is really a proxy for a different debate,” said Joseph Henchman, vice president for state projects at the Tax Foundation, a conservative-leaning research organization. “Everyone agrees we’ll get more growth with consumption taxes. It’s just that some people prioritize fairness.”

Beyond citing economic growth, the governors and their supporters say their plans would help make their states more competitive in attracting employers and high-skilled workers, as well as simplify their tax systems, and curb pressure for more government spending.

For [Bobby] Jindal, [Republican Governor of Louisiana, and others] who are considering a presidential run in 2016, there are obvious political benefits to having a robust income tax-cutting record to present to conservative primary voters.

But Democrats say the approach would lead to cutbacks in education, health care, and other vital services while shifting relatively more of the tax burden to those who can least afford it.”

According to the National Conference of State Legislatures, sales taxes account for about 46 percent of state revenues in the US. Personal and corporate income taxes stand at about 42 percent, making it difficult for states with high personal and corporate taxes to shift to a consumption tax.

Apart from the problems of changing tax codes, governors also need to think about how their tax proposal will affect public opinion. Shifting to a consumption tax is not going to find favor with middle and lower-income families, who spend a large part of their wages and will need to pay more taxes than the rich. Upsetting a large part of the population is never good politics. Mr. Jindal explores the possibility, per the NYTimes:

“By focusing on sales tax revenue, Mr. Jindal has also opened up a fundamental issue in an Internet-heavy economy. Sales taxes were developed in an era when sales of physical goods dominated the economy, and they exempt many services, which now account for a majority of spending.

Hair spray is taxed, but not haircuts. So if states — or one day the federal government — want to shift toward a truly broad-based consumption tax, they would have to expand the definition of what should be taxable.

Officials in Louisiana have indicated that Mr. Jindal is at least open to looking at a broader sales tax that included some services.”

The complexity of charging taxes consumption on a wider scale makes it difficult to implement. Which services and items to charge taxes on and which to exempt is a difficult decision. Nevertheless, the positive is that possibilities are being explored by governors to help the economy up and running.