Over the past few years a lot of states have been wrangling with companies like Amazon over collecting sales taxes on online purchases.
As people increasingly buy more stuff online, states have been losing out on sales tax revenue, and the price differential is hurting traditional brick-and-mortar retail stores by making online goods seem cheaper.
Amazon is supposedly working out some *software issues* that will eventually allow it to collect sales taxes for PA, but until then people have to keep track of their online purchases and figure out how much sales tax they should’ve been paying.
This is obviously an unwieldy and terrible way of sales taxing, and it’s only going to get worse over time.
Fortunately, this is not the only way to do consumption taxes. There is actually a much easier way to do it that could make sales taxes steeply progressive, and end politically-favored tax exemptions in the same stroke.
Here’s the explanation from my Patch column:
Currently, the state exempts dozens of different kinds of goods and services from the sales tax. Some of these are necessities like food and clothing, but other exemptions are clear handouts to politically-favored industries. Some of my favorite pointless tax exemptions are out-of-state horse purchases, trout, candy and gum, and helicopters.
Because the special interests and their politician friends have turned the tax code into Swiss cheese, the sales tax rate is higher than it has to be. If the state legislature eliminated these exemptions, the sales tax rate could be lowered. Ed Rendell wanted to lower the sales tax to 4% by ending some of these politically-protected tax exemptions, but he was opposed by business interests, including the Lehigh Valley Chamber of Commerce, because it increased revenue.
There is an easy solution to this political problem, which would also make the sales tax much more progressive.
Instead of taxing sales at the point of sale, the state would tax your consumption – the difference between your income and your savings. On their state tax forms, taxpayers would report their total income and their total savings. The difference, their consumption, would be taxable at the sales tax rate.
To make it progressive, I would exempt the first $25,000 of consumption, and tax consumption over $100,000 at progressively higher rates.
Getting rid of the sundry exemptions for specific industries would allow the state to keep the consumption tax rate very low, while preserving HB1776’s goal of a broad tax base. It would also encourage high earners to save and invest, instead of splurging on pure luxury consumption and status competition. With a progressive consumption tax, taxpayers would benefit from useless status competition between the top earners.
I like this idea because it wouldn’t matter whether you bought something online or in a store, and the generous deduction would ensure that people who are really poor and spend their whole income wouldn’t end up paying taxes on necessities like food and clothing.
If you are interested in learning more, here is a very good introduction to the progressive consumption tax from economist Robert H. Frank.