A bill has been introduced in the Idaho legislature that would require all sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. exemptions to be reviewed every five years and would make all new sales taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. exemptions automatically expire after five years unless they are extended by lawmakers.
This seems like a step in the right direction, assuming lawmakers actually take the review process seriously. Sales taxes should apply to all end-user purchases but states routinely exempt from taxation entire categories of consumption, such as services, clothing, and groceries. These exemptions distort the market by favoring certain types of purchases over others and, all else equal, force the tax rate to be higher. Thus, eliminating the exemptions has positive effects on the market as a whole and can allow lawmakers to lower the rate.
For an example of such sales tax reform, see our recent post on Pennsylvania Gov. Ed Rendell’s plan to broaden the sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. and lower the rate as part of his larger budget plan. While we always like to see lawmakers reconsidering the host of politically entrenched sales tax breaks, the Pennsylvania plan also reminds us to include some words of caution: by all means, eliminate sales tax exemptions on consumer purchases, but don’t tax business to business transactions. Doing so leads to double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. and comes with its own set of damaging economic distortions.
There is a similar bill in Idaho that would impose 5-year limit and mandatory review period on income tax deductions and credits.
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