A tax expenditure is defined as a departure from the default tax code that decreases total taxes paid. They are called tax “expenditures” because they resemble government spending.
Although a majority of...
A sales tax that best minimizes economic distortions is one that taxes all final retail sales once and only once. However, most states depart from this by not taxing services while taxing business inputs, meaning some goods have no tax on them while others have multiple sales taxes. And of course, in many states there is a tendency to avoid tax on "necessities."
Putting legislators in the awkward position of deciding which goods and services are luxuries and which are necessities-not to mention deciding which have educational, cultural or artistic value-can cause discord and confusion. The more things are exempt, the more special interests become determined to exempt their good or service, thus driving up the rate on everything else to maintain the same amount of revenue.
One example of this is clothing. 8 states partially or fully exempt clothing from the sales tax. Some clothing, however, is taxed, as not all clothing purchases can properly be considered necessities. Retailers and consumers thus face rules defining the difference, adding complexity to the tax code. At the same time, clothing purchases are a large part of retail purchases, meaning exemptions lead to large revenue reductions; states generally do not cut spending, so taxes are likely to rise elsewhere. Connecticut recently ended its exemption while New York has temporarily reduced theirs.
Table: Sales Tax Treatment of Clothing
as of January 1, 2012
|Alaska||No Sales Tax|
|Connecticut||X||Exemption repealed July 1, 2011.|
|Delaware||No Sales Tax|
|Massachusetts||X||$175 or less.|
|Montana||No Sales Tax|
|New Hampshire||No Sales Tax|
|New York||X||$55 or less. Rises to $110 or less on April 1, 2012.|
|Oregon||No Sales Tax|
|District of Columbia||X|
Source: Tax Foundation; Commerce Clearing House.
NOTE: A previous version of this post erroneously included Texas in the exemption column.
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