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The Sales Tax Base Makes Headlines

2 min readBy: Richard Morrison

It started out as a somewhat obscure issue, but the question of how wide or narrow a state’s 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. base is seems to be a newly hot topic. Earlier this week my colleague Joseph Henchman blogged about “California's (Not Unusual) Shrinking Sales Tax,” as described in a new report by the California Legislative Analyst's Office (LAO). It seems that since 1979, the portion of an average Californian’s purchases that are subject to the 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. has declined from 53 percent to only 33 percent. With two-thirds of sales going untaxed, the rate on everything else is much higher than it would otherwise have to be.

This morning, Wall Street Journal reporter Erica Phillips had a story describing the same phenomenon, and noting that the long-term erosion of 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. has not been confined to the Golden State:

Californians are increasingly spending a larger share of their incomes on nontaxable items, such as health care, rent and education—which some experts say end up costing the state revenue.

It's an issue playing out throughout the country, with some experts calling for an expansion of sales tax to include services and other items that are currently exempt. In some states, clothing is exempt from sales tax

Joe Henchman, of the Tax Foundation, a nonpartisan think tank in Washington, D.C., said many state and local governments are counting on income taxes to make up for slowing growth in sales-tax revenue—but it isn't practical, he said. "If you don't want the tax system to discourage economic growth, then we shouldn't rely on income taxes any more than we have been," he said.

Public radio listeners also got an earful on the issue this morning when Krissy Clark’s story for Marketplace Morning Report hit the airwaves:

Way back in the 1930s, sales taxes got popular as a way to raise emergency revenue for states. And the way sales taxes were designed reflected the economic realities of the times. “They generally only taxed goods,” says Joe Henchman, a public policy analyst at the Tax Foundation in Washington, D.C. “Because in the Great Depression that's what our economy was — it was a goods based economy.”

Nowadays, however, we spend less on goods, and more on services — everything from health care to rent to education to going to the nail salon. And yet, in all but three states (New Mexico, Hawaii and South Dakota), services are not taxed under the sales tax.

“That's why states have had to raise the rate over the last 30 or 40 years every so often, in order to keep raising the same amount of revenue,” says Henchman.

More material on sales taxes is available here; an archive of California-related publications is here.