A 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. 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 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. es. 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|Connecticut||X||Exemption repealed July 1, 2011.|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.Share