The holiday weekend is almost upon us and many are getting ready for a weekend of family and celebration. Independence Day means firing up the barbecue, setting off fireworks, enjoying cold drinks, and wearing flag paraphernalia. It also means spending big: last year, Americans spent $6.52 billion for the Fourth of July. This year, after many pandemic-related restrictions have been lifted, the estimates are somewhat higher at $7.5 billion.
To celebrate the holiday in true Tax Foundation style, I decided to take a look at all the taxes consumers are likely to pay while shopping for the weekend. I will use Pennsylvania taxes as an example since I will be celebrating the holiday there.
A typical shopping list may look something like this:
| Product | State Tax Rate |
|---|---|
|
Hamburgers |
No tax |
|
Watermelon |
No tax |
|
Hot dogs |
No tax |
|
Potato salad |
No tax |
|
Smores |
No tax |
|
Cake |
No tax |
|
Flag T-shirt |
No tax |
|
Soda |
6% |
|
Beer |
$0.08 per gallon; 6% or 6% of 25% retail value |
|
Wine |
18%; 6% |
|
Bourbon |
18%; 6% |
|
Fireworks |
12%; 6% |
|
Cigars |
6% |
|
Source: Pennsylvania statute, Bloomberg Tax. |
|
In Pennsylvania, as in many other states, groceries are exempt from the sales tax. That means only ready-to-eat food is taxed. The Pennsylvania 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. rate is 6 percent. A 1 percent local 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. is added to purchases made in Allegheny County (Pittsburgh), and 2 percent local tax is added to purchases made in Philadelphia.
Several states include candy in their sales tax despite exempting groceries, but Pennsylvania is not one. While this may be a welcome carveout for many residents, it is not sound tax policy. A well-designed sales tax is levied on all final consumer goods and services; purchases made by businesses as inputs in the production process are exempt. A broader sales tax base is more effective, meaning it can raise the same revenue at lower rates.
Most states tax clothing, but not Pennsylvania, where all apparel is exempt except for: articles made from real, imitation, or synthetic fur “where the fur is more than three times the value of the next most valuable component material”; formal day or evening apparel; and sporting apparel and goods.
In contrast to candy, soda in Pennsylvania does not qualify for the sales tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. , which means consumers are paying sales taxes on it. If you are in Philadelphia, you will also pay an additional 1.5 cents per ounce of sugary or artificially sweetened beverages. For a 2-liter bottle, the additional soda tax comes out to a little more than $1. Philadelphia is one of seven cities in the U.S. levying excise taxes on soda. These taxes have generally failed to raise expected revenue, are highly regressive, and do not significantly decrease sugar or calorie intake.
The excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on beer is $0.08 per gallon in Pennsylvania. In addition, Pennsylvania levies the general sales tax on beer purchases. If consumers buy beer directly from the manufacturer, a use tax (often levied on craft beer purchased at breweries) is collected. The base is 25 percent of the retail price. Hence, a $5 beer would be taxed by levying the sales tax of 6 percent on $1.25. According to the Beer Institute, “Taxes are the single most expensive ingredient in beer, costing more than the labor and raw materials combined.” Research has shown that approximately 40 percent of the retail price of beer is dedicated toward covering all the applicable taxes.
Wine and liquor are taxed at 18 percent of the price paid by the consumer. This 18 percent excise tax has a long history, going back almost to the end of Prohibition. Though originally implemented as a temporary measure to raise revenue after the Johnstown flood in 1936, the tax was made permanent in 1951. And in addition to the excise tax, Pennsylvania levies the sales tax on liquor and wine.
No Fourth of July is complete without fireworks. In Pennsylvania, the tax is 12 percent, in addition to the sales tax. Pennsylvania’s 12 percent tax was built into Act 43, which legalized the sale of consumer-grade fireworks statewide in 2017. A portion of the law was recently reversed in the court case Phantom Fireworks Showrooms, LLC v. Wolf which outlawed the sale of aerial fireworks at roadside tents but continued to allow such sales at permanent buildings. Both iterations of the law snuff out the state’s historical practice of selling consumer-grade fireworks tax-free to nonresidents. To sell fireworks in Pennsylvania, retailers must obtain a permit, which costs $20,000.
If you are so inclined, you might celebrate the holiday by lighting up a cigar—and celebrate that your state, plus Florida, are the only states that do not levy an excise tax on traditional cigars. All other states and the federal government levy an excise tax on cigars.
Pennsylvania is the example we’ve chosen to enumerate the many additional ways you’ll be spending on Independence Day, but it’s not alone—all states levy some or more of such taxes. Many of those described here run afoul of the core tax principles of transparency and neutrality, making it difficult for Americans to accurately determine what they pay in taxes. That is an unwelcome Fourth of July firecracker that policymakers should reconsider when debating future tax programs.
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