Philadelphia Sales Tax Increases Tomorrow; State Debates Expanding the Sales Tax Base

October 7, 2009

Tomorrow the sales tax rate in Philadelphia will increase from 7% to 8%. The city already levies a 1% sales tax on top of the state’s 6%, but tomorrow that extra 1% increases to 2%. The city recently received approval from Harrisburg to temporarily increase its sales tax for 3 years. Governor Rendell and Mayor Nutter insist the sales tax increase is temporary, but we’ll see in 3 years.

The state of Pennsylvania is also trying to expand its sales tax base to include entertainment, such as tickets to plays, museums, zoos and concerts. On cue, the special interests have shown up to ensure that they keep receiving special treatment, and unfortunately it looks like legislators are caving.

A properly structured retail sales tax applies to all end-user purchases, even politically popular industries like the arts. For a given revenue amount, bestowing a tax-free status on a particular set of goods means that the sales tax on the remaining taxable purchases (or some other tax) must be higher to compensate. These higher taxes will increase economic distortions, damaging the economy.

While ideally we would like to see a sales tax base expansion offset by a reduced sales tax rate, if a state must raise additional revenue, expanding the sales tax base is a much better way to raise revenue than say, a rate increase, or the other option being considered in PA: punitive taxes on politically unpopular groups and activities like natural-gas drilling, smokeless tobacco, and cigars.

The proposal to single out smokeless tobacco and cigars is receiving a lot of opposition as well, and rightly so. The difference between the opposition to the sales tax base expansion and the opposition to the tobacco tax is this: the arts people want to continue receiving special treatment that other consumer products don’t receive, while consumers and sellers of smokeless tobacco and cigars, which are already fully taxed under the retail sales tax, are trying to avoid being singled out for additional targeted, punitive taxation.

Note that some say that tobacco should be singled out to compensate for costs imposed on society from its consumption. We respond to these and other frequent claims here. Read more on smokeless tobacco taxes here.

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