How to Make PA’s Sales Tax Progressive

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Over the past few years a lot of states have been wrangling with companies like Amazon over collecting sales taxes on online purchases.

As people increasingly buy more stuff online, states have been losing out on sales tax revenue, and the price differential is hurting traditional brick-and-mortar retail stores by making online goods seem cheaper.

Amazon is supposedly working out some *software issues* that will eventually allow it to collect sales taxes for PA, but until then people have to keep track of their online purchases and figure out how much sales tax they should’ve been paying.

This is obviously an unwieldy and terrible way of sales taxing, and it’s only going to get worse over time.

Fortunately, this is not the only way to do consumption taxes. There is actually a much easier way to do it that could make sales taxes steeply progressive, and end politically-favored tax exemptions in the same stroke.

Here’s the explanation from my Patch column:

Currently, the state exempts dozens of different kinds of goods and services from the sales tax. Some of these are necessities like food and clothing, but other exemptions are clear handouts to politically-favored industries. Some of my favorite pointless tax exemptions are out-of-state horse purchases, trout, candy and gum, and helicopters.

Because the special interests and their politician friends have turned the tax code into Swiss cheese, the sales tax rate is higher than it has to be. If the state legislature eliminated these exemptions, the sales tax rate could be lowered. Ed Rendell wanted to lower the sales tax to 4% by ending some of these politically-protected tax exemptions, but he was opposed by business interests, including the Lehigh Valley Chamber of Commerce, because it increased revenue.

There is an easy solution to this political problem, which would also make the sales tax much more progressive.

Instead of taxing sales at the point of sale, the state would tax your consumption – the difference between your income and your savings. On their state tax forms, taxpayers would report their total income and their total savings. The difference, their consumption, would be taxable at the sales tax rate.

To make it progressive, I would exempt the first $25,000 of consumption, and tax consumption over $100,000 at progressively higher rates.

Getting rid of the sundry exemptions for specific industries would allow the state to keep the consumption tax rate very low, while preserving HB1776’s goal of a broad tax base. It would also encourage high earners to save and invest, instead of splurging on pure luxury consumption and status competition. With a progressive consumption tax, taxpayers would benefit from useless status competition between the top earners.

I like this idea because it wouldn’t matter whether you bought something online or in a store, and the generous deduction would ensure that people who are really poor and spend their whole income wouldn’t end up paying taxes on necessities like food and clothing.

If you are interested in learning more, here is a very good introduction to the progressive consumption tax from economist Robert H. Frank.

This entry was posted in Budget.

5 Responses to How to Make PA’s Sales Tax Progressive

  1. This is a great idea. It could be applied at the federal level with a per capita redistribution to state and local governments, eliminating all other personal income tax regulations and processes other than withholding. I would suggest that "savings" should be supplemented to include certain investments that are not savings but have a benefit for the country as a whole, such as middle-class size home mortgages and college tuition.

    • jongeeting says:

      I really don't like the exemption for home mortgage interest at the federal level. It's a regressive tax break, because it encourages people to buy ever larger homes, which I think is pretty awful for the environment. Housing is one of the key things I have in mind when I think about status competition at the top.

      • IKE says:

        @JonGeeting, I agree that larger homes are a problem but buying a home is a step away from poverty. Renting can be a viscous cycle for a lot of individuals in poverty. I believe that they should keep the exemption but only for one home per claim. We can reform without gutting.

        • jongeeting says:

          Why not just convert the tax exemption to a credit, and give everybody the same amount of subsidies toward a home?

  2. Sten Wilson says:

    First point is you will still have to deal with individual jurisdictional tax differences as your proposition slams the door on constitutional issues at both the state and Federal levels. We choose to live in different states for different reasons. One of them being tax. Why should someone in NH which has no sales tax be required to start paying because someone in CA thought a Federal sales tax would be a good idea. But then how do you distribute the tax fairly?

    Our current sales tax system works well and with progressive integration of modern technology which allows for states to automate their tax remittance procedures while simultaneously eliminating the costly legacy procedures. Technology available freely on the Internet easily Integrates with most shopping cart platforms seamlessly collecting proper tax amounts based on item classification and exempt status. Now any merchant can easily process sales tax due saving their customers from the fear of being audited for tax evasion. 24 states have simplified their tax definitions, rates and remittance requirements streamlining tax processing for merchants and governments. Did I mention this technology is FREE.

    We do not need to sacrifice our constitutional rights and burden government anymore with legacy procedural tax schemes. We embraced the Internet years ago when it was in its infancy, and now that baby has matured offering technology that can easily calculate sales tax for any of the 10,787 tax jurisdictions throughout the United States.

    Furthermore, an end to evasion is necessary and will permit states to rid harmful taxing schemes created from the demand of evaded tax obligations made possible via the Internet. The state of CT recently enacted the largest tax increase in state history to make up for un-remited sales tax revenue on Internet transactions. The state of West Virginia is intent on scrapping it's grocery tax in favor being granted it's right to collect sales tax legally due.

    As long as citizens continue evading their tax obligations other harmful for invasive tax schemes will continue to manifest. Schools, libraries, fire services, police protection, state funded medicare, infrastructure and so much more all require sales tax dollars to fund. If not sales tax dollars then ever increasing non negotiable property and income taxes will continue to invade savings rates across the country.

    The Marketplace Fairness Act simply provides states the choice to collect sales tax on out of state transactions while continuing to maintain our constitutional choices as citizens. Most important, it streamlines a legacy system burdened by bureaucracy replacing it with modern technology eliminating waste and providing a greater percentage of every dollar collected to be utilized for services we demand. I think we would all agree that we would rather voluntarily choose to pay a little sales tax when we can afford it versus having more deducted from our paychecks.