Published January 26, 2006 in issue 0504 of the Hook

BY DAVID SHREVE [email protected]

Delegate Ben Cline of Amherst [R-Rockbridge] has proposed a bill to establish a sales tax holiday in August for the purchase of school supplies and clothing. Other members of the Virginia General Assembly have submitted similar proposals, and over a dozen states have already instituted similar holidays in a variety of forms.

This legislation would, indeed, offer a break for many poor and working class parents. Although wealthier citizens are usually better positioned to time their discretionary purchases and to exploit such temporary breaks, since the bill (HB 1125) targets back-to-school products, it will likely have a much more even-handed and useful impact.

Most significantly, however, the bill also serves another useful purpose: to remind us that of all popular sources of revenue, sales taxes are the most objectionable.

When any government relies to a significant extent upon sales tax revenue, that government taxes its poorest citizens at a higher rate than its wealthiest residents relative to personal income. This is not only unjust and contrary to the teachings of virtually all major religions, but it also imposes fiscal drag on the economy.

Because the poorest citizens in any city or state spend a larger percentage of their income than any of their wealthier counterparts, taxing them at a higher rate relative to income can only depress overall purchasing power, dampen markets for virtually all goods and services, and constrain business investment.

Some would describe this reliance on sales taxes as beneficial, assuming that greater reliance on income tax revenues would favor consumption at the expense of savings.

However, we know that savings depend in the first place on the proceeds taken from the sales of goods and services. The rate at which we tax those proceeds (income), while still significant, is far less important to savings and investment than the rate at which we tax the spending that generates all such income. Indeed, moving away from reliance on sales tax revenues can be seen as an unmatched economic development tool, difficult to equal in either its effectiveness or widespread impact.

Moreover, while sales taxes appear to be easy to pay and collect, we know that virtually all citizens underestimate their extent, that they are difficult and expensive to audit, that they vary widely due to numerous exemptions and local options, and that the still widespread Internet sales exemption creates an increasingly tilted playing field that often favors distant, out-of-state merchants over local, in-state businesses. "Use taxes," the sales tax equivalent we are supposed to pay on out-of-state purchases, are widely evaded.

We also know that because sales tax revenue grows more slowly than population or the general economy, if governments rely upon it to a significant extent, they must also continually raise rates just to keep pace. Like the Red Queen, they must run fast just to stand still. Indeed, since the 1980s, Virginia's sales tax rate has risen from four percent to five percent-- a 20 percent jump in the rate.

This would imply, of course, that increased reliance on a more progressive tax (such as an income tax) would do the opposite; with proceeds growing faster than population or the general economy, rate cuts become that much more feasible.

That sales taxes cannot be deducted from income on federal tax returns except in those rare cases where an individual determines that they are greater than state and local income and property taxes paid in that same year, makes the proposition of continued reliance on sales tax revenue an even sillier one.

Virginians should support Delegate Cline's sales tax holiday proposal. Given the chance, we should also endorse a considerably lengthier and more generally applied sales tax vacation.

David Shreve is assistant professor at the Miller Center of Public Affairs at the University of Virginia. He originally penned this essay as an op-ed for the Virginia Organizing Project, a grassroots group that sticks up for the little guy.

PULL QUOTE:

The still widespread Internet sales exemption creates an increasingly tilted playing field that often favors distant, out-of-state merchants over local, in-state businesses.

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