Are Sales Taxes Good Public Policy?

The August 20, 2005, copy of the Anchorage Daily News featured this somewhat unsettling headline: “It’s sales tax vs. bigger sales tax.” The story began with…

Assemblyman Dan Coffey is proposing a 3 percent sales tax that would shave most people’s property tax bills by 25 percent. Assemblyman Dan Sullivan wants to examine whether a higher sales tax could replace property taxes altogether.

Let me take a philosophical diversion for a moment. I have a friend who buys and sells real estate in Florida. He is politically very conservative. In order to maintain the friendship, we generally try to stay away from political discussions. We tend to be passionate about our respective political beliefs, and butt heads when such subjects bubble to the surface of our otherwise friendly repartee.

One day we were discussing his business, and I was quite speechless when I heard him say that he was very happy to pay taxes–”the more the merrier”–or something to that effect. I stammered out a few words like, “How can YOU be saying THAT?” He is a practical businessman, and his response reflected that. He said that since taxes are related to wealth, the more he pays in taxes, the wealthier he is. He would rather be rich and pay lots of taxes, than poor and pay fewer taxes. I thought about it, and I could see his point.

I am a homeowner in anchorage. I have to say that my jaw did drop when I recieved notice of how much I would be paying in property taxes this year. It had gone up several hundred dollars since just last year. On the other hand, the value of my house has gone up several thousand dollars in the last year. Counterintuitive though it may be, I am very glad to have the opportunity to pay higher property taxes year after year, because the value of my home is shooting up. It is evident in this case that the good outweighs the bad, in terms of our family finances.

Moving from philosophy to analysis, let’s take a closer look at property taxes. After all, the Dans at the Municipal Assembly are justifying their sales tax proposals on the basis of their perceived resentment by property owners having to pay ever increasing property taxes. Earlier this year the Center on Budget and Policy Priorities published Property Taxes in Perspective, a short primer on current myths and realities of property taxes. The main finding of their research was that,

Some observers suggest that a property tax “crisis” is brewing because property tax collections nationwide as a share of income have risen somewhat over the last few years, and imply that a new round of property tax revolts might be the appropriate response. The data show, however, that there is no crisis. At most, there is a cyclical uptick in property tax collections relative to income that historically occurs in the aftermath of a recession and fiscal crisis.

Some of the key points covered in this excellent article include the following,

  • As the economy improves and incomes again grow, property tax collections as a share of income are likely to stabilize or decline, as they have in other recoveries.
  • Given the external factors driving property tax collections, blunt-instrument “reforms” such as a uniform property tax cap are not an appropriate response. Such caps carry ramifications that extend well beyond the problem they purport to address, and typically lead to long term inequities in property taxes paid by similarly situated households. Moreover, such limits often lead to greater than expected or desired reductions in vital public services funded by property taxes, such as K-12 education, police, and fire protection.
  • Alternative methods of alleviating property tax burdens could include increased state aid to localities and targeted tax relief for low-income families most burdened by property taxes.

This is a short, informative, and easy to read article. I urge you to take a look at it, in light of its relevance to the subject of sales taxes. Then you will be ready to tackle the Institute on Economic and Taxation Policy(ITEP) excellent publication, The ITEP Guide to Fair State and Local Taxes, released in February of 2005, which…

offers citizens, activists and policymakers a detailed primer on state and local tax policy. The guide explains the differences between progressive, flat and regressive taxes—and why you should care. It covers the full range of taxes that states and localities can impose, including personal and corporate income taxes, property taxes, and sales and excise taxes.

The guide has eleven chapters ranging from Chapter 1: Tax Fairness Fundamentals, through Chapter 4: Property Taxes, to Chapter 9: Taxes and Economic Development. For our immediate purposes, however, Chapter 3: Sales and Excise Taxes may be the most pertinent. This chapter makes it very clear that a sales tax adversely impacts low and moderate income families, and lets the wealthy skate by…

Sales taxes are inherently regressive because the lower a family’s income, the more of its income the family must spend on things subject to the tax. Typically, low-income families spend three-quarters of their income on things subject to sales tax, middle-income families spend about half of their income on items subject to sales tax, and the richest families spend only about a sixth of their income on sales-taxable items. Thus, about three-quarters of the income of a lowincome family, half of a middle-income family’s income and just one-sixth of the income of a rich family is typically subject to sales tax.

Put another way, a 6 percent sales tax is the equivalent of an income tax with a 4.5 percent rate for the poor (that’s three-quarters of the 6 percent sales tax rate), a 3 percent rate on the middle-class (half of 6 percent) and a one-percent income tax rate for the rich (one-sixth of 6 percent). Obviously, no one could get away with proposing an income tax that looked like that. The only reason this pattern is tolerated in consumption taxes is that their regressive nature is hidden in a harmless looking single rate, and the amount families pay is hidden in many small purchases throughout the year.

All of a sudden a sales tax does not seem to be in the interest of low and moderate income families in Anchorage. What to do, what to do? I highly recommend The ITEP Guide to Fair State and Local Taxes as a place to start to identify a fair and equitable tax solution for low and medium income families in Anchorage, and the rest of the state.

Lawrence D. Weiss Ph.D., M.S.
President of the Board, ACPP

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Posted on August 28, 2005, in Low-Income Families, Tax Policy. Bookmark the permalink. 1 Comment.

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