Ramesh Ponnuru makes the argument for sales-state-side sales taxes for interstate commerce:
A far better solution would be for states to levy sales taxes based on where products are coming from rather than on where they’re going — or for Congress to tell them to do so. Under an origin-based tax rather than a destination-based tax, for example, Washington state would have the power to tax Amazon.com’s sales. For physical stores, sales taxes would keep being collected as before.
The immediate problem with this is obvious: Shipping centers (and/or corporate headquarters) would all relocate to states with no sales tax. Pannuru notes this, and actually approves.
This would be a much simpler tax system with lower compliance costs. It would tend to constrain sales taxes by increasing competition among the states: A state that raised its rates too high would induce businesses, particularly catalog or Internet businesses that can sell remotely, to locate elsewhere.
Anti-tax fetishes aside, does this really promote good tax policy?
The answer is… partly, depending on your point of view. But ultimately, at least from my perspective, no.
By and large, those like Ponnuru that favor lower taxes would welcome more states either lowering the state sales taxes or eliminating them altogether. Typically speaking, the more revenue streams a state has, the more taxes it will ultimately collect. While you might think that, for instance, states with a state income tax would have low sales taxes, but it isn’t necessarily the case that they get you here if they don’t get you there. There are differences between how much each state brings in, and it’s the states that do not have one form of tax or another that tend to tax the least, in the overall. This is true of conservative-leaning states like Texas and Tennessee, but also liberal-leaning states like Washington and Oregon.
Having said that, some states have sales taxes with no income tax, and some states have income tax with no sales tax. So the question should be asked: should we be rewarding one over the other? And if so, which one?
Ponnuru is a conservative, so you would think that he would favor the sales tax over the income tax. The sales tax is broadly more regressive. The income tax provides very specific opportunities to, as Ponnuru might see it, “stick it to the rich.”
From a practical standpoint, though, I really prefer state sales taxes and property taxes over income taxes. Most notably because the federal government already collects a pretty hefty income tax. So while a sales tax might go from 0% to 7%, a state income tax is raising overall levels of taxation from what might already be 25%. In other words, the income tax hurts a specific activity more, while the sales tax targets another that is untouched at the federal level.
In the greater scheme of things, perhaps this should matter since a state government that spends 10% of its state’s GDP is going to get its money anyway. But each of the taxes target a particular activity, and there are questions about whether or not you want to target any specific activity too much. An excessively high property tax, for example, encourages people to buy or rent smaller housing accommodations. Sales taxes encourage people to buy things outside of the sales tax zone (as it pertains to Ponnuru’s idea, to buy from online companies based out of Oregon or Montana). Income taxes can discourage second household jobs, working overtime, or taking on additional responsibilities for additional pay that they will be seeing less of.
While there are arguments to avoid balancing taxes too much, as that can simply lead to higher overall taxation (not necessarily a bad thing, but it certainly is in Ponnuru’s worldview), if we’re going to focus state revenue on only one or two of the streams, I don’t see any particular reason why we should favor the income tax over the sales tax (except progressivity, but you can account for that with the property tax).
So if Ponnuru’s policy were to be enacted, the end result is that states like Washington which have high sales taxes and no income tax would become states like Oregon. And while Oregon might be preferable to California for its overall legel of taxation, it seems far from clear to me that the Oregon model is preferable to the Washington model and should be rewarded for it.
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16 Responses to Internet Sales Taxes & Revenue Streams
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The last time I checked, it is unconstitutional for one state to levy a tax on goods imported from another state. Not sure how that impacts your or Ponnuru’s analysis…
My understanding is that you can tax the goods, but you can’t force the company to collect the tax. And so “use taxes” are largely unenforced. You can also tax goods imported from another state so long as the company has a nexus or storefront in your own state (so if I order from Walmart.com, they can tax me even if it’s being shipped straight from Arkansas to my house). These are more regularly enforced.
Whether a state can tax goods that are being sent elsewhere (Ponnuru’s idea) is less certain. I don’t see why not. But it hasn’t been tried (probably for fear of chasing them out of the state).
I think the ultimate solution to this is a 50-state compact of some sort, wherein there is interstate cooperation. This, I believe, would be Constitutional. The alternative is for the federal government to handle it as Interstate Commerce.
except progressivity, but you can account for that with the property tax
The property tax isn’t as progressive as you think it is, mostly because the correlation between income and property value, while positive, is weak.
In NJ the income tax was taxed specifically to remedy this situation. Of course, once the money got into the state coffers the property tax relief ended up being less than promised.
The property tax isn’t as progressive as you think it is, mostly because the correlation between income and property value, while positive, is weak.
Well, you can avoid it by going cheap on housing. That has its own public benefit, though. It’s best if something (other than the annihilation of our economy) keeps home prices from escalating.
In NJ the income tax was taxed specifically to remedy this situation. Of course, once the money got into the state coffers the property tax relief ended up being less than promised.
I’m utterly shocked it worked out this way. If you can’t trust politicians in Jersey…
“Well, you can avoid it by going cheap on housing.”
Actually, you can’t (not within NJ, at least). Property taxes are much higher on a percentage basis on a condo in my city than in a mansion in a small, affluent town. My city has an underclass that requires extra policing, it has its own school system, a professional fire department, etc. Some of the small affluent towns (such as the one Nixon retired to, for example), have volunteer firefighters, less crime and fewer cops, regional school systems, etc.
What I’d like to see is prices marked with the after tax amount in stores. Trying to remember whether you’re in a county with 8.0 versus 9.0 percent sales tax is a pain in the ass.
Dave,
I don’t know the particulars in New Jersey. It does work out in Delosa that living in larger cities almost invariably result in higher property taxes, but that’s due to higher local property taxes. In an apples-to-apples comparison, within taxing jurisdictions, you pay similar percentages.
Even if we are talking about a lower percentage basis, though, the overall bill is likely to be higher. I know the percentages in towns near where I grew up tend to be low, but because the housing prices are high (for the area), you still end up paying more than you would paying a higher percentage on cheaper housing elsewhere.
Web, I go back and forth on that. On the one hand, the pricing simplicity of tax-included or tax-free sales is nice (except for the excess of pennies). On the other, it’s adds transparency to taxation.
It doesn’t really add that much transparency. More, it adds a layer of complexity (“I have $2.28 in change and that’s marked at $1.99 do I have enough to cover it with the sales tax what the hell is the sales tax in this county anyways”) that makes it a pain in the ass to make purchases with cash.
Tax transparency, not price transparency. You know what you would be paying without taxes, and you know what you have to pay with taxes. I believe that to be one of the main things that have kept sales taxes below 10% nationally. They know that’s a mental barrier that there would be great pushback on. A mental barrier that wouldn’t be there if it were just automatically added.
Plus, it’s good math lessons for younguns. I’m very good at mentally adding a certain percent to most amounts, at least to a rough approximation, because I used to have to do it on everything I bought. 🙂
Most places I’ve lived, the sales taxes have been pretty uniform. There was a time when Phillippi had sales taxes that were .75% lower than Colosse and everywhere else, but they brought it up to line. I can’t remember the last time I bought anything in Delosa that didn’t have that standard sales tax.
In Cascadia, the two main counties both had sales taxes .5% higher than everywhere else, but you got used to that.
The unincluded taxes that annoy me are the ones that only apply to very specific items. Hotel and rental car taxes, for example. Alcohol taxes in some places.
6.What I’d like to see is prices marked with the after tax amount in stores. Trying to remember whether you’re in a county with 8.0 versus 9.0 percent sales tax is a pain in the ass.
How often is the amount of cash you have on hand less than 101% of the total cost of your purchase?
Rather, greater than 100% and less than 101%. Or between 108% and 109% of the marked price.
The unincluded taxes that annoy me are the ones that only apply to very specific items. Hotel and rental car taxes, for example. Alcohol taxes in some places.
Gas taxes, too.
Well, you can avoid it by going cheap on housing.
Home ownership tends to be sticky. Furthermore, even if you get a 20% raise, your property tax stays the same. No one in city hall gets your W2. Conversely, if your family income is cut in half one year, your property tax also stays the same.
Gas taxes, too.
Gas taxes are at least included in the posted price.
Home ownership tends to be sticky. Furthermore, even if you get a 20% raise, your property tax stays the same. No one in city hall gets your W2. Conversely, if your family income is cut in half one year, your property tax also stays the same.
Well, all the reason to avoid buying a house that doesn’t max you out, so you can afford the pay cut and pay less in property taxes when times are good. Win/win!
Or, of course, you can rent.
Gas taxes are at least included in the posted price.
Thankfully they are hidden though. I think people would be upset if they knew how much they were paying in gas taxes.
Well, all the reason to avoid buying a house that doesn’t max you out, so you can afford the pay cut and pay less in property taxes when times are good. Win/win!
Or, of course, you can rent.
Yes, but that is a choice that people should be able to make freely, not because they are trying to game their property taxes. Of course, renters also pay property taxes indirectly.
Thankfully they are hidden though. I think people would be upset if they knew how much they were paying in gas taxes.
Delosa requires a sticker on every pump saying how much of the bill is going to taxes. My ex-roommate Hubert and I had a debate about it once.
“Why do they put that there? All it does is make people pissed off at the government.”
“Exactly!”
Of course, I support higher gas taxes (at least sufficient to pay for the roads), so I probably shouldn’t talk.
If I recall, there was a debate when the law on some telecom fee legally forbade carriers from mentioning it on their bill.