Editorial
National Sales Tax Coming - Buyers Beware!
by Fred E. Foldvary, Senior EditorThe sales tax is an antiquated 19th-century tax ill suited to the mobile 21st century, but the chiefs of state seek to keep it going no matter what. One noble exception is the governor of Colorado; hurray for him!
During the 1700s and 1800s, governments mostly taxed goods. This was easy to do, since the government could require a stamp attached to the good, indicating the tax was paid. The United Kingdom used revenue tax stamps to extract revenue from its American colonies, one reason why the 13 colonies chose to become disunited from the mother country in 1776.
In the 20th century, governments relied more on value-added and income taxes, since it is easier to avoid sales taxes than value-added and income taxes. But governments kept taxing sales, since having many different taxes makes it more difficult for taxpayers to know their total tax burden. In the USA, most sales taxes are levied by the states.
The collection problem for sales taxes is that when goods are sold to customers who are out of state, the goods often escape taxation. The sales tax falls on purchases within a state. Legally, in most states, the buyer is supposed to pay a "use" tax on purchases made out of state, but that depends on self-reporting, which is seldom done.
Now, in the 21st century, a growing portion of purchases are made online, at web sites, and there is also a large catalog sales business. Store owners complain that they compete unfairly with mail-order sales, since stores charge sales tax and much of mail-order commerce does not, and shipping charges can be lower than the sales tax.
The state governments are seeking to end tax-free sales by forming a sales-tax cartel, an agreement among the states to tax all sales from catalogs and the Internet. The plan is called the Streamlined Sales and Use Tax Agreement (SSUTA). It is to be implemented when at least 10 states, having at least 20% of the population of the sales-tax states, enact it. The states are now getting close to this threshold. Ohio has already enacted it, and several states have adopted the SSUTA to take effect on January 1, 2004.
Legislation to join SSUTA has been introduced in many states. For example, in California, SB 157 would require California to join SSUTA. Gov. Davis has already requested that the state controller develop an Internet tax policy. SB 103 has a statement saying that it is the intent of the legislature to implement the SSUTA. California's Board Of Equalization voted to be represented at SSUTA as an observer. This is an important issue for Californians, yet I have not heard any discussion of this from any major candidate for governor. Only a few candidates, such as libertarian Jack Hickey, oppose the sales tax entirely.
One governor who has spoken and written against SSUTA is Colorado's Bill Owens. At a Cato forum in Washington, DC, on June 11, 2003, governor Owens stated that SSUTA would not just impose added taxes; it would also "fundamentally alter the retail landscape in America, and change the nature of digital commerce." His article, "Nine Problems with Taxing the Internet," has been published by the Center for the New American Century.
Those who are pushing for SSUTA claim that it will bring $440 billion in extra revenue into state treasuries in the next decade. Governor Owens notes that this goes beyond just equalizing the tax burden among sellers; SSUTA is also a substantial increase in state taxes. Owens also points out that the sales tax is regressive, taking a larger portion of the income of the poor than the rich, so this plan makes taxes overall more regressive.
Governor Owens also notes that SSUTA will diminish federalism, the sovereignty of the US states and the decentralized political power of cities and counties. States and local governments have different ways of taxing sales, with different rates and exempt items. In California, for example, basic food is not sales taxed. But SSUTA would "streamline" sales taxes by imposing a uniform tax cartel standard among the states, reducing state and local control.
SSUTA would create a national bureaucracy authorized by Congress to enforce the sales tax rules, in effect making it a national sales tax. This would further shift power from the states to a national bureaucracy. The national enforcement would also diminish the privacy of consumers, since new measures would be taken to prevent tax evasion.
Governor Owens points out that while a retail store today pays more in sales taxes than an Internet seller, it also receives more government services. An Internet firm would have the expense of collecting sales taxes from many different states at different rates, yet get no services from most of the states that tax it.
As to the impact on the Internet, the governor stated in his Cato talk that "Attaching tax burdens to each online transaction will certainly dampen enthusiasm for Internet usage and stifle technological innovation. Studies show that consumers will reduce their online shopping if taxes are imposed, perhaps significantly." Much of the funding for the Internet comes from the sellers and their online advertising. It would be foolish to risk stifling future Internet innovations just to squeeze more taxes out of buyers.
The basic problem is the sales tax itself. Sales taxes are increasingly unfit for the global and electronic economy of the 21st century. Consider a download of music or software. Sales made this way would be subject to the SSUTA sales tax. But how would this be enforced? They would have to monitor Internet transactions. And what about purchases from foreign countries? If one downloads software from a Canadian firm, would that be taxed? What's next, a global sales tax bureaucracy?
Taxing Internet sales will push the major sellers to set up sales points outside the country. SSUTA will push business and jobs out of the country. There will be more tax avoidance and evasion, and then ever greater enforcement and invasion of privacy.
All of this is unnecessary. The solution is simple: eliminate sales taxes. Shift taxation to a source that does not flee, shrink, or hide when taxed: land value. Land is the 21st-century solution to the global public revenue problem. Land is stuck in its place. Also, taxing land rent or land value imposes no extra burden on society, since the land is already there.
Eventually, the logic of taxing land value will become obvious. Unfortunately, until that day, government officials will try to try to preserve the antiquated sales tax. SSUTA can still be stopped, but time is growing short. Write to your state legislator today and tell him that you oppose SSUTA. Californians, ask the governor candidates where they stand on SSUTA. And consider not voting for any candidate who does not clearly and boldly say, "I oppose SSUTA!"
Copyright 2003 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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Also see Fred Foldvary's earlier editorial on the Sales Tax
and Mason Gaffney's amazing list of Sales Tax 'Suicides' |
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