Many have excluded the purchase of services and digital goods from tax, and many provide exemptions and holidays for other specified purchases.Īccording to the Tax Foundation, the average sales tax breadth, or share of a state economy included in the sales tax base, was 29.71% in fiscal year 2021. In fact, a growing number of consumer purchases are not subject to sales tax in most states. Backgroundįor tax policy purists, the ideal sales tax would fall on all final consumption, but state sales taxes are far from having such breadth. “Because of persistent high inflation, we are seeing substantial weakness in sales tax revenues as consumers are recognizing the toll of higher prices,” according to the Urban Institute’s analysis of monthly state revenues. Going into 2023, with many states forecasting slower revenue growth, sales tax revenues may become particularly sluggish. While sales tax collections have been strong over the last two years because of increased spending on durable goods, sales revenue growth was slow or flat in many states in the years leading up to the pandemic. However, states wishing to transition from income toward consumption taxation will eventually need to reckon with long-standing issues facing the sustainability of state sales taxes, which have not kept pace with changes in the economy and have gradually eroded over time. Some economists who favor the sales tax say that taxing consumption is less economically distortive and more conducive to growth than taxing income. To the extent that states continue to reduce income taxes, more reliance inevitably will fall on sales taxes, the second-largest state revenue source. Those with lower incomes typically spend about three-quarters of their earnings on items that are subject to sales tax, whereas top earners spend about a sixth of their income on taxed items. Replacing the average state’s most productive revenue stream could lead to budget instability and would increase the regressivity of the overall tax system. Those with lower incomes typically spend about three-quarters of their earnings on items that are subject to sales tax, whereas top earners spend about a sixth of their income on taxed items.Įliminating the income tax is a highly contentious proposition. Governors in several states- Nebraska, North Dakota and West Virginia, for example-have proposed reducing income taxes or even eliminating them. Going into 2023, the push to cut income taxes does not appear to be over. At least 20 states have cut personal or corporate income tax rates, or both, since the start of 2021, reducing revenues by hundreds of millions or, in several cases, billions of dollars annually. Since emerging from the pandemic-fueled economic downturn, state budgets have been flush with cash, and lawmakers across the country have enacted a historic amount of income tax relief.
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