Sales tax rates in the United States have been steadily increasing, impacting consumers and raising questions about affordability. Unlike property and income taxes, sales taxes have rarely faced organized opposition, leading to their continuous rise over the past century. This article explores the historical context, recent trends, and implications of sales tax increases, examining their effects on consumers and potential policy solutions.
1. Sales Tax Overview
• Sales taxes are levied by states and local governments and have become a primary source of revenue.
• First imposed during the Great Depression, these taxes began at low rates but have risen significantly over the decades.
• Today, general sales taxes and selective taxes on certain goods (e.g., alcohol, cigarettes) represent the largest revenue source for state and local governments.
2. Historical Trends
• Sales taxes started at low rates but have increased over time due to budgetary needs and inflation.
• The Supreme Court’s 2018 decision in South Dakota v. Wayfair allowed states to collect sales tax on online purchases, greatly expanding sales tax revenues.
• States are now taking in nearly $700 billion annually from sales taxes, with substantial portions coming from new online tax rules.
3. Consumer Behavior and Resistance
• High sales taxes have driven consumers to seek lower-tax states like New Hampshire, where there is no sales tax.
• Many consumers are required to pay use tax on out-of-state purchases, but compliance is generally low.
4. Complexity and Exemptions
• Sales taxes are complicated; approximately 60% of sales go untaxed, leading to higher rates on the taxed goods.
• There are numerous exemptions for specific goods and services, adding complexity to the tax system and often favoring certain groups or industries.
5. Challenges of Regressivity
• Critics argue that sales taxes are regressive, disproportionately affecting low-income individuals.
• Despite this, there is support for increasing local sales taxes to fund various political agendas, such as social services and transportation.
6. Recent Local Initiatives
• Many cities and counties have passed new sales taxes to fund initiatives, primarily in healthcare and homelessness, without necessarily demonstrating effectiveness.
• New taxes are often justified on the grounds of funding specific services, but the actual allocation of funds may differ from initial promises.
7. Policy Suggestions
• Experts advocate for a broader tax base with lower rates, suggesting that states tax more services and reduce overall tax rates.
• Some regions, like Washington, D. C., have successfully expanded their sales tax to include services while also lowering other taxes.
8. The Political Landscape
• Although sales taxes are a significant burden on consumers, political focus often shifts toward other tax types or new consumer taxes.
• Efforts to reduce or reform sales taxes are limited, reflecting a disconnect between voters' calls for lower living costs and legislative action.
The steady rise of sales tax rates, compounded by economic pressures such as inflation, poses a growing burden on consumers. Despite its potential to raise significant revenue, the sales tax system's complexity and perceived regressivity call for re-evaluation. Policymakers need to address the impact of sales taxes on affordability and consider reforms that could alleviate financial strain on consumers while still meeting revenue needs. As political attention remains divided, significant challenges lie ahead in balancing tax structures with public demands for economic relief.
https://www.city-journal.org/article/state-sales-tax-cost-inflation
