Taxed & spent: does the sales tax have a future?

• Author: Brainerd, Jackson
• Position: TAXATION

The sales tax has fallen on hard times. Designed to capture payment on every purchase meant for general use, state sales taxes often miss transactions that should be taxed and apply to ones that shouldn't, experts tell us.

For years, consumers' spending preferences have shifted to shopping online rather than in stores and to buying more services than tangible goods. Since many states don't tax such purchases, these changes have undoubtedly contributed to the currently anemic state of sales tax revenues.

In NCSL's "Fall 2015 State Budget Update," 22 states reported that general sales tax revenues fell below estimates or that revenue targets had been lowered. In Wyoming, for example, total taxable sales in the third quarter of 2015 were 18.2 percent lower than a year earlier.

And it's not looking much brighter this year. In Kansas, retail sales tax revenues were $12.2 million below estimates in February 2016, contributing to an overall $53 million shortfall that prompted cuts to higher education. In March, Maryland lowered estimates for sales tax collections by a total of $127 million for fiscal years 2016 and '17.

Past Its Peak?

Nationally, the tax is growing slightly slower than other forms of revenue. U.S. Census Bureau data show that, from 2008 to 2015, state and local income tax revenues grew by 26 percent in nominal terms, property tax revenues grew by 23 percent and sales tax revenues grew by 19 percent.

Economist John Mikesell, professor of public finance at Indiana University, points out that sales tax difficulties have been a long time coming. He has found that consumption growth has been consistently outpacing growth in the sales tax base for decades. In other words, consumers are buying more and more things that are not taxed.

In the report "Georgia's Incredible Shrinking Sales Tax Base," Robert Buschman of Georgia State University noted that the state's sales and use tax revenues peaked in FY 2001 on an inflation-adjusted basis. Although the state's economy was much larger in 2014 than in 2001, sales tax revenues fell by 31 percent in real terms.

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Although some of the drop can be explained by legislated tax exemptions, the report cited changes in consumption as a major factor. Had the sales tax kept pace with growth in state gross domestic product growth, it would have generated an extra $2.2 billion in FY 2014.

A Big Chunk of the Revenue Pie

In many states, the sales tax makes up a significant chunk of total tax revenue. On average, it accounted for 31.2 percent of state tax collections in 2014, and more than 50 percent in a few states. It is commonly criticized for its regressivity--low-income people lose a greater percentage of their income to the tax than the wealthy do--but its historical stability relative to the income tax makes it an appealing revenue-raiser.

In fact, the struggles of the sales tax are occurring as a number of states attempt to place more responsibility for funding government on its back, often by reducing income or business taxes. From 2008 to 2015, seven states combined income tax cuts with higher sales tax rates, and 10 raised sales tax rates only. The trend has continued in 2016, with Louisiana and South Dakota lawmakers approving sales tax increases.

As the challenges of the 21st century marketplace mount, many states are looking for ways to ensure the sales tax remains a strong component of state revenues.

Case for E-Fairness

The sales tax has not kept pace with the rise of electronic commerce. In 1992, the U.S. Supreme Court reaffirmed in Quill v. North Dakota that, in order for a state to have the authority to require a busine0.ss to collect and remit sales taxes, the business must have a sufficient physical presence--or "nexus"--in the state.

The ruling did not prevent states from collecting taxes on online purchases, just those made from out-of-state retailers. It also left...