5 Reasons to Dump the Sales Tax
By Michael Kleen
June 6, 2012
Whether it is to fund road repair and construction, local jails, or supplement public school funding, politicians in Illinois seem to be enamored with sales taxes. A penny here and a penny there taken from the pockets of consumers, they argue, cannot be that harmful. Yet there are compelling arguments that sales taxes have a depressive effect on the economy, disproportionately affect the poor, and are not a reliable source of revenue. Far too often, politicians use deceptive tactics to get sales tax increases approved. Before voting on any sales tax increase, voters deserve to consider the following reasons why sales taxes should be rejected.
1. Sales taxes punish consumer spending and hurt the local economy. It is generally understood that taxes influence behavior, and that we get less of a behavior when it is taxed. That is why activists demand high taxes on cigarette and alcohol sales. Their goal is to make those products more expensive so that less people will be inclined to purchase them. Why then do we tax consumer spending in general? For every increase in the sales tax, that is less money in a person’s pocket to spend at stores, gas stations, and restaurants. In turn, those businesses have less revenue with which to hire more employees or expand.
Sales taxes are often approved 1 percent at a time, meaning that for every dollar that is spent, one penny goes to the government. This does not seem like much, but when that is added to an already high state and local sales tax rate, the damage begins to accumulate. For example, Winnebago County’s 1 percent sales tax took $24.3 million out of the hands of consumers in 2011. When added to Illinois’ 6.25 percent sales tax, that comes to a total of $176 million. Think of all the things that could have been done with that money if left in the pockets of consumers. This is not even taking into consideration the money that is lost from consumers who cross borders to escape high sales taxes. Every time sales taxes are raised, the local economy suffers.
2. The sales tax is a regressive tax that disproportionately hurts the poor. According to the Institute on Taxation and Economic Policy, a 6 percent sales tax amounts to roughly a 1 percent income tax rate for families in the highest income brackets, a 3 percent tax on middle-income families, and a 4.5 percent tax on the poorest families. That is because, generally, wealthier families spend only one-sixth of their income on items that are subject to sales taxes, while low-income families spend three-quarters of their income on taxable purchases.
Legislators have tried to mitigate these effects by not taxing purchases of certain groceries and medicine. The poor, however, eat at restaurants (especially fast food restaurants), purchase clothing, and seek out entertainment just like their wealthier neighbors. Furthermore, because low income families have to stretch every dollar, sales taxes have a much bigger impact. $50-75 extra dollars in tax a month might not mean much to someone making $25,000 or more a year, but for the 43 percent of individuals making less than that, it can have a depressing effect.
3. The sales tax is a hidden tax. How many times have you purchased something and looked at how much sales tax you paid? Now, how many times have you written down the tax on each and every purchase and totaled it up at the end of the month? Never? Then you are part of the majority of consumers who have no idea how much sales tax they really pay on a monthly, let along daily or weekly, basis. Unlike property taxes, that come in a bill describing how much you owe and what percentage of the tax goes to particular local municipalities, most consumers do not know how much sales tax is being collected or where that money is being spent.
4. The sales tax is not a reliable source of revenue. Because sales tax revenue rises and falls with the economy, it is not a reliable source of revenue for the critical projects it is often called to support. When my home county of Winnebago raised a 1 percent sales tax to fund its new jail, for example, they had to lay off workers and abandon their plans to pay off construction debt when the latest recession hit. With the jail nearing its full capacity, layoffs and cut backs on services strained already thin resources, yet when people are not spending as much, declining tax revenue means cutbacks are guaranteed. Because of the unpredictability of the marketplace, this is a scenario that will continue to be repeated over and over again, but it can be easily avoided by finding more stable sources of revenue.
5. Sales taxes are often raised and used deceptively. In order to convince voters to approve a sales tax increase, local politicians often include a “sunset clause” that states the tax will need to be reapproved by voters in a certain number of years or it will expire. When that time comes, those same politicians argue that the critical projects supported by the tax (see #4) will go unfunded and fall into ruin if the tax is not reapproved, effectively scaring voters into making it a permanent tax. Furthermore, during times of strong consumer spending, politicians are often tempted to view excess sales tax funds as a pool they can dip into to fund their pet projects, projects that have no oversight and were not approved by the voters.