Nothing is more frustrating than buying groceries or completing a shopping trip and being rung up at the register only to find out your total cost is much more than anticipated. This is because of sales taxes. Many people often forget about sales taxes but get a rude awakening when making purchases, especially larger ones, because sales taxes are a fixed percent. The bigger the purchase, the bigger the sales tax.
People are already struggling in this super-inflated economy to make ends meet, and taking on sales tax feels like adding insult to injury. Sales taxes are a type of tax that is imposed on the sale of goods and services, and they are a significant source of revenue for state and local governments across the United States.
Sales taxes are often considered “hidden fees” because they are not always transparent to the consumer, and many people do not fully understand the impact of sales taxes on their daily lives. Also, the sales tax rate varies from state to state and even within the same state, from city to city.
Sales taxes disproportionately impact low-income people who spend a larger portion of their income and wealth on taxable goods and services. Let’s dive deep into what sales taxes are, how much the United States is making from them, and why they mainly impact lower-income people.
What are Sales Taxes?
Sales taxes are taxes levied on selling goods and services at the point of sale. State and local governments impose these taxes in the United States. The sales tax rate varies from state to state, with some states having no sales tax, such as Delaware, Montana, New Hampshire, and Oregon. Other states have a state-wide sales tax rate, augmented by local sales taxes varying from city to city. For instance, California has a state-wide sales tax rate of 7.25%, but cities within California can add local sales taxes, bringing the total sales tax rate to as high as 10.25%.
The Purpose of Sales Taxes
The primary purpose of sales taxes is to generate revenue for state and local governments. Sales taxes have been a substantial source of revenue for state and local governments because they are a broad-based tax levied on a wide range of goods and services. Additionally, sales taxes are generally considered a stable revenue source because they are not subject to the same economic fluctuations as income taxes or corporate taxes.
Sales taxes are also used to fund specific government programs, such as infrastructure projects or education programs. For example, some states’ sales tax revenue is dedicated to financing education initiatives. In other states, sales taxes may be used to fund transportation projects, public safety programs, or healthcare initiatives.
Impact on Consumers
Sales taxes have a substantial impact on consumers. First, sales taxes increase the price of goods and services, which can already be particularly burdensome for low-income households. For example, a 10% sales tax on a $100 purchase increases the total cost to $110. This additional cost is a burden for families who are already struggling to make ends meet.
Sales taxes are regressive, meaning they place a greater burden on low-income households than high-income households. This is because low-income households spend a higher percentage of their income on goods and services than high-income households. The regressive nature of sales taxes is typically seen through the lens of income. But, seen through the lens of wealth, they are even more regressive as has been pointed out by Dr. Mitch in his book A Taxing Problem. The Psychologist’s Prescription for a Just Tax System. Therefore, a sales tax that is the same percentage for everyone can appear to be fair, but it is disproportionately burdensome for low-income and middle-income households.
Impact on Businesses
Sales taxes also impact businesses. Sales taxes are an additional administrative burden for businesses that sell goods or services. Businesses must collect sales taxes from customers, maintain accurate records of sales tax revenue, and remit the taxes to state and local governments. This can be particularly burdensome for small businesses that may need more resources to hire additional staff to manage sales tax compliance.
Sales taxes can impact consumer behavior. When the price of goods and services increases due to sales taxes, consumers may be more likely to shop around for better deals or delay their purchases until prices drop. This can be particularly challenging for businesses that operate in competitive markets.
United States Yearly Revenue from Sales Tax
The revenue generated by sales taxes in the United States varies yearly. It depends on various factors, such as the state of the economy, changes in tax laws, and consumer spending habits. According to the U.S. Census Bureau, in 2019, state and local governments in the United States collected a total of $446.4 billion in sales and gross receipts taxes, including state and local sales taxes and other types of gross receipts taxes.
In addition to state and local sales taxes, the federal government also collects excise taxes on specific goods, such as gasoline, tobacco, and alcohol, which can be considered a type of sales tax. In 2019, the federal government collected a total of $97.8 billion in excise taxes, according to the U.S. Department of the Treasury.
Therefore, the total revenue generated by sales taxes in the United States in 2019, including state and local sales taxes and federal excise taxes, was $544.2 billion. It’s worth noting that this number does not include other types of taxes that are levied on goods and services, such as value-added taxes (VATs) or tariffs on imported goods, which can also impact the price of goods and services for consumers.
United States Sales Tax History
The history of sales taxes in the United States dates to the early 20th century when states began to adopt the tax to generate revenue for government programs.
Origins of Sales Taxes
The first sales tax in the United States was implemented in West Virginia in 1921. The tax was a one percent tax on retail sales of tangible personal property and was intended to generate revenue for the state’s road construction program. The tax proved to be successful, and other states soon followed suit.
By the end of the 1930s, sales taxes had been adopted by 18 states. Taxes were primarily used to fund education and infrastructure programs like highways and bridges. However, the taxes were not uniform across states, and there needed to be more consistency in what was subject to the tax and how it was collected.
Expansion and Uniformity
In the 1940s and 1950s, sales taxes continued to expand and became more uniform across states. Adopting the Uniform Sales and Use Tax Act in 1951 helped standardize sales tax laws across states and made it easier for businesses to comply with the tax. The act provided a model for states to follow, which helped to reduce the administrative burden of complying with the tax.
In the 1960s and 1970s, sales taxes continued evolving as states sought ways to generate revenue to fund new government programs. Many states began to expand the items subject to sales tax, including services and digital goods. For example, in the 1970s, California expanded its sales tax to include haircuts and dry-cleaning services.
In the 1980s and 1990s, sales taxes continued to expand as states faced increasing pressure to fund new government programs, such as healthcare and education. Many states also began to shift the tax burden from businesses to consumers by increasing the sales tax rate.
Internet Sales and the Future of Sales Taxes
In recent years, the rise of e-commerce has presented new challenges for sales taxes. Online retailers, such as Amazon, were initially not required to collect sales taxes on their sales, which put brick-and-mortar retailers at a disadvantage. However, in 2018, the U.S. Supreme Court ruled in South Dakota v. Wayfair, Inc. that states could require online retailers to collect sales taxes, even if they had no physical presence there.
The ruling has led to a patchwork of sales tax laws across states, with some states implementing economic nexus laws that require online retailers to collect sales taxes if they meet certain sales thresholds in the state. The issue of online sales taxes is likely to evolve as e-commerce continues to grow and states look for ways to generate revenue from online sales. Of course, if adoption of the FairTaxSystem as described by Dr. Mitch in his book, A Taxing Problem eliminates sales tax, the sales tax issues will disappear.
Sales Tax and Its Impact on the Poor and Lower Class
Sales taxes primarily burden the lower class and poor, and secondarily the middle class. This disproportionate impact results from several factors. In this blog, we will explore why sales taxes disproportionately affect low-income households, the effect of sales taxes on people with low incomes and moderate incomes, and potential solutions to address this issue.
One reason why sales taxes disproportionately affect low-income and moderate-income households is because they are regressive. Regressive taxation means these households pay a higher percentage of their income and wealth in taxes than high-income and wealthy households. Since sales taxes are the same percentage for everyone, low-income households end up paying a larger share of their income and wealth in taxes than wealthier households. For example, a household that earns $20,000 per year may spend a larger percentage of their income on goods and services subject to sales tax than a household that earns $200,000 per year.
Sales taxes also disproportionately impact low-income households because they often spend a larger share of their income on essential goods and services, such as food, clothing, and medicine. These goods and services are often subject to sales taxes, meaning that low-income households pay a larger share of their income in taxes compared to wealthier families.
For example, a household that earns $20,000 per year may spend a more significant percentage of its income on groceries than a household that earns $200,000 per year. If both households live in a state with a 6% sales tax, the lower-income household will pay a larger share of their income in sales taxes because they spend a larger share of their income on groceries, which are subject to the sales tax.
Limited Ability to Avoid Sales Taxes
Another reason why sales taxes disproportionately affect low-income households is that they have limited ability to avoid paying sales taxes. Low-income households may need more resources to travel to neighboring states with lower sales tax rates or buy online items from retailers that do not collect sales taxes.
Impact on the Poor
The disproportionate impact of sales taxes has the most significant consequences for the poor. When low-income families are forced to pay a larger share of their income in sales taxes, they may have to cut back on essential goods and services, such as food, clothing, and medicine. Cutting back on essentials can lead to increased financial stress, reduced access to basic needs, increased risk of poverty, increased stress and the health risks that come with these.
For example, a single mother with two children who earns $25,000 per year may spend 20% of her income on groceries. If she lives in a state with a 6% sales tax, she will pay $300 per year in sales taxes on groceries alone. This may not seem like a significant amount, but it can have a significant impact on her ability to afford other essential goods and services.
Solutions to Address Disproportionate Impact
Policymakers could consider several solutions to address the disproportionate impact of sales taxes on low-income households. One potential solution is to exempt essential goods and services from sales taxes. For example, many states exempt groceries and prescription drugs from sales taxes. Expanding these exemptions to include other essential goods and services, such as clothing and medical services, could help reduce the tax burden on low-income households.
Another solution is to increase the tax system’s progressively by increasing income taxes on higher-income households. This would help reduce the burden of regressive taxes on low-income households, such as sales taxes. However, this solution would require significant political will, would be very difficult to implement, and might face opposition from higher-income households and businesses. Low-income households could become qualified for sales tax exemptions like they can qualify for food stamps. This however would add another level of bureaucracy with the attendant costs and additional logistical problems for sellers of goods and services.
The best solution, it would appear, is to eliminate sales taxes altogether and impose a small annual tax on wealth to fund government and its societal functions. This in short is the solution proposed by Dr. Mitch in A Taxing Problem,The Psychologist’s Prescription for a Just Tax System.
Sales Taxes as “Hidden Taxes” or “Hidden Fees”
Sales taxes are often considered “hidden taxes” or “hidden fees” because they are not always transparent to the consumer. Here are a few reasons why:
- Included in the Purchase Price: Sales taxes are included in the purchase price of goods and services, making it difficult for consumers to distinguish the specific costs associated with the tax.
- Variations Between States: Sales tax rates can vary significantly between states and even between cities within a state. This can make it difficult for consumers to understand the specific costs associated with sales taxes when traveling or moving from one location to another.
- Limited Information at the Point of Sale: Retailers may not always provide detailed information about the amount of sales tax included in the purchase price. This can contribute to a perception of “hidden fees” or a lack of transparency.
- Not Always Applied Uniformly: Sales tax exemptions, such as those for certain goods or for certain purchasers, may not always be applied uniformly or consistently. This can make it difficult for consumers to understand the specific costs associated with sales taxes for different goods and services.
The perception of sales taxes as “hidden taxes” or “hidden fees” is often due to a lack of transparency and variability in the application of sales taxes. However, policymakers and government agencies can work to increase transparency and consistency in the application of sales taxes to inform consumers better and address concerns about hidden costs.
Dr. Mitch’s Proposed Solution
Again, the best solution to this and other tax inequities, it would appear, is to eliminate sales taxes altogether and impose a small annual tax on wealth to fund government and its societal functions. This in short is the solution proposed by Dr. Mitch in A Taxing Problem,The Psychologist’s Prescription for a Just Tax System.