Sales Taxes

SALES TAXES

SALES TAXES consist of two types: excise and general sales. The excise tax is placed on specified commodities and may be at specific rates or on an ad valorem basis. The general sales tax may be a manufacturers' excise tax, a retail sales tax paid by consumers, a "gross income" tax applied to sales of goods and provision of services, or a "gross sales" tax applied to all sales of manufacturers and merchants.

During the nineteenth century several states adopted tax levies resembling sales taxes. The sales tax in its modern form was first adopted by West Virginia in a gross sales tax in 1921. During the 1930s, many states adopted the sales tax in its various forms as a replacement for the general property tax that had been their chief source of income.

The adoption of sales taxation slowed somewhat during the 1940s, but became more popular after World War II. At the end of 1971, forty-five states and the District of Columbia levied a sales tax in some form.

A corollary of the sales tax is the use tax. This is a charge levied on taxable items bought in a state other than the state of residence of the purchaser for the privilege of using the item in the state of residence. The rate structure is the same as that of the sales tax. Automotive vehicles are the most significant item in the yield of use taxes.

The rate structure used in the general sales tax is proportional; that is, the rate is constant as the base increases. For ease of administration and determination of the tax due, bracketing systems have been adopted by nearly all states. The rates in use in the mid-1970s varied from 2 percent to a high of 7 percent; 4 percent was the most common rate. A combination of state and local rates may exceed 7 percent. A selective sales tax applying to a single commodity may have much higher rates. At the time of initial adoption of many of the sales taxes in the 1930s, tokens were used for the collection of the tax on small sales where the tax was less than one cent. Ohio used stamps to show that the tax had been collected. Nearly all these systems have been abandoned in favor of collection of the tax in full-cent increments.

Several forms of sales taxes have been used abroad. Canada has used a manufacturers' excise in the belief that a levy at that level of the distribution process offers fewer administrative problems because of the small number of business units with which to deal. The value-added tax has been extensively used in Europe and has been adopted by the European Economic Community nations as a major revenue source with the goal of uniform rates within each member nation. During the 1950s and early 1960s, Michigan used a business receipts tax that was an adaptation of the value-added tax.

Specific sales taxes on selected commodities have long been used by the states. Selective sales taxes were used in the colonial period, with liquor the most frequently taxed commodity. Gasoline was selectively taxed by Oregon in 1919. The disadvantage of specific sales taxes is that they do not produce the revenues a general sales tax does. During World War II a national sales tax was proposed, but no action was taken by Congress. The proposal has been revived periodically, but changes in personal and corporate income taxes have been preferred over a national sales tax.

A great deal of attention is given to the regressive effect of the sales tax because an individual with a low income spends a greater portion of his or her income on consumption goods that are taxed than do those with higher incomes. When the necessities of food and clothing are excluded from the sales-tax base, the regressive effect is reduced.

The impact of sales taxes is on the seller, for in nearly all cases he makes the payment to the state. However, the incidence or final resting place of the tax burden is on the purchaser of the taxed commodity or service; the price increases or the price is constant, but the tax is stated separately on the sales slip and added to the sum collected from the purchaser. In fact, the laws of some states require forward shifting of the tax to the consumer.

In the late twentieth century, sales taxes became a preferred method of paying for publicly funded sports stadiums and arenas. A growing chorus of critics has argued that the use of sales taxes to finance professional sports facilities is tantamount to corporate welfare. They point out that the biggest financial beneficiaries of such facilities are the wealthy owners of professional sports franchises, who typically gain a controlling interest in the stadium's ownership. Nevertheless, sales taxes remain a popular way for state legislatures to avoid raising income tax rates, which usually alienate voters more than sales taxes do.

BIBLIOGRAPHY

Due, John F., and John L. Mikesell. Sales Taxation: State and Local Structure and Administration. Washington D.C.: Urban Institute Press, 1994.

Mikesell, John L. Fiscal Administration: Analysis and Applications for the Public Sector. Pacific Grove, Calif.: Brooks/Cole, 1991.

Chalmers A. Monteith / a. g.

See also Duties, Ad Valorem and Specific ; Gasoline Taxes ; Negative Income Tax ; Taxation .