Sales Tax

Here's an interesting bit of news from Sioux Falls, South Dakota. The city needs to borrow money -- about $38 million -- to pay for levee repair and other flood control programs. But there's an initiative on the local ballot to cut sales taxes. What does one have to do with the other? The city's financial advisor says that the borrowing will be more expensive because bond investors, jittery over municipal finances around the country, could worry that Sioux Falls would have less revenue to pay off the bonds.

Los Angeles Times columnist George Skelton has an interesting idea for stimulating the economy: Have the federal government restore the tax deduction for state sales taxes.

In California, this would blunt some of the blow from the expected sales tax hike to help fill an estimated $40 billion shortfall in the state budget over this year and next. Skelton argues that the credit would spur consumer spending -- making it more of a pure stimulus. The sales tax credit existed before the 1986 tax bill. Under President Bush, taxpayers could take a credit for either state income tax or state sales tax, but not both.

In a news conference, a frustrated and angry Gov. Arnold Schwarzenegger blasted legislators of both parties for failing to reach a budget compromise ("shameful") and offered another budget proposal. This is unusual. California governors typically release two budget proposals -- one in January, and one in May. But the governor has put forward a compromise plan that includes a temporary sales tax increase -- violating his promise not to raise taxes -- in exchange for budget reforms. He said he was taking a risk: "I'm stepping over the line here," he said.

There was a take-it-or-leave-it feel to the session, which was cut short after four questions. He said it was time for budget "dialogue" to stop. "This is not part of the kabuki or anything like that," said the governor, all but demanding his proposal be passed.

Other highlights:

-Schwarzenegger admitted openly that his first attempt to fix the state's budget problem--the ballot measures Propositions 57 and 58, which were approved by voters in 2004--had been a failure. "This year is coming out clearly that our budget reform that we attempted in 2004 with Props 57 and 58 does not work," he said. 

A gubernatorial spokesman predicts a "total meltdown" in the Capitol if there's not a deal for a new California budget  by Saturday, the deadline for adding measures that would be part of any compromise to the November ballot. At Blockbuster Democracy, we're adopting "Total Meltdown" as a way to distinguish California posts from news from other states.

In Total Meltdown news...

DON'T TAKE PERATA'S WORD: The Senate Democratic leader said a deal was close. It wasn't.

DIFI SMACKDOWN: Democratic U.S. Sen. Dianne Feinstein, a rumored candidate for governor in 2010, went to Sacramento yesterday and criticized legislators for failing to put a $9.3 billion water bond on the ballot. She's right, of course. The state badly needs the infrastructure, and the bond represents a compromise reached by her and Gov. Schwarzenegger. But folks on the left and right hate it, and the California legislature's mantra right now might as well be: "Let's make the perfect the enemy of the good."

WE DECIDE, YOU VOTE.  The Los Angeles County Board of Supervisors reversed itself and voted to put a sales tax on the ballot to fund transit programs. But then the board voted to register its opposition to the package. Yes, it's confusing.

Tax systems get used for a lot more than raising revenue for the government. They are also often used to help change behavior and to make prices reflect costs of "negative externalities." If you want to discourage something, raise the tax on it.  If you want to encourage something, lower the tax or offer a special deduction or tax credit.

One activity we want to discourage today is greenhouse gas emissions, such as CO2 from burning fossil fuels - like the gas in your car. So, despite some elected officials calling for ways to lower the cost of gasoline, we should really be looking to increase the cost because:

1. The higher cost will encourage people to drive less or find other ways to use less gasoline.
2. What we pay for gas at the pump is not the true cost. When we drive and burn gasoline, we cause air pollution, create GHG emissions that contribute to global warming, wear out roads, and cause congestion. These activities have costs - such as cleaning the air or refurbishing roads. When that cost is not included in the price we pay, the government doesn't get the money needed to deal with the problems - the negative externalities of driving.

Beijing seems to have the idea right. It was reported in several news outlets that on August 13, Beijing announced that there would be a much higher sales tax on large cars and a lower tax on smaller cars (see abcnews.go.com)

In April, New York changed its sales tax law to try to make a few large vendors subject to sales tax collection - most notably, Amazon.com.  The new law creates a rebuttable presumption that a vendor is soliciting business and thus required to collect tax if, per an agreement, they compensate New York residents for directly or indirectly referring potential customers. Referrals may be made through a website or other means. The presumption only applies to sellers with over $10,000 of sales to New York customers made via the referrals in the prior four quarters. Sellers may rebut the presumption by showing that the residents did not solicit sales in New York for them. (Bill Summary, p. 10)

Amazon's "Associates Program" causes it to have many associates who may be New York residents. Amazon filed a lawsuit as soon as the law went into effect challenging the new law as unconstitutional. It also started collecting the tax!

Another company that fell under the law change is Overstock.com. Their remedy was to cancel its agreements with its New York affiliates who were helping Overstock.com advertise.

OREGON GAMING MEASURE DROPPED: Backers of an initiative to establish Oregon's first non-tribal private casino say they've decided not to go forward. They could revive the proposals, but want to see how proposals for two tribal casinos fare first.

IMMIGRATION COPS: The Arizona legislator who wants to allow police officers to enforce immigration laws is pursuing dual tracks -- a ballot initiative and legislation at the same time. The initiative is back-up, he explains.

COLORADO GOV RAIN ON SPEAKER's INITIATIVE: Gov. Bill RItter, a Democrat, questions the political strategy behind an effort by the Democratic House speaker in his state to qualify a measure lifting some of the state's spending limits. Ritter has been trying to reduce the number of measures on the November ballot.

ONE CENT SALES TAX TO FUND TRANSPORTATION: Arizonans, including Gov. Janet Napolitano, have launched an initiative to pay for $42 billion in transporation spending with a one-cent sales tax. The full plan for how they would spend the money is due next month.

In the past year, we have seen both Michigan and Maryland enact new taxes, only to repeal them soon thereafter and before they became effective, due to complaints. That's a lot of work for no effect. What could have been done differently?

On 12/1/07, the day a use tax on specified services was to go into effect, Michigan repealed the law (see prior blog post). More recently, Maryland repealed its expansion of the sales tax to computer services. In November 2007, the legislature added computer services to a measure designed to address a budget shortfall (see Washington Post article of 12/9/07). The tax was to become effective on July 1, 2008. Fierce opposition by the business community led to its repeal in April 2008. The tax would have mostly applied to businesses since they purchase more computer services than do individual consumers.

Back in 1987, we saw Florida expand its sales tax to include specified services, only to repeal that tax 6 months later. In 1990, Massachusetts expanded its sales tax to services, but repealed it before the effective date.

Tax systems can get out of date. For example, an income tax designed with a rate structure to apply to specified income levels (some type of progressivity goal), will become out of date if the tax brackets are not adjusted for inflation. That is, if individuals with income between $30,000 and $40,000 are to have a 15% rate, they will start to creep into the next higher rate as their income increases with inflation (for example, a person gets a cost-of-living raise), even though their buying power has remained constant (they are really no richer). So, one way to keep the system current, is make an inflation adjustion to the income levels at which each tax rate bracket begins.

What about keeping a tax base current and relevant? That is, enabling a tax base to reflect current ways of doing business and how people live even as things change. That's harder than the rate adjustment which can just be built into the law by having a rule that tells the IRS to adjust the rate structure annually for inflation. Keeping a tax base current and relevant requires regular attention from legislators and making tough decisions. For example, perhaps decades ago it made sense to provide special tax breaks to a particular industry. Yet, if such breaks are not looked at regularly, they remain even when no longer needed. And, it is politically difficult to get a tax break removed once it has been there for a while.

Recently, to address budget problems, Michigan lawmakers agreed to expand the sales tax base to include many more types of services (see prior post). Big surprise - taxpayers and service providers did not like the change - a $725 million tax increase (see story in The Detroit News, 11/1/07)

On 12/1/07, the effective date of the expanded tax, Governor Granholm signed HB 5408 (PA 145) to repeal the tax on services. That expected sales tax revenue will be replaced with a business tax surcharge.

There are many good reasons for having a sales tax cover all types of personal consumption rather than just tangible personal property (see prior post). However, change is difficult. Expanding the sales tax base to include more types of services means that businesses, such as nail salons and child care facilities, who have not collected sales tax before and not had to file returns, now have to.

How might the Michigan sales tax expansion to services have been done in a way that might have reduced the desire to immediately repeal it?