NOVEMBER
2002

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

Visit Larry DeBoer's Indiana Local Government Information Web site

Download the audio files or subscribe to our podcast.

 

 

11-27-02

Download the audio of Capital Comments: MP3, WMV

A Nickel and a Penny


On Dec. 1, for the first time in a generation, Indiana's sales tax will increase. The tax-restructuring bill passed by the special session of the General Assembly on June 22 included an increase in the sales tax. The rate will rise from 5 to 6 percent, just in time for Christmas.

The sales tax is different from income and property taxes. With the income tax, taxpayers know to the dollar how much they pay, once they fill out their tax forms. The property tax bill arrives each spring, showing how much must be paid. Even homeowners who pay their tax with their mortgages receive a bank statement showing how much they paid.

But people pay the sales tax with nickels and quarters and dollars in purchases throughout the year. Many taxpayers have no idea how much sales tax they pay.

The amount must be substantial, though. During the 2001-02 fiscal year, which ended on June 30, the sales tax raised $3.8 billion for Indiana. The state income tax raised less, only $3.5 billion. For many taxpayers, all those sales tax nickels add up to a tax payment at least as large as the yearly income tax bill. The extra penny on the sales tax will increase these payments by about $800 million in fiscal year 2003-04, which starts next July.

We can make a good guess about how much families pay in sales taxes. The U.S. Bureau of Labor Statistics collects data on household spending. On its Web site, http://stats.bls.gov/cex (that's right, no "www"), you can find out how much an average family of four with a pre-tax income of $35,000 spends on laundry and cleaning supplies ($159 a year), floor coverings ($41 a year), pork ($188 a year) or just about anything else. We can identify which items are taxed and compute tax payments at the old 5 percent rate, as well as the new 6 percent rate.

What is taxed? Most tangible goods are taxed. Most food is not taxable, unless it's served in a restaurant. Drugs are exempt. Tobacco and alcohol are taxed. Most services are exempt, though utilities and rentals are taxed.

So, let's take that favorite household of analysts everywhere, the family of four, give them an income of $50,000, and ask how much they pay in sales taxes. The answer comes back $1,073 a year at 5 percent and $1,277 a year at 6 percent. The sales tax hike costs this household an extra $204 a year. These are averages, of course. Your taxes may differ.

Smaller households pay less. One person with no spouse or kids and a $50,000 income pays $692 at 5 percent, $825 at 6 percent. That's an extra $133 with the tax increase. Lower-income families pay less, upper-income families more. A family of four with a $25,000 income pays $796 at 5 percent and $948 at 6 percent, $152 more with the tax hike. Families with higher incomes pay more in dollars, but not as a share of their incomes. At 6 percent, the family with $25,000 pays 3.8 percent of their income in sales taxes. The family with $50,000 pays 2.6 percent. The sales tax is often called "regressive" because the share of income paid to the tax decreases as incomes rise. It happens because upper-income families save more of their incomes, and savings aren't sales taxable.

The extra penny on each dollar adds up to $800 million a year. What's to be done with the money? The sales tax hike is the largest piece of a total $1.5 billion tax increase, with cigarette and gambling taxes contributing most of the rest. About a billion dollars of this revenue will be returned to taxpayers in property tax cuts, mostly for homeowners. Some homeowners will see their property tax bills drop enough to offset their higher sales taxes. Some won't.

The other $500 million will be used to fill in part of the state budget gap. It's enough to keep the state from an unconstitutional budget deficit, but not enough to pay for new spending. Despite the new penny, the General Assembly will have to make some tough budget decisions when its session starts in January.

 

 

Writer: Larry DeBoer,
Editor: Olivia Maddox,