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| By
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| Larry DeBoer |
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| Professor of |
| Agricultural
Economics |
| Purdue University
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11-27-02
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.
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