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01-22-04
Sales Tax Maybes
Early in January, the state announced that revenues had fallen short
of projections -- again. Later in the month, revenue forecasts were again
revised downward. The state's budget is in bad, bad shape.
When the forecast was revised, it knocked $322 million out of expected
revenue. This cut the sales tax forecast $352 million. The net change
in all the other taxes was positive.
What's wrong with the sales tax? Why has its growth fallen so far short
of predictions in the recent recession and slow recovery?
Maybe it's the kind of recession that we had. It was mostly a recession
in manufacturing. From February 2001 to July 2003, U.S.
businesses shed 2.7 million jobs. About 2.4 million of those were jobs
in manufacturing. Indiana is a manufacturing state. One out of every five
of our jobs is in a factory. For the United States,
it's one out of nine. So, when a manufacturing slump drags down the national
economy, it really hurts here.
Many people are not working, or working less than they'd like, so they
tighten their belts and spend less. Sales tax revenues fall short.
Maybe it's not just recession. Globalization and technology are changing
the economy. If a factory closes temporarily during a recession, then
re-opens when the economy recovers, there are jobs to be filled. If a
factory closes for good, because its machines are obsolete or its products
can be produced cheaper somewhere else, jobs are lost. New jobs will be
created, but only after a company builds a new plant or an entrepreneur
gets a new idea. That takes more time. More people are without jobs longer.
They spend less, and sales taxes grow slowly.
Maybe it's the things we tax. I mean things. Most goods are taxable;
most services are not. Cars and clothing, appliances and fuel are taxed.
Untaxed are travel agents, haircuts and movie tickets, as well as medical
care and legal advice.
Over the years, taxpayers have spent less and less on taxed goods and
more and more on untaxed services. According to national data, the things
that Indiana taxes made up about 35 percent of all consumer spending in
1970. It's 29 percent today. Less of our spending is taxed.
It's not so much that we're buying fewer goods and more services. Mostly,
it's that the prices of goods are rising slower, and the prices of services
are rising faster. The sales tax is a percentage of price.
Maybe it's the Internet -- everyone's favorite explanation for everything.
More and more taxable goods are sold online. The state has trouble collecting
taxes on these goods. The state can require a retailer to collect and
pay sales taxes if they have facilities in Indiana. Most online vendors
do not.
Perhaps online consumers don't know this, but if the seller doesn't pay
the sales tax, the buyer owes it. The sales tax is a "sales-and-use"
tax, meaning taxes are owed on goods bought elsewhere if they are used
in Indiana. The state tries to collect these taxes with the income tax
returns. If you use the IT-40 tax form, check out line 17: "use tax
due on out-of-state purchases." About three million taxpayers file
returns each year. Only 30,000 pay any use tax. No one believes that only
1 percent of Indiana taxpayers buy online.
The problem will only get worse as online sales keep growing. Two professors
from Tennessee, William Fox and Donald Bruce, figure that Indiana lost
$114 million in taxes on Internet sales in 2001 and will lose $389 million
in 2006. You can read their study on the Internet (tax free!) at
http://cber.bus.utk.edu. Click on "e-commerce."
What's wrong with the sales tax? Maybe it's the recession or technology
and globalization. Maybe it's growing spending on services or Internet
sales. Maybe it's all four, and some other reasons besides. Here's the
irony. A year and a half ago, we decided to reduce property taxes by a
billion dollars. We funded that relief with a sales tax hike. That made
Indiana's governments more dependent than ever on sales taxes. Maybe we've
got a problem.
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