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FISCAL IMPEDIMENTS: Super Sales Tax

Background:

Missouri per capita expenditures on higher education and health care for the poor are among the lowest in the nation (45th and 43rd lowest respectively). Missouri also ranks 37th lowest on state and local expenditures for elementary education. Over the years, Missouri has consistently remained near the bottom of the states in spending on these critical public needs because state revenue to support these programs has also been held low intentionally. Most recent calculations rank Missouri 46th lowest in overall state revenue per capita. In the recession of 2009, even the moderate existing general revenue sources have deteriorated. To prevent further deterioration and to allow for any possible improvements, the state of Missouri needs a robust and a growing stream of tax revenue to fund the many obligations of the State.

Total state revenues are collected from a varied of taxes and receipts from the federal government.  The general revenue fund (excludes federal funds and earmarked funds) is the primary source for discretionary state expenditures and the income tax and the sales tax produce 80% of the general revenue fund. State government receives almost no property tax revenue.  A robust states tax system should have both stability and potential for growth.  Between the two major taxes, the individual income tax is the most stable, followed by the sales tax and finally the much smaller corporate income tax. However, for growth, the corporate income tax has tremendous potential and the sales tax reflects both real and inflationary growth. The individual income tax typically has modest growth reflecting increased jobs or wage increases. Experts often suggest that a tax structure which has a fair balance of these major taxes provides a good foundation for providing public services.

2010 Tax Proposals

Even in a time of significant decline in state revenues, there are almost no proposals to provide additional state revenue by raising taxes. The most talked-about proposal this year has been introduced by several sponsors and should be called a “Super Sales Tax”
(often mislabeled “Fair Tax”). The purpose of this proposal is not to provide additional revenue, but to repeal the individual income tax, corporate income tax and several smaller business taxes on banks and insurance companies and replace the lost funds with a super sales tax.

Super Sales Tax

To date, the following state constitutional amendments have been introduced during the 2010 legislative session to repeal the current income tax and replace it with a super sales tax on goods and services: Senate Joint Resolution 29 (SJR 29) by Senator Purgason (R 33rd), SJR 37 by Senator Ridgeway (R 17th),   HJR 56 by Rep. Emery (R 126th), and HJR 71 by Rep. Koenig (R 88th). All of these proposals have been assigned to committees, but only SJR 29 has received further action. All of the proposals are very similar, but the following summary and analysis is based on the Senate Committee Substitute for SJR 29.

 

SJR 29 Purgason: 

Repeals income tax and imposes super sales tax on goods and services.

Approved by Gov Accountability & Fiscal Oversight on February 18, 2010

Taken up for debate by the Senate – March 4, 2010

This proposed constitutional amendment would void the state individual and corporate income tax, the corporate and bank franchise tax and state sales and use tax and replace them with a super sales tax on the sale, use, or consumption of taxable property and services in Missouri beginning January 1, 2012. The amendment includes an exemption from the new sales tax for business purchases of component parts or ingredients used to make new tangible personal property to be sold at retail, federal government purchases, and business-to-business transactions including agriculture will be exempt and the sale of used cars and construction equipment. All existing state sales tax exemption of food, prescription drugs and residential utilities will be eliminated.  Because a sales tax has a proportionately higher impact on lower income families, the proposal provides for a monthly rebate equal to the amount of sales tax that would be collected from a family with income equal to the poverty level.

Purpose:

The purpose of this proposal is to repeal all income taxes in Missouri and shift those taxes to consumption expenditures through a super sales tax. The income taxes to be repealed are the individual income tax, the corporate income tax, the bank tax and the corporate franchise tax. We refer to the replacement tax as a “Super Sales Tax” because, in addition to the sale of products, the new sales tax would also apply to services like doctors, lawyers, accountants, plumbers and auto repairs.  Also, while the current state sales tax exempts food and prescription medicine, the new tax would apply fully to both. Because it is well known that the sales tax is regressive, which means it taxes the poor at a higher effective rate, the proposed “Super Sales Tax” includes a rebate to all families that will substantially offset the new sales tax paid by the poorest Missouri families.

Impact:

 

Low Income below $20,000 – In principle, this proposal will be either neutral or possibly have a small benefit for the lowest income Missourians. With a rebate equal to an amount calculated equal to the new sales tax rate times the poverty level of income, families with actual income less than poverty may receive a small boast in income.

High income  above $125,000 – Because high income families tend to “spend” a larger portion of their income on non-taxable intangible investments like retirement accounts, life insurance, savings deposits, the effective sales tax rate (% of total income) declines on the families at this income level because fewer purchases are taxed. However, the income tax does not depend on how you spend your income (except chartable donations) and the effective tax rate increases up to about $50,000 and then increases as income increases. Therefore, the repeal of the individual income tax and the business income taxes will provide a tremendous tax cut for people with income over $125,000. Because of purchasing and investment patterns of the wealthiest 20% of Missourians, the super sales tax will recapture only about 65% of the tax cut given this group by the income tax repeal. The SCS/SJR 29 provide for a rebate equal to the new sale tax rate times an amount equal to the poverty level of income. By the wording, it appears the rebate would be available to all Missouri households. If it is somehow conditioned on income, families will have to notify the state of their income creating an administrative overload. This direct payment to the wealthiest Missourians would effectively further reduce taxes on this group. The tax cuts to this group could exceed $500 million dollars.

Middle Income   The proponents of this proposal claim it will be revenue neutral to the state. Therefore the new tax will have to cover the rebate to the all taxpayers, the income tax cut for the wealthiest and the other business taxes that are repealed. Since the lowest income taxpayers tax is offset and the upper income people get a cut, the approximately 55% of Missouri households in the middle would suffer a substantial tax increase totaling as much as $800 million. On average, middle income Missouri households would pay more than $1,000 extra tax so that the wealthiest households and companies could receive major tax cuts.

Missouri retail and service business on the border – The two largest metropolitan areas in Missouri sit on the east and west boarder. The super sales tax will push up the total sales tax rate on products so that there will be an incentive for shoppers to shop across the state line to avoid the tax. Neither bordering state impose a sales tax on services so the tax differential on charges for hospital, doctors, accountants, nursing homes, child care, auto insurance and repairs will be nearly ten percent and drive consumers to flee Missouri businesses. Given that these two areas represent a major portion of the state sales tax collections, this proposal may result in a significant reduction in tax revenue as buyers legally avoid the new tax by shopping across the borders

Implementation and Administration

Tax Rate – The proponents have included language in the constitutional amendment to initially set the new super sales tax rate at 5.1%. However, recently the Republican supported think-tank that did the original analysis admitted it may be over 6%. Analysis by legislative staff suggests the replacement rate may be over 8%. A detailed analysis done by independent groups indicate that to cover all losses from the income tax repeal and pay the proposed rebate would take a sales tax rate of about 10%. This is just the state rate and local sales taxes will add significantly to the state rate.

Effective date – If passed by the Legislature, this proposal will be put to a vote of the people in November 2010. If approved, the proposal calls for implementation 13 months later on January 1, 2012. However there are no funds provided to enroll the tens of thousands of plumbers, doctors, carpenters, accountants, auto mechanics, lawyers, auto insurance sales offices and many other service providers that will be newly taxed under this proposal. If the newly taxed service providers are not identified an enrolled, taxes will go uncollected and possible penalties could be incurred.

Taxing Medical services – Medical treatment is an obvious new service that will be taxed under SJR 29. However, what is the taxable amount is not clear!  If an uninsured person is treated and individually pays for medical services, then the full service is taxable. If that same person promises to pay, but later cannot pay, does the Doctor have to pay the sales tax? If an insured patient is treated, is the full price taxed and paid by the insurance company and or the individual?  With insurance, is only the co-pay taxable?

Taxing auto insurance and auto repairs – It is unclear if auto insurance is a taxable service or under SJR 29, an exempt intangible asset.  Regardless, when insurance pays for an auto repair service, is the full price taxable or only the deductible?  If the full repair price is taxable, does the insurance company have to pay its part, or does the individual pay the entire sales tax?  If the insurance company is exempt under the business to business principle set forth in SJR 29, then are any bills exempt if paid by insurance?

Taxing new home sales – SJR 29 appears to tax the sale of new homes. To add a $10,000 or $20,000 sales tax on home sales would devastate new home sales. If new home sales are taxed then all the inputs are exempt as component parts of a product sold at retail. If the new home sale is exempt, then all carpenter, plumbing, electrical and concrete labor services would be taxable as retail sales.

Taxing Rent – SJR 29 specifically mentions leasehold interest or rents. This would appear to impose this tax on residential rents and apartment leases. It is unclear if rent on commercial property would be taxable or exempt. The standard collection process would require that all landlords be registered as sellers and collect the sales tax and remit it each month.

Gasoline Sales – The current sales tax exempts the sale of motor fuel because there is a per gallon tax on gasoline when wholesalers first bring the gas into Missouri. SJR 29 would repeal the current sales tax exemption and impose a sales tax increasing the price by almost 25 cents a gallon.

IN OUR OPINION –

The repeal of the Missouri income tax and several other business taxes and replacing them with “Super Sales Tax” (as proposed by Senator Purgason in SJR 29) is very negative policy. The impact would be to pay for a tax cut for the wealthiest 20% of Missourians by imposing a substantial tax increase on middle income Missourians.

SJR 29 would impose a significantly higher tax on Missouri retailers and would make retailers and service providers along the state border less competitive with retailers in neighboring states. There is a real chance that the proposal would not fully replace existing tax revenues that are lost, which would reduce state revenues and require further budget cuts.

SJR 29 locks into a constitutional provision (that cannot be changed without a vote of the people) a major change in state tax policy with unknown or uncertain consequences. Proponents claim the proposal “simplifies taxation” but in truth, it will create a tremendous burden on all service providers, landlords and boarder businesses. The design of this proposal will eliminate business taxes and reduce taxes on people that don’t spend all their income and shift that tax burden to the middle income Missourians who have to spend all their income to survive. This is a cruel, unfair policy that is being marketed as a fair tax by wealthy interests that will benefit.  SJR 29 and similar legislation should be opposed.