Friday, February 12, 2010

Higher Sales Tax Proposal is Bad Magic

By Amy Blouin

Wouldn’t it be nice if Missouri could magically find the money needed to pay for services people need and to make the sort of investments that help build a prosperous future?

That’s pretty much what some state lawmakers are proposing. Wave a magic wand and — poof! — the state income tax disappears. Wave it again and — poof! — corporate taxes disappear. How would reducing revenues get us the money we need? Watch carefully as supporters of this plan pull a rabbit out of their hat. But wait, that’s not a rabbit — it’s a sales tax like none ever before seen in Missouri or any other state.

Measures have been introduced in the state House and Senate that would essentially take this approach to paying for Missouri’s needs. And like all magic tricks, they involve sleights of hand that, when closely observed, reveal that things are not as they seem.

Eliminating individual and corporate income taxes and replacing them with a greatly expanded sales tax would in fact be a bad deal for the vast majority of Missouri families, while also threatening the state’s ability to meet future needs.

First, let’s consider how much money we’re talking about. The taxes that supporters of this plan would eliminate took in almost $9.4 billion in 2008. To make up all of that through only a sales tax would mean taxing far more purchases than is the case today; in fact, far more than any other state taxes. According to the language of the proposals, we could see a new sales tax on nursing-home care, doctor’s office visits, child day-care services, purchases of new homes, funerals, food and prescription drugs, legal counseling and financial services, private K-12 school tuition and much more.

Not only that, but the sales tax rate itself would have to go up dramatically in order to offset the money lost from ditching other taxes. That means what we pay in sales tax on items already taxed would have to be increased as well. Recent estimates show that to fully replace lost revenue, the

new sales tax rate would need to be approximately 11 percent -- not the 5.11 percent rate stated in the legislation.

It is clear who would bear the brunt of that increased tax rate. Because they don’t have as much money to stash away in savings, middle-income Missourians (including most seniors) spend a higher portion of their incomes on buying products and services than do the wealthiest people. Folks in the middle would get the biggest tax increases as a result of the income tax being eliminated.

And that’s just the impact today. As families know, needs and costs tend to rise. So how would this system pay for necessities like education, highway repair and job training in the future? The proposals rely on the Missouri Legislature to further raise the sales tax rate after the first year if the proposed rate proves insufficient. So there is no telling how high the sales tax rate would have to go, with the alternative being massive cuts in services people need.

No other state taxes services as broadly as would Missouri under these measures, which, among other things, raises the issue of how competitive Missouri would be with its neighbors. There are a few states with no income tax, but they collect significantly more revenue from tourism or oil severance fees than Missouri. None has in place a system like the one being proposed for Missouri. There simply is no comparison we can use to assess this proposal.

What is known, though, is that putting all of our eggs in the sales-tax basket would be a risky strategy, especially in tough economic times like these. No tax structure is perfect during a recession, but a diversified approach — sales and income taxes; taxes on businesses and individuals — has proved through the years to be the strongest.

In the end, there is no magic to building a prosperous state. We would do well to resist temptations of easy answers.
Amy Blouin is executive director of the Missouri Budget Project.
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