The Most Regressive Tax

Sales taxes are already regressive enough, why do progressives also allow them to be a waste of time too?

By Gabriel Ferrante

Tagged Reformtax reformTaxesValue-added Tax

A few weeks ago, Grover Norquist tweeted a story about his daughter:

The liberal response noted that the purchase of the guitar would have been impossible without the protections and services funded by state and local sales tax (roads and police officers to civilize them, anyone?). What many responders failed to note was that Ms. Norquist ought to have learned a valuable lesson, not about why she should hate all taxes, but that it isn’t cheap to be poor, or even middle class in America.

The average American wage grew by 2.5 percent in the last year, while the price of the average good or service went up by 1.9 percent. With real wages increasing so slowly, it is no surprise that most people have trouble building up meaningful savings. In fact, six in ten Americans couldn’t cover a $500 expense if it arrived unexpectedly. As a result of this chronic insecurity, many are forced to rely on credit cards, payday loans, and social networks to make ends meet, methods which are either highly priced or unreliable themselves.

Unpredictable expenses might take the form of a medical crisis or a car breakdown, but the financial surprises faced by all but the wealthiest are surprisingly diverse. The strangest is the entirely artificial surprise of sales tax at the end of a trip to the mall, restaurant, or, as in Ms. Norquist’s case, music store. Unlike the UK, Ireland and many other countries, prices in the United States represent not the actual cost to you, the consumer, but rather, the amount received by the retailer when you make the purchase (less the fee they pay to the provider of your credit card, but more on that below). This tends to be taken for granted by American consumers, and it’s the subject of good-natured ribbing on travel blogs written by foreign travelers who are used to being able to add their totals in their heads. However, it presents more than just a minor nuisance. It is, instead, another manifestation of the pernicious effect of America’s most regressive tax.

Sales tax is a conservative dream. While on its face it affects all consumers equally, in fact it taxes poorer households to a greater extent, because they spend a larger portion of their income on it. It is for this reason that it is not blue states with expansive governments, but red states like Louisiana, Arkansas, and Kentucky that have the highest average effective sales tax rates. (Blue states New York, California, and Washington follow close behind, but also provide many more state services). However, because of tax-exclusive pricing, sales tax is not just a tax on consumption, it is also a tax on the time of low-income Americans. Those lucky enough to be well off make a grocery list or identify the clothes they need and buy the desired items, shopping around for the best price. However, Americans with fixed or low incomes cannot simply toss everything into the cart and wait until they get to the checkout counter to find out precisely how much they are going to pay (many, but by no means all, states exempt all or some grocery sales from their sales taxes, or else reduce them). The price of every good must be calculated out to include sales tax to make sure that the final cost isn’t greater than the $30 or $50 or $100 budget allotted by the shopper for their visit: The few dollars and cents required on top of the listed prices are likely needed for something else. Time is money, and with the multitude of moments wasted over little inconveniences and indignities like these over the course of a lifetime, it is no wonder that America’s poor and middle classes feel like they are being nickel and dimed to death.

There are several arguments in favor of America’s tax-exclusive advertising system. All of them are, at best, limited in their impact. Let’s survey them:

Sales Taxes Vary Too Much: It is true, state and local governments set a variety of tax rates, many of which are fractional (my home state, Connecticut, applies a tax of 6.35 percent on purchases). This means that, if taxes were included in listed prices, multi-state businesses might have to print a variety of price tags for their goods, and the usefulness of national advertising campaigns might be limited. While there is some logic to this objection, this is unlikely even if corporate convenience is more valuable than consumer transparency. Instead, many national corporations would probably simply price products with tax included nationally or regionally, as they already do, and allow variation in their profit margin on each product, depending on the tax rate in the state or municipality.

How do we know that they would do this? Because they already do. Remember your credit card? If you chose to pay for a product with cash, the full pretax amount is revenue for the retailer. But if you paid with an American Express card, a vendor’s take is short a fee of up to 3.5 percent. Paying with Visa, MasterCard, or other cards will cost the vendor different amounts depending on your preference. This does not lead to a multiplicity of prices. Vendors receive a slightly different amount from every sale. While sales taxes vary from zero to nearly ten percent, this practice tells us that a few, but not a legion, of different price tags would be necessary. This, after all, is a strategy that must already be employed in Europe, where Value Added Taxes vary, and where national populations are often dwarfed by those of U.S. states like California.

Fractions of Cents Would Make Setting Prices Difficult: Difficult, but certainly not impossible, nor even all that challenging considering the widespread availability of calculators. When you go to a bar and order a beer, the bartender tells you a price, which includes a tax. At a crowded bar, the manager has no interest in losing business because of the time needed to make change on cash sales of $4.236. The same is true for vendors at sporting events, or just about anyplace where the time of the cashier is valuable. This hurtle is certainly surmountable.

Tax Transparency Is Paramount: From a tactical perspective, as Grover Norquist’s tweet demonstrates, conservatives are big fans of keeping taxes separate from advertised prices: Surprise price hikes are annoying to everyone. However, they usually phrase this objection as allowing people to “keep an eye on the government.” This is silly. Most states mandate that any receipt include the tax on a different line from the pre-tax price, and list the tax rate. Moreover, unless one is purchasing a single item, one likely knows the amount of tax that one is paying only by looking at one’s receipt, not by totaling the added prices in their heads. These laws would not vanish if taxes were included in advertised prices. People would still see the cost of the tax on their receipt. Tax transparency would not change at all. Consumer transparency, on the other hand, would be significantly improved.

America’s patchwork of sales taxes are already a pet peeve of corporations, which would much rather not have to factor in the varying prices consumers pay for their goods in different states. Though sales taxes often fund the backbone of state and local governance, and therefore many key services, progressives should remember that they are disproportionately hurtful to the poor, both in time and inconvenience. We ordinarily think of sales tax as a few nickels on the dollar, but this can add up for large purchases. If your child needs a new computer because their school requires typed essays and budget cuts have shrunk the hours at the local library, or your refrigerator breaks beyond repair, the addition of a sales tax to the purchase price can break the bank. Other, more progressive taxes ought to replace sales taxes entirely.

Lowering or eliminating sales taxes need not starve states and local governments of revenue. Taxes on consumption could be made progressive, as Robert Frank argued in Democracy in 2008. Additionally, raising taxes on inheritance, real estate (especially real estate held by landlords for rent) or luxury goods and services could make up for the lost revenue. However, because they are the preferred tax method of the right, and because of the difficulty of rewriting the tax code in the many states that already charge a regressive sales tax, sales taxes probably will not vanish overnight. As a result, progressives ought to ensure that the price that’s advertised is the price you pay. It is in the interest of corporations to try to convince Americans to make purchases, even when they cannot afford them. But business would be impossible without the infrastructure, education, and physical and environmental protection provided by governments. These costs are paid by the sales tax, and thus, they are rightly part of the cost of every good or service sold. They should be advertised as such. Even the smartest regulation cannot prevent unexpected financial shocks, but it can, at the very least, make sure that sales taxes aren’t among them.

Read more about Reformtax reformTaxesValue-added Tax

Gabriel Ferrante is a summer fellow at Democracy.

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