Presentation to the Revenue Interim Committee on Sales Taxes HJ 35: - - PowerPoint PPT Presentation

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Presentation to the Revenue Interim Committee on Sales Taxes HJ 35: - - PowerPoint PPT Presentation

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Presentation to the Revenue Interim Committee on Sales Taxes HJ 35: STUDY OF STATE AND LOCAL TAX POLICY Marco Guzman Institute on Taxation & Economic Policy July 20, 2020 marco@itep.org Introduction to ITEP The Institute on Taxation and

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Presentation to the Revenue Interim Committee on Sales Taxes

HJ 35: STUDY OF STATE AND LOCAL TAX POLICY

Marco Guzman Institute on Taxation & Economic Policy July 20, 2020 marco@itep.org

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Introduction to ITEP

The Institute on Taxation and Economic Policy (ITEP)

 Non-profit  Non-partisan research organization  Federal, state, and local tax policy issues

Mission:

Ensure elected officials, media, and general public have access to accurate, timely, and straightforward information that allows them to understand the effects of current and proposed tax policies with an emphasis on tax-incidence analysis.

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Overview

1. Sales Taxes in Context

  • 2. Montana’s Tax Systems vs. Other States
  • 3. Design and Best Practices
  • 4. Addition of a General Sales Tax in Montana
  • 5. Summary and questions

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Sales Taxes in Context

  • 3 Major Sources of Revenue for State and Localities
  • Personal Income Tax
  • General Sales Tax
  • Property Tax
  • Sales Taxes Are Regressive
  • Low-income taxpayers pay a greater share of their income in sales tax than the

wealthy

  • Income Spent on Sales-Taxable Items
  • Low-income: Three-quarters
  • Middle-income: Half
  • Upper-income: One-sixth

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“While s e sales es taxes es don’ n’t grow w with t the ec e econo nomy a as w wel ell a as per ersona nal inc ncome e taxes es d do o

  • ver

er the e long ng t ter erm, they ey also t tend end t to dec ecline ne les ess t than i n inc ncome e taxes es when a en a r rec eces ession n hits. During ng rec eces essions ns, i inc ncome t e tax rev evenu enues es fall a as peo eople e lose t e thei eir j jobs o

  • r s

see t ee thei eir h hours cut; s sales es tax rev evenu enues es dec ecline t ne too (sinc nce e peo eople e cons nsume f e few ewer er taxable e goods and nd ser ervices es w when t en thei eir inc ncomes es d drop), but u usually lly not a as sharply ly.” .”

  • -Michael Leachman & Michael Mazerov, Center on Budget and Policy Priorities, (2013)

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Current Sales Tax Collections

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Montana Compared to Other States

  • Average State’s

Consumption Tax Structure is Equivalent to an Income Tax of…

  • 7.1% for the Poor
  • 4.8% for Middle Class
  • 0.9% for the Wealthy

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Reference: ITEP Who Pays? Sixth Edition

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Reference: ITEP Who Pays? Sixth Edition

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Most & Least Equitable Tax Systems

Most… & Least

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Reference: ITEP Who Pays? Sixth Edition

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Reference: ITEP Who Pays? Sixth Edition

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Reference: ITEP Who Pays? Sixth Edition

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Design & Best Practices

  • Principles of a Good Sales Tax
  • Broad base
  • Low Rate
  • Exemption(s) for low- and middle-income taxpayers
  • Sustainable

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Design & Best Practices Cont.

  • Horizontal equity
  • A tax is structured to impose the same tax liability on two taxpayers in

similar economic circumstances — most often, two taxpayers with the same income

&

  • Vertical equity
  • The distribution of tax liabilities among people with different incomes

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Services Taxed by Category & State

  • Montana taxes 17 services
  • ut of more than 176
  • States need to ensure their

taxable base remains up- to-date

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Reference: FTA Survey of Services Taxation - Update, July-August 2017

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Wayfair and Online Sales Tax Collections

  • South D

Dak akota v a v. W Way ayfai air, Inc.

  • c. (2018)
  • SCOTUS overruled the “physical presence” requirement for out-of-state

sellers

  • Opened the door for states to collect sales tax from remote sellers
  • States have begun enacting similar laws exempting sellers below a specific

amount of income in sales and/or a sales threshold

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Options for Reducing Regressivity

  • Exemptions
  • Eliminate sales tax on

specific item

  • Sales Tax Holiday
  • Temporary break on sales

tax liability

  • Sales Tax Credit
  • An amount taxpayers

may subtract from taxes owed

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Reference: Options for a Less Regressive Sales Tax in 2019

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Reference: Sales Tax Holidays: An Ineffective Alternative to Real Sales Tax Reform

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Sales Tax Credits & Maine

  • Advantages:
  • Refundability
  • Targeted
  • Do not affect sales tax base
  • Less expensive alternative
  • Disadvantages:
  • Administration

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Reference: Options for a Less Regressive Sales Tax in 2019

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A Sales Tax in Montana?

  • 2% broad based sales

tax based on HB 300 & HB 620

  • Raise $1.4 Billion in

2019 $

  • New ITEP Tax

Inequality Index Rank: 39th

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Sales Tax & Credits

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Sales Tax & Credits Notes

  • First bar:
  • Universal credit
  • $100 per person
  • Fully refundable
  • Cost: $102 million in 2019 $
  • New Tax Inequality Index Rank:

36th

  • Second bar:
  • Targeted credit to taxpayers

making >$35,000

  • $200 per person
  • Cost: $53 million in 2019 $
  • New Tax Inequality Index Rank:

43rd

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Summary

  • Sales taxes can be an important part of state tax systems despite being

regressive

  • Avoid relying too heavily on sales tax
  • Implement a sales tax to diversify tax system and not to replace other

taxes

  • Utilize policy to offset regressive nature of sales tax

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