The Council On State Taxation (COST) and the State Tax Research Institute (STRI) are pleased to announce the release of a new study “A Global Perspective on U.S. State Sales Tax Systems as a Revenue Source: Inefficient, Ineffective, and Obsolete”. The study is authored by COST’s Karl A. Frieden and Douglas L. Lindholm. Ros Barr and David Douglas Robertson of EY provide analysis of the European Union VAT and the Canadian GST/provincial sales tax system.
The study provides an international perspective on U.S. state and local sales tax systems through a comparison to the primary general consumption taxes in the European Union (the Value-Added Tax (VAT)) and Canada (the Goods and Services Tax/Harmonized Sales Tax (GST/HST) and a few provincial sales taxes). In particular, the study evaluates the efficiency, efficacy, and historical development of general consumption taxes in each of these geographies based on the three key principles of an optimal consumption tax:
- a harmonized and broad-based consumption tax on household goods and services;
- an exemption (or credit) for business inputs; and
- centralized and simplified tax administration.
The study concludes that in comparison to European Union and Canadian consumption taxes, U.S. state retail sales taxes are failing as part of a balanced revenue system. The failure is twofold: First, U.S. state sales tax systems are among the most inefficient and ineffective consumption taxes in the world, with a tax base overinclusive of business inputs and underinclusive of household goods and services, and with tax administrative rules that generally lack harmonization or simplification. The obsolescence of state sales tax systems harms the nation’s international tax competitiveness and undercuts its ability to use consumption taxes as a scalable option for raising revenue and balancing the composition of tax types.
Second, less reliance on consumption taxes in the United States leads to a dangerous imbalance in the nation’s overall tax mixture and an underuse of the revenue source with the least negative impact on economic growth. The United States relies less on consumption taxes and more on income, payroll, and property taxes as a share of all taxes than any other advanced nation in the world. This imbalance undermines the resilience and sustainability of the U.S. tax revenue stream.
In the near future, two converging financial crises will place enormous stress on the U.S. tax system: the fiscal impact of the unprecedented COVID-19 pandemic and the longer-term repercussions of escalating levels of federal debt. In the short-term, the federal government has spent almost $6 trillion on COVID relief and economic stimulus in 2020 and 2021. In the long term, the Congressional Budget Office (CBO) estimates the federal debt-to-GDP ratio will rise to 102% in 2021, compared to 79% at the end of 2019, and 35% in 2007 before the start of the previous recession. With substantial unfunded liabilities for health care and social security for an aging U.S. population, the CBO estimates that the debt-to-GDP ratio will increase to an almost unimaginable 202% in 2051, nearly five times the average federal debt level for the last 50 years. Current federal and state tax systems in the United States will be sorely challenged to satisfy these budgetary demands, which will require an effective, balanced, and efficient mix of taxes to meet the demands of burgeoning deficits and government spending and to avoid hindering economic growth.
According to Douglas Lindholm, President and Executive Director of COST, “This study provides one of the most comprehensive comparative consumption tax studies ever undertaken relating to U.S. state sales tax systems. The study analyzes the harmful consequences of the inefficiency and ineffectiveness of U.S. consumption taxes and provides a number of options available to U.S. policymakers to transform state sales tax systems and address the dangerous imbalance in sources of tax revenue.”
Source cost.org
