Let’s Eliminate the Sales Tax

As my dad and I argued last year, Colorado should eliminate the sales tax (along with the use tax) even if done in a revenue-neutral way by increasing the income tax rate.

Consider a few of the many problems with the tax:

Interstate commerce has created huge problems for collecting and administering sales and use taxes.

* Paying the sales tax over small-scale intrastate commerce is incredibly difficult. For example, I can directly sell my book, Values of Harry Potter,practically anywhere in the world, but I cannot afford the paperwork nightmare of selling it directly in Colorado. (You can still buy it on Amazon!) In my experience, many small businesses simply ignore the sales tax laws.

Paying the use tax is an absolute nightmare, and the fact that hardly anybody does it turns most Coloradans into criminals.

* Sales taxes disadvantage local stores, yet forcing out-of-state businesses to collect sales taxes would create “as many as 15,000 tax rates to administer” — a bureaucratic nightmare.

The obvious solution to all these problems is to simply eliminate the sales tax.

Thankfully, the Joint Budget Committee has placed the Colorado budgetonline starting with 2004-05. Looking at the budget for fiscal year 2011-12, we can learn what eliminating the sales tax would mean.

Page 6 of that document reveals that total “excise taxes” (sales, use, and related taxes) bring in $2,184,400,000 (let’s say $2.2 billion). Income taxes bring in $4,692,200,000 (let’s say $4.7 billion). So, very roughly, eliminating the sales tax in a revenue-neutral way would require an increase in the income tax of somewhere less than fifty percent. Of course I’d rather see net taxes decline, but I could live with a revenue-neutral shift in order to get rid of the onerous sales tax.

1 thought on “Let’s Eliminate the Sales Tax”

  1. Comment by Rob September 22, 2011 at 11:21 AM

    Would you apply this to just the state sales tax, local tax or both?

    I’m not familiar with the situation in Colorado, but here in Oklahoma an incredible amount of effort – including some serious emotional blackmail – is put into keeping sales taxes high. In some cases, the local sales tax can include special taxes enacted for municipal projects. It’s been frustrating to me to see how effective blatant appeals to collectivism and sacrifice have been in support of some of these.

    Comment by Ari September 22, 2011 at 11:37 AM

    I was talking only about the state sales tax. To get rid of local sales taxes (in a revenue-neutral way), those would have to be absorbed into property taxes.

    I do think it’s worth separating out the tax structure debate from the tax level debate. Even with the same level of net taxes, different tax structures can be more or less onerous.

    Comment by kazriko September 22, 2011 at 12:35 PM

    One thing to note is that consumption taxes have historically been more stable forms of income for the government than income taxes, especially in economic downturns.

    I’m certainly for simplifying the tax code though, either through income tax or by stripping sales taxes down until they’re easily calculated by everyone. I’m of the belief that if any government wants to collect a sales or use tax, they should provide retailers with a consistent (between states) and stable server (never goes down) they can connect to that will calculate these things automatically with a minimum of data provided (such as, only a zip code and an amount.) Trying to force everyone to figure out the horrific sales tax quagmire we have now is not acceptable.

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