The following article originally was published by Grand Junction’s Free Press.
May be time to dump ‘emergency’ sales tax
by Linn and Ari Armstrong
“This article shall be known and may be cited as the ‘Emergency Retail Sales Tax Act of 1935.'” Thus begins the section of Colorado statutes on the sales tax. That must have been some emergency, given the state continues to collect the tax three-quarters of a century later.
Colorado joins forty-four other states (plus the District of Columbia) in collecting sales taxes. Economist William Fox points out that “twenty-four of the states first levied the tax during the 1930s,” during the Depression era.
Politicians back then did what the Colorado legislature has done this year: expand business-killing taxes during an economic slump. That is part of the reason why the Great Depression lasted as long as it did.
Taxes should be few in number, easy to follow, and closely related to the government services the payer receives. The sales tax violates all these principles. Therefore, instead of talking about how to expand the sales tax, we should be talking about how to repeal it.
The Amazon Tax, which caused Amazon to drop its Associates program in an attempt to avoid the onerous law, illustrates one important problem with the sales tax. The U.S. Constitution grants the federal government the authority to regulate interstate commerce. That is why Colorado’s Amazon Tax is likely to end up in court, thereby costing taxpayers even more money.
Granted, it is unfair to in-state stores to force only them to collect the sales tax. However, the best way to solve that problem is to stop subjecting the in-state stores to the tax. The sales tax discourages shopping and it imposes onerous red tape.
The sales tax has other bizarre regional implications. If a resident of Grand Junction (or Texas) buys something at a Denver store, that store collects a tax for Denver. However, if a resident of Grand Junction buys something from Washington, the tax is supposed to go to Grand Junction (plus the county and state).
Something else odd about out-of-state sales is that retailers with physical stores in Colorado, such as Barnes and Noble, already must collect sales tax on items shipped from out of state. That is because the presumed federal rule (which Colorado legislators apparently want to challenge in court) is that a state has jurisdiction only over companies with a physical presence in the state.
As bad as store-collected sales taxes are, consumer-paid “use taxes” are even worse. Colorado residents who buy from out-of-state stores are already supposed to calculate and pay a tax on the purchase. However, hardly anybody knows about these laws or how to follow them, and hardly anybody complies with the law.
Retailers that operate out of a single store front must calculate only a single tax rate, based on the tax regions they operate under. However, those in Colorado who ship items throughout the state must calculate many rates, which is practically impossible for small businesses shipping low-cost items. The result is that many businesses either choose not to do business in Colorado, or they ignore the tax laws.
The sales tax also skews the behavior of both businesses and consumers. Businesses sometimes set up shop outside of higher taxing zones, and people often drive down the road to pay less sales tax.
Then there is the endless special-interest pressure to charge different rates on different goods. Should we exclude “necessary” items like groceries? Are Cocoa Puffs as “necessary” as a head of lettuce? Should “sinful” items from beer to soda pop be subject to higher sales taxes? What about “luxury” items like high-end cars? Who decides what is necessary, sinful, and luxurious, and why should government be involved in such social engineering?
Should businesses involved in, say, tourism, collect special taxes to fund related bureaucratic operations? Should cities give special tax breaks to favored businesses?
Because of the compliance costs, wasteful behaviors, and inequitable imposition of the sales tax, we would be open to completely doing away with all sales and use taxes. Preferably this would be done by cutting state spending, but it could be done in a revenue-neutral way by raising income taxes to compensate.
Obviously the income tax is also subject to compliance costs, severe loss of privacy, and special-interest pandering. However, we already have to pay the income tax. We’d rather have one onerous tax than two. Merely expanding the state income tax, and substituting income taxes for sales taxes at the local level, would not impose higher compliance costs than already exist.
Within the sales tax regime, some modest reforms would improve matters. As examples, the legislature should repeal the Amazon Tax and all consumer-paid use taxes. The better reform, though, is to completely abolish sales taxes. That would be a great place to start, and next on the block should be property taxes. But we fear that if we discuss too many tax reforms in one article we might give the bureaucrats heart palpitations.
Linn Armstrong is a local political activist and firearms instructor with the Grand Valley Training Club. His son, Ari, edits FreeColorado.com from the Denver area.
Steve D April 6, 2010 at 12:13 PM
Why would you rather (if you had to make a choice) get rid of the sales tax than the income tax? They are both obnoxious in their own way of course, but the income tax involves far more paperwork and privacy violations for people not in business. For people running a business, it seems to me it’d be a push–you have to do accounting either way. Also a sales tax won’t ever force one to sell their property to make the payments as the income tax can.
Ari April 6, 2010 at 12:23 PM
1. At the state level, it is possible to get rid of the sales tax, but it is impossible to get rid of the income tax, because of the federal income tax. (The state could drop its income tax, but Coloradans would continue to be forced to comply with the federal income tax.)
2. Business accounting is not nearly as onerous as complying with the sales tax, especially for small businesses that sell mail order throughout the state.
3. It is precisely the sales tax which keeps many people from going “in business,” and that’s bad.
4. True, if an individual earns income and fails to save enough to cover the income tax, the individual might then sell off property to cover the tax. By contrast, the sales tax is paid at the point of each purchase, so there is no possibility of delinquent payment. However, the total amount paid in taxes would presumably be the same.
If I could choose to totally eliminate either the income tax or the sales tax, at all levels, I’d have to think about which is worse. I think we’re agreed that having just one of them would be better than having both. The danger with a national sales tax is that it could easily devolve into a VAT on top of an income tax, which would be a disaster.