SALES TAX EXEMPTIONS
VS. REFUNDABLE TAX CREDITS
by William B. Brown Principal, Minneapolis Office
Presented before the Midwestern States Association of Tax Administrators, Rapid City, South Dakota-October 1972
At the present time, forty-five states levy some form of sales tax on consumer goods. The main reason for the popularity of the tax is that it is a comparatively painless method of raising revenue. However, the variety of philosophies adopted in making such levies is as great as the jurisdictional authorities legislating such taxes.
The most commonly heard objection to the sales tax as a vehicle for raising revenue is the regressivity of the tax. Another objection is that it hits hardest on low income taxpayers (this is not necessarily the same as being regressive). Several methods have been devised to overcome these objections and some methods achieve this goal. In fact, with certain modifications such a levy can become progressive or at least proportional.
This paper will focus on comparing two of these modifications which have been gaining in popularity as a means of reducing regressivity.
Possibly, before getting into that comparison, a standard should be set for determining what is meant by a "regressive" tax. A sales tax is considered to be regressive if the effective tax rate (i.e., the ratio of taxes paid to income) decreases as income increases. If the effective tax rate remains the same for all income brackets, it is proportional, and if the rate increases as income increases, the tax is progressive. In other words, if the tax takes a greater percentage from small incomes than from large incomes of taxpayers, it is regressive.
One of the basic theoretical concepts in U . S. taxation is the requirement that taxes be equitable. Equity in taxation requires that persons with the same ability to pay should pay equal amounts of taxes and those with greater ability should pay more taxes than those who are less able to pay. Therefore, if we take the foregoing to be true and assume that a regressive tax is undesirable, the next step in accomplishing the "fairest" tax system would be to consider alternatives that would eliminate regressivity. Which brings us back to the main topic for discussion—consideration of two of these alternatives: Exemptions from taxation and sales tax credits.