I TAKE IT ALL back. All those nasty thoughts I had — and very nearly wrote — every time House Speaker Pro Tem Tommy Pope and the other members of his tax reform committee started talking about cutting the state’s 6 percent sales tax in half.
Well, yes, of course you can do that, I thought — if you eliminate every sales tax exemption. And start taxing services. And we all know you’re not going to try to do that. No one has the guts to try to do that.
I’ll be darned if I wasn’t wrong. That is precisely what Mr. Pope proposes to do. Eliminate every single sales tax exemption — from the portable toilets to the sweet grass baskets to the gold bullion. And gasoline. And electricity. And groceries.
He even proposes to do away with the most obscene part of our sales tax: the $500 cap on sales taxes on cars. And boats. And jets.
On top of that, he wants to start treating services like the “things” we purchase, and subject them to the sales tax. That change would strip away much of the upper-income benefit in the sales tax, since poorer people tend to spend more of their income on (taxed) goods, while wealthier people spend more of their income on (untaxed) services.
Now, I don’t believe for a second that he actually intends for this plan to become law. Nor should it; it doesn’t carve out the handful of exemptions that actually ought to be preserved.
But the last time a House panel tackled exemptions, it ignored the six biggest exemptions that account for 75 percent of the cost, and most of the other large ones. The bill that representatives finally passed back in 2012 eliminated just two dozen small exemptions, enough to lower the tax rate from 6 percent to … 5.98 percent. The Senate ignored it.
Mr. Pope, who was tasked by House Speaker Jay Lucas in 2016 with chairing a special committee to overhaul the state’s entire tax code, unveiled his sales tax reform and an equally ambitious income tax reform late last month. But while the committee sent the income tax bill to the House Ways and Means Committee for debate, it decided to hold off on advancing the sales tax measure, so it could take it up in conjunction with a property tax measure that’s not as far along.
But maybe that doesn’t matter, because with just two months left in the shortened legislative session, and the budget debate still ahead for the House and the Senate, and that whole V.C. Summer nuclear mess consuming all the legislative attention, there really isn’t much chance that either bill will pass the House this year, much less the Senate. Maybe all that matters right now is that a respected member of the House, who clearly has the speaker’s blessing, is willing to tackle our broken sales tax.
Recall that economists say a good tax is broad and thin: It taxes as much as possible at as low a rate as possible. Our sales tax desperately needs reforming because it is just the opposite. We exempt far more than we tax, so the rate is much higher than it would need to be if we taxed most spending.
Some sales can’t be taxed. Congress won’t let us tax certain internet purchases, and we can’t tax purchases by the federal government. But state law enumerates 82 exempt items, several with multiple parts; by my count, there are about 110 exemptions total. The state Revenue Department says they’re worth about $3.2 billion this year. On top of that, economists say nearly two-thirds of consumer spending is now on services instead of goods, and nearly all services are untaxed. The last good estimate I’ve seen — now a decade old — said that if we taxed all the services that are considered “feasible” to tax, we’d collect another $1 billion a year.
By comparison, we collected about $4.2 billion in sales taxes last year.
Not all exemptions are bad. Economists say we shouldn’t tax raw materials that are used in the manufacture of products that will be taxed, in order to avoid double-taxation; and we don’t. Those exemptions probably should stay in place.
But most of our exemptions don’t fall into that category. Most go to special interests. The biggest ones are preserved by special interests, even though they benefit just about everyone: gasoline, prescription drugs, groceries, electricity and, of course, cars. Simply getting rid of the first four would make the tax more regressive, but taxing services would balance that out. And the fifth one … well, there’s simply no justification for it.
The tax cap on automobiles means people who buy clunkers pay the same tax as those who buy luxury cars. And yachts. And planes. Last year, the Legislature had the best opportunity ever to eliminate the tax cap, or replace it with a floor. Instead, it raised the cap from $300 to $500. What this means is that people who buy most clunkers still pay the same tax as those who buy luxury cars, and yachts, and planes. Only now, they pay $200 more.
If Mr. Pope fixed nothing more than that one problem, he’d be our greatest tax reformer ever.
Ms. Scoppe writes editorials and columns for The State. Reach her at firstname.lastname@example.org or (803) 771-8571 or follow her on Twitter or like her on Facebook @CindiScoppe.