1 Sales Taxes © Allen C. Goodman, 2015. .

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Sales Taxes

© Allen C. Goodman, 2015

http://taxfoundation.org/article/facts-figures-2015-how-does-your-state-compare

State and Local Sales Tax RatesAs of January 1, 2015

State State Tax Rate Rank Avg. Local Tax Rate (a) Combined Rate RankAla. 4.00% 38 4.91% 8.91% 3Alaska None 46 1.76% 1.76% 46Ariz. 5.60% 28 2.57% 8.17% 11Ark. 6.50% 9 2.76% 9.26% 2Calif. (b) 7.50% 1 0.94% 8.44% 8Colo. 2.90% 45 4.54% 7.44% 15Conn. 6.35% 11 0.00% 6.35% 31Del. None 46 0.00% 0.00% 47Fla. 6.00% 16 0.65% 6.65% 29Ga. 4.00% 38 2.96% 6.96% 24Hawaii (c) 4.00% 38 0.35% 4.35% 45Idaho 6.00% 16 0.01% 6.01% 36Ill. 6.25% 12 1.94% 8.19% 10Ind. 7.00% 2 0.00% 7.00% 21Iowa 6.00% 16 0.78% 6.78% 27Kans. 6.15% 15 2.05% 8.20% 9Ky. 6.00% 16 0.00% 6.00% 37La. 4.00% 38 4.91% 8.91% 4Maine 5.50% 29 0.00% 5.50% 42Md. 6.00% 16 0.00% 6.00% 37Mass. 6.25% 12 0.00% 6.25% 33Mich. 6.00% 16 0.00% 6.00% 37

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Minn. 6.88% 7 0.33% 7.20% 17Miss. 7.00% 2 0.07% 7.07% 20Mo. 4.23% 37 3.58% 7.81% 14Mont. (d) None 46 0.00% 0.00% 47Nebr. 5.50% 29 1.30% 6.80% 26Nev. 6.85% 8 1.09% 7.94% 13N.H. None 46 0.00% 0.00% 47N.J. (e) 7.00% 2 -0.03% 6.97% 23N.M. (c) 5.13% 32 2.22% 7.35% 16N.Y. 4.00% 38 4.48% 8.48% 7N.C. 4.75% 35 2.15% 6.90% 25N.D. 5.00% 33 1.56% 6.56% 30Ohio 5.75% 27 1.35% 7.10% 19Okla. 4.50% 36 4.27% 8.77% 6Ore. None 46 0.00% 0.00% 47Pa. 6.00% 16 0.34% 6.34% 32R.I. 7.00% 2 0.00% 7.00% 21S.C. 6.00% 16 1.13% 7.13% 18S.D. (c) 4.00% 38 1.83% 5.83% 40Tenn. 7.00% 2 2.45% 9.45% 1Tex. 6.25% 12 1.80% 8.05% 12Utah (b) 5.95% 26 0.73% 6.68% 28Vt. 6.00% 16 0.14% 6.14% 34Va. (b) 5.30% 31 0.33% 5.63% 41Wash. 6.50% 9 2.39% 8.89% 5W.Va. 6.00% 16 0.07% 6.07% 35Wis. 5.00% 33 0.43% 5.43% 44Wyo. 4.00% 38 1.47% 5.47% 43D.C. 5.75% (28) None 5.75% (41)

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Table 22State Gasoline Tax Rates (Cents Per Gallon)As of January 1, 2015

State Excise Tax Other Taxes and Fees Total RankFederal 18.4¢

Ill. 19¢ 11.72¢ 30.72¢ 15Ind. 18¢ 11.85¢ 29.85¢ 19Iowa 21¢ 1¢ 22¢ 35Mich. 19¢ 11.26¢ 30.26¢ 17Minn. 28.5¢ 0.1¢ 28.6¢ 20Ohio 28¢ 0¢ 28¢ 21Wis. 30.9¢ 2¢ 32.9¢ 12


Gas taxes

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• Note: The American Petroleum Institute (API) has developed a methodology for determining the average tax rate on a gallon of fuel. Rates may include any of the following: excise taxes, environmental fees, storage tank taxes, other fees or taxes, and general sales tax.

• In states where gasoline is subject to the general sales tax, or where the fuel tax is based on the average sale price, the average rate determined by API is sensitive to changes in the price of gasoline. States that fully or partially apply general sales taxes to gasoline: California, Connecticut, Georgia, Illinois, Indiana, Michigan, and New York.

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Table 24State Cigarette Excise Tax Rates (Dollars Per 20-Pack)As of January 1, 2015

State Tax Rate RankFederal $1.0066Ala. $0.425 46Alaska $2.00 11Ariz. $2.00 11Ark. $1.15 29Calif. $0.87 32Colo. $0.84 33Conn. $3.40 4Del. $1.60 21Fla. $1.339 26Ga. $0.37 47Hawaii $3.20 5Idaho $0.57 41Ill. $1.98 16Ind. $0.995 31Iowa $1.36 25Kans. $0.79 35Ky. $0.60 39La. $0.36 48Maine $2.00 11Md. $2.00 11Mass. $3.51 2Mich. $2.00 11Minn. $2.90 7

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Miss. $0.68 36Mo. $0.17 50Mont. $1.70 18Nebr. $0.64 37Nev. $0.80 34N.H. $1.78 17N.J. $2.70 9N.M. $1.66 20N.Y. $4.35 1N.C. $0.45 44N.D. $0.44 45Ohio $1.25 28Okla. $1.03 30Ore. $1.31 27Pa. $1.60 21R.I. $3.50 3S.C. $0.57 41S.D. $1.53 23Tenn. $0.62 38Tex. $1.41 24Utah $1.70 18Vt. $2.75 8Va. $0.30 49Wash. $3.025 6W.Va. $0.55 43Wis. $2.52 10Wyo. $0.60 39D.C. $2.50 (11)

Table 8Sources of State and Local Tax Collections, Percentage of Total from Each SourceFiscal Year 2012

State Property General SalesIndividual

IncomeCorporate

IncomeOther

Taxes (a)

Ill. 38.4% 14.5% 23.3% 5.3% 18.5%Ind. 26.5% 27.0% 24.9% 3.2% 18.4%Iowa 33.5% 23.7% 23.1% 3.1% 16.6%Mich. 36.7% 24.7% 20.3% 2.2% 16.2%Minn. 28.0% 18.0% 28.4% 3.8% 21.8%Ohio 29.0% 21.6% 28.7% 0.8% 20.0%Wis. 37.9% 17.5% 25.5% 3.5% 15.6%

8http://taxfoundation.org/article/facts-figures-2015-how-does-your-state-compare

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Table 2State and Local Tax Burden Per Capita and as a Percentage of IncomeFiscal Year 2011

State State-Local Tax Burden as a Share of State IncomeRank Total Tax Burden (per capita)US 9.8% $4,217Ala. 8.3% 41 $2,886Alaska 7.0% 49 $3,319Ariz. 8.9% 34 $3,194Ark. 10.3% 12 $3,405Calif. 11.4% 4 $5,136Colo. 9.0% 32 $4,220Conn. 11.9% 3 $7,150Del. 10.1% 15 $4,209Fla. 9.2% 31 $3,699Ga. 8.8% 35 $3,237Hawaii 9.6% 20 $4,259Idaho 9.5% 24 $3,189Ill. 10.2% 13 $4,658Ind. 9.5% 22 $3,385Iowa 9.3% 29 $3,740Kans. 9.4% 26 $3,849Ky. 9.5% 23 $3,169La. 7.6% 46 $2,872Maine 10.2% 14 $3,836Md. 10.6% 7 $5,598Mass. 10.3% 11 $5,586Mich. 9.6% 21 $3,505

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Minn. 10.7% 6 $4,858Miss. 8.4% 40 $2,620Mo. 9.0% 33 $3,380Mont. 8.6% 38 $3,137Nebr. 9.4% 25 $3,991Nev. 8.1% 43 $3,221N.H. 8.0% 44 $3,769N.J. 12.3% 2 $6,675N.M. 8.6% 37 $3,044N.Y. 12.6% 1 $6,622N.C. 9.8% 17 $3,564N.D. 8.8% 36 $4,057Ohio 9.7% 18 $3,687Okla. 8.5% 39 $3,187Ore. 10.1% 16 $3,861Pa. 10.3% 10 $4,374R.I. 10.5% 8 $4,676S.C. 8.3% 42 $2,784S.D. 7.1% 48 $3,052Tenn. 7.6% 45 $2,777Tex. 7.5% 47 $3,088Utah 9.4% 28 $3,304Vt. 10.5% 9 $4,351Va. 9.2% 30 $4,469Wash. 9.4% 27 $4,366W.Va. 9.7% 19 $3,160Wis. 11.0% 5 $4,477Wyo. 6.9% 50 $3,500D.C. 9.7% (20) $6,641

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Sales Taxes are Excise Taxes

• Sales, or consumption, taxes provide largest source of revenue for state governments.

• General sales taxes are used in 45 states w/ rates varying from 1.76 to 9.45%.

• In 2013, they generated about $809 per person in revenue. Close to $2,500 per household.

• Michigan’s total (in 2013) was $852 rank = 21.

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Not Everything is Taxed

• In principle, one could argue that sales taxes might serve as consumption taxes, and hence encourage saving, but …

• Not everything is taxed.• Food in grocery stores is not taxed in

numerous states (including Michigan).• Net effect General sales taxes apply to

40 to 60% of personal consumption in aggregate.

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Origin and Destination Principles

• Origin – Tax based on location of sale.

• Destination – Tax based on location of consumption or consumer.

• State sales taxes are INTENDED to be destination taxes … but what about Internet purchases?

• There are lots of holes in the collection of these taxes.

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Selected Sales Taxes

• Items such as cigarettes or gasoline,

• Cigarette taxes vary from $0.17 per pack in Missouri to $4.35 per pack in New York.

• Gasoline taxes vary from $0.113 per gallon in Alaska (no surprise) to $0.505 per gallon in Pennsylvania. Michigan’s tax = $0.303.

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Optimal Sales Tax Analysis

• Suppose we have goods A and B and we need to collect revenue R from taxes tA and tB. Should the taxes be equal?

Good A

$

Good B

Price B

1 1

DA

DB

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Optimal Sales Tax Analysis

• If they are equal we get indicated revenues.• We get reduced quantity demanded for each.• We also get indicated DW losses.

Good A

$

Good B

Price B

1 1

DA

DB

RA RB DWB

1+t 1+tDWA DWB

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Optimal Sales Tax Analysis• We could be more efficient if we could raise same revenue with

less DW loss.• How can we do that?• Raise tax on A so price ↑ by 1%. This leads revenue to ↑ by a

lot, and quantity to decrease by a little so DW ↑ by a little. • Reduce tax on B (about 1%) to make revenue constant and it

decreases DWB by more than DWA increased.

Good A

$

Good B

Price B

1 1

DA

DB

RA RB DWB

CS loss ↑

CS loss ↓

Rb’

1+t + tA

1+t - tB

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Optimal Sales Tax Analysis• Idea, here, is that you tax most heavily those things that have

the least elastic demand, because it changes quantity the least.• Called the Ramsey Rule. Taxes should be inversely

proportional to their price elasticities of demand.

Good A

$

Good B

Price B

1 1

DA

DB

RA RB DWBRb’

CS loss ↑

CS loss ↓1+t

SeeSlides27-29

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Should we tax this way?

• There are some ethical and distributional issues here.

• If demand for insulin is very inelastic, do we slap a big sales tax on insulin.

• May hit the poor.

• On the other hand, it provides a rationale for taxing addictive substances.

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Border Effects

• We talked about this a little bit before.

• What happens if Michigan taxes cigarettes a lot, and Ohio a little?

• What happens if Michigan taxes items a lot and the Internet doesn’t collect any taxes at all?

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Taxes

Complicating our earlier analysis• Let’s look at cigarettes.

• You may have somewhat inelastic LR supplies. Why?

$ $

Q q

MI OH

P0 P0

Q1Q2

DODM

PM+ t

q1

SM

S'M

P1 +PS-CS

D'O – Michigan buyers

DW

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Taxes

Complicating our earlier analysis• You have a DW loss in MI.• You have an efficiency gain in OH, which does not offset

the loss in MI.• Also, additional costs and inconvenience to Ohio

buyers.$ $

Q q

MI OH

P0 P0

Q1Q2

DODM

PM+ t

q1

SM

S’M

P1-CS

D’O

DW +PS

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Pechman’s Analysis – Table 15.5

Effective SalesTax Burden as % of Family Income

0%

5%

10%

15%

20%

0-5

5-10

10-1

5

15-2

0

20-2

5

25-3

0

30-5

0

50-1

00

100-

500

500-

1000

1000

+

Income Category

Eff

ecti

ve T

ax B

urd

en

Eff.Rate

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Effective SalesTax Burden as % of Family Income

0%1%2%3%4%5%6%7%8%9%

1 2 3 4 5 6 7 8 9 10

Income Decile (Low to High)

Per

cen

tag

e

Eff.Rate

Pechman’s Analysis – Table 15.5

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Simple Ramsey Proof – 1

Two goods

Q1 = a1 – b1P1

Q2 = a2 – b2P2

Normalize prices P1, P2 at 1

Institute tax rates t1 and t2 per unit.

Revenue = R1 = [a1 – b1 (1+t1)] t1

Revenue = R2 = [a2 – b2 (1+t2)] t2

Deadweight Loss = D1 = ½ * Q P = ½ * b1t1 * t1 = b1t12/2

Deadweight Loss = D2 = b2t22/2

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Minimize sum of DW subject to constant tax revenue.

Min L = ½ b1t12

+ ½ b2t22 + λ { - [a1 – b1 (1+t1)] t1 -[a2 – b2 (1+t2)] t2}

Simple Ramsey Proof – 2

R

1 1 1 1 1 11

2 2 2 2 2 22

- [( - ) - 2 ] 0

- [( - ) - 2 ] 0

Lb t a b b t

t

Lb t a b b t

t

Simplifying,

1 2 2

2 1 1

bQ t

b Q tFurther simplifying,

1 1 1 1 1

2 2 2 2 2

2

2

b t Q b t

b t Q b t

You can ALWAYS

minimize DW loss if …

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Simple Ramsey Proof – 3 Because i

ii

Qb

P

12

1 2 1 2

22 1 11

2

QQ

bQ P tQb Q tQP

Multiplying by1 1

2 2

( / )

( / )

P P

P P

1 11

1 1 2

12 22

2 2

/

/

Q PP

P Q t

tQ PP

P Q

And finally … 2 1 2

1 2 1

P t

P t

If P1 = P2 = 1, then 1 2

2 1

t

t

If demand elasticity of G1 > G2, we have a higher taxon G2 than on G1.

1 Sales Taxes © Allen C. Goodman, 2015. .

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Transcript of 1 Sales Taxes © Allen C. Goodman, 2015. .