Consumption tax conversation overdue
Senators in the Revenue Committee are taking a look at LR300CA, a proposed constitutional amendment that would replace virtually every tax in Nebraska with a tax on consumption. A proposed amendment to the resolution would spare the state’s gas tax, but otherwise end local property taxes, state income taxes, and much more.
In exchange, Nebraskans would have to pay a sales tax on new goods or services. In Nebraska and most states, the majority of purchases are currently exempt from sales tax, leading many to wrongly believe the sales tax is only intended to fall on luxuries. It isn’t and it doesn’t.
This whole discussion about replacing major taxes with a consumption tax may feel very speculative, especially since it would make Nebraska the only state without a real property tax.
But the idea of a broad-based consumption tax itself is far from unprecedented and could be used for either conservative or progressive policy ends.
Most countries today have Value-Added Taxes (VAT) that are collected on a wide range of goods and services, and the tax rates imposed on consumption internationally are generally much higher than those that can be found in the United States.
Germany, for instance, collects a 19% VAT on most goods and services, which is actually on the lower side for the European Union, where rates can be as high as 27%. While some countries do exempt the sale of groceries from VAT, the “reduced” German grocery tax rate is 7%.
Such a rate on groceries would be controversial if proposed in Omaha for example, where 7% is the current combined sales tax rate on things like utilities, household goods, nonprescription drugs, and motor vehicle sales.
However, just a few hours from Omaha, residents of South Dakota and Kansas pay comparable or higher tax rates on groceries than the volks in Germany.
In conservative-leaning South Dakota, the sales tax is collected on most goods and services, and those revenues are used to forgo taxes like the state income tax and local personal property taxes.
In progressive-leaning Hawaii, the state’s roughly 4% General Excise Tax is collected on absolutely everything Hawaii residents buy, from groceries and medical care to business inputs. Although property taxes in Hawaii are low, income taxes are high, and the overall tax burden in Hawaii is among the country’s highest.
To me, the importance of LR300CA is that it gives Nebraskans a chance to ask what we would do with our tax system if we were to start over, and what role consumption tax should play.
Given that our sales tax is based on an early-20th century economy that no longer exists, one can hope we’d at least do some things differently.
Alaska is currently looking at a new tax system, too. Oil revenue was such a substantial factor in public finance that the state does not levy a state sales tax or personal income tax, though local property taxes are still a fact of life in populated areas of Alaska. Now, with volatility in the energy sector, they are seeking more sustainable revenues.
In a new report, the Tax Foundation offers an example of how much revenue Alaska could raise if policymakers implemented a consumption tax similar to the kind envisioned in LR300CA, as well as with a more typical, narrow sales tax.
If Alaska lawmakers wanted to collect a sales tax on almost everything (the few notable exceptions are at the bottom of the chart), a rate of 3.1% would be needed to raise $1 billion. If lawmakers were satisfied with raising half as much, they could tax goods and services at 1.6%.
Even in less-populated Alaska, these are not extraordinary figures. You can’t pay for everything people might demand of state government for $500 million or even $1 billion.
But the chart is helpful for showing how a broad-based consumption tax can collect a significant amount of revenue without making a major difference in prices. Conversely, the more policymakers rationalize away reasons taxpayers shouldn’t pay the sales tax on certain purchases, the higher the rate has to be.
In attempting to replace most other taxes, LR300CA may require a higher tax rate than Nebraskans would be comfortable with. But that doesn’t mean the consumption tax approach couldn’t be used in a different way, to make the process of paying taxes less impactful on daily economic life in Nebraska.
With broad bases and low rates, taxes can become less of a factor in deciding whether it’s worth working or investing more, or deciding what you should or shouldn’t buy, or whether a property is worth owning or improving.
It also seems that a larger conversation about consumption tax is overdue nationally, even if the conversation results in deciding the status quo is OK.
Whether you want the United States’ tax policy to more closely resemble South Dakota or Sweden, politicians can’t sustainably fund all the promises they’re making without a stable base of revenue that everyone pays into.