Tax Panel Missed the Math on Sales Tax
October 16, 2008
William F. Shughart II
The public learned at least one valuable lesson from the controversy triggered awhile back when former Lt. Gov. Amy Tuck proposed swapping a reduction in the state sales tax on groceries for an increase in the state excise tax on cigarettes: At 7 cents on the dollar, Mississippi imposes the highest sales tax in the nation on food.
Mississippi is a poor state and relies heavily on sales taxes to fund state government operations and, through revenue-sharing arrangements, city governments as well. Sales tax receipts for Fiscal 2007, which ended June 30, totaled more than $2.85 billion. That figure is nearly double the sum produced by the state personal income tax and, at 43 percent of tax collections overall, makes the sales tax Mississippi’s single largest source of revenue. Sales tax remittances from Jackson also represent a significant share (about 29 percent on average) of the total revenues of municipal governments around the state.
The fact that, unlike many other states, Mississippi’s local governments share revenue generated by the state sales tax rather than having authority to levy sales taxes on their own led the Tax Study Commission to conclude that Mississippi is not out of line with the rest of the nation tax-wise. After comparing the rate here to the combined state and local sales tax rates levied by its mid-South neighbors, “Mississippi’s sales tax rates are actually lower than Louisiana, Arkansas and Tennessee,” the commission says.
No member of the commission must ever have been to a restaurant in Oxford, where the sales tax on food and drink consumed away from home is 9 percent — the 7 percent state sales tax rate plus the city’s 2 percent “tourism tax,” which also applies to hotel rooms. Of course local Mississippi governments can tax retail sales. Under current law, however, they cannot do so unilaterally, but must seek legislative approval on a case-by-case basis to put such issues on the local ballot. And, as Oxford’s tourism tax illustrates, local sales taxes in Mississippi are narrowly tailored. They do not apply to all retail purchases, are assessed for specific purposes (to help defray the capital costs of the Oxford-University baseball stadium or Jackson’s convention center, for example) and supposedly expire when the intended purpose has been met.
The commission did not take existing local taxes into account in recommending that municipalities be allowed to tax sales at retail on the same broad base as the state now does, provided that they are levied for specific purposes, are limited in duration and are supported by 60 percent of those voting in a tax referendum. But even if one accepts that tourism and similar local taxes can be ignored because they do not apply across the board, the commission committed a more fundamental error.
In most jurisdictions where the sales tax rate is as high or higher than Mississippi’s, many items are taxed at less than the maximum state-local rate or relieved from taxation altogether. It is a very common practice elsewhere to exempt food, clothing, books and other necessities from the sales tax base. Mississippi, in contrast, taxes virtually all retail purchases and, as a result, the total sales tax burden here is much heavier than in other states where the combined state-local sales tax rate is 8 or 9 cents on the dollar.
Nevertheless, wanting to ensure that every citizen pays his or her “fair” share, the commission recommends expanding the state sales tax base to include the handful of goods and services that are not now taxed. If the commission has its way, sales tax will be collected when, among other things, you buy a newspaper or magazine, have your pet groomed, your lawn mowed, your car towed, your carpet cleaned, your trash collected, and your hair cut or styled.
Sales taxes are highly regressive, falling more heavily on people at the lower end of the income distribution than those at the upper end. If the commission truly were interested in promoting vertical tax equity and spurring economic development, it would follow other states’ lead by exempting life’s necessities from the sales tax base.
Total state tax revenue might then even increase. Mississippians would have more disposable income to spend at the grocery store and the clothing store if some purchases there were tax-exempt. They would have more to spend on other things that continue to be taxed. That means larger income tax receipts from retailers and their employees.
William F. Shughart II is a Senior Fellow at The Independent Institute, Frederick A. P. Barnard Distinguished Professor of Economics at the University of Mississippi, and editor of the Independent Institute book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.