Back to Tax Revision Commission main page — Back to list of research papers
|
Columns DCWatch
Archives Elections Government and People Budget issues Organizations |
SALES TAXES IN THE DISTRICT
OF COLUMBIA: By William F. Fox Paper Prepared for the September 10, 1997 The author is deeply indebted to Patricia Price for essential analytical support. Thanks also are extended to Julia Friedman, Mark Grippentrog, Charles Wilson, and especially Modibo Coulibaly of the District of Columbia Department of Finance and Revenue for gracious support, helpful ideas, and full cooperation.
The first state sales tax was introduced by Mississippi in 1932. The District of Columbia followed 18 years later, introducing its sales tax in 1950. Today D.C. accompanies 45 states in levying sales taxes.1 The sales tax has grown to be the third largest revenue source for the District, generating almost one-half billion dollars in 1996 and providing nearly one out of every five tax dollars. The sales tax is a somewhat less important revenue source for D.C. than for the average state, but it is more important than for the average city. Five different sales tax rates are levied, depending on the specific type of transaction being taxed. In addition, the District levies selective sales taxes on gasoline, cigarettes, beer, and wine. Both the sales tax and the selective sales taxes are imposed at rates that generally are high by comparison with Maryland and Virginia, potentially creating economic development problems and revenue losses. Perhaps the most significant finding in this report is that sales taxation has been a less productive revenue source for D.C. in the 1990's than in the previous decade. Revenues from the general sales tax have grown much more slowly relative to income in recent years, and beer, cigarette, and gasoline tax revenues have fallen as the purchase of these commodities has declined in the District. A number of causes, including the shifting location of population and employment and relatively high tax rates, can be cited. Unfortunately, there are no quick, easy fixes to the sluggish revenue performance. Some of the factors influencing the sales tax that are described here, such as a growing tendency for consumers to purchase services and D.C.'s small geographic size are outside the control of the District. Other factors, such as design of the sales tax structure, are in the District's hands. The challenge facing the District is to design effective sales tax policy in this environment. A series of issues and options is listed in the last several sections of the report to identify the key policy alternatives for the District's tax commission. This comprehensive analysis of the District of Columbia's sales and selective sales taxes is composed of six sections. The first major section is a description of the sales tax structure, including consideration of the base, exemptions from the base, existence of multiple tax rates, and the extent to which services are taxed. The second major section is an analysis of the sales tax's contribution to D.C.'s finances, including consideration of tax adequacy and stability. The third section is an evaluation of two major issues in the sales tax: equity and effects on the location of retailing and other economic activity. Next is a review of the selective sales taxes. The fifth section is an analysis of significant issues in design of the sales tax base. The final section is a discussion of several issues in tax administration and compliance. 1Vermont was the most recent state to accept a sales tax (in 1969), leaving only Alaska, Delaware, Montana, New Hampshire, and Oregon without a broad based sales tax. Return to the Table of Contents Sales Tax Structure 2 General Tax Base The gross sales tax is levied on the privilege of selling tangible personal property at retail and on certain enumerated services. The base for each taxable transaction is gross receipts, though the receipts can be reduced by cash discounts and rescinded sales (when a complete refund is made). The specific set of taxable goods and services has been altered regularly since the sales tax was introduced in 1950. Department of Finance and Revenue publications list at least 20 changes in the general sales tax base since 1950 and a number of other changes in the bases that are taxable at higher rates. Recent base expansions include snack foods, publications and newspapers, courier services and employment services. Sales tax revenues are collected and remitted to the District by vendors. As a norm, vendors must submit tax payments by the 20th of the month after the sale takes place. Street vendors remit payments quarterly. A penalty of 5 percent per month, with a maximum of 25 percent, is assessed for failure to pay the sales tax or for tardy payments. In addition, 1.5 percent interest is charged monthly for late payments. As occurs with sales taxes in all states, exemptions, which often are defined either by type of transaction or type of vendor, are permitted for a variety of reasons. A number of business transactions are exempt, such as sales for resale, to reduce tax pyramiding and to make the sales tax more like a consumption tax. Exemptions are allowed for some other transactions, such as casual sales, to limit administrative and compliance costs. Some transactions are exempt because there may be a constitutional limitation or because Congress wanted the exemptions, such as with sales to the Federal Government. Exemptions are granted in some cases because the transaction is subject to another tax, as is true with some telecommunications activities. Other exemptions are provided in an attempt to make the tax more equitable, as occurs with exemptions for health care. The specific list of exemptions includes:
Another set of transactions is not defined to be sales at retail, which effectively means these items are exempt from tax. These include:
The provisions described above result in the majority of sales in D.C. being exempt from the sales tax. Exemptions as a percent of total sales reported to the Department of Finance and Revenue are shown in Table 1 for the past 8 years. These statistics understate the extent of exempt sales, because firms with no sales tax liability, such as law firms, may choose not to report their sales and companies may generally do a poor job of reporting exempt sales (since there is no associated tax liability). The percent of exempt sales has varied between 53.8 and 60.3 percent across the years, though there has been no trend up or down since 1989. The percent of gross sales that was exempt during 1996 for a select set of industries is shown in Table 2. More than 90 percent of sales by apparel and finished product manufacturers were exempt. Similarly, large percentages of sales by wholesale firms and health service firms were exempt. These industries do have some taxable sales because they may also sell at retail (as with manufacturers and wholesalers) or they may have restaurant and concession sales (as with health care providers). By comparison, eating and drinking establishments, hotels, and apparel stores have very limited exempt sales. Measuring the breadth of sales tax bases is difficult because there is no data series on local consumption to serve as a benchmark. A frequently used approach is to examine the tax base as a share of personal income. The sales tax base as a share of personal income has declined nationally from an average of 58.7 percent in 1979 to the 1996 average of 41.9 percent. The District tax base, including the base taxable at each of the five tax rates, equals 34.6 percent of personal income.3 Data are only available to measure the base decline in D.C. since 1989, when the base was 43.0 percent of personal income. Thus, the District's base is a smaller share of personal income than in the average state, and the relative decline during the 1990's has been remarkable. Several explanations can be given for the narrowness of D.C.'s base. Some of the reasons result from policy decisions and administrative practices and some from factors that are outside the District's control. The base includes a relatively long list of services (see Table 2), but otherwise policy decisions have led to a narrow base. Residential utilities, non-prescription drugs, and food for consumption at home, are examples of potentially taxable items that have been exempted by the District. Weak administration of the tax is another possible explanation for the narrow base. The propensity for D.C. residents to shop outside the District reduces the base relative to personal income. Also, the intensive presence of the federal government and international organizations, neither of which can be required to collect or pay the sales tax, makes it more difficult for the District to collect sales taxes that would be due if the vendors were private firms. The Use Tax The District, as with all sales-taxing states, imposes a compensating use tax. The use tax is levied on the use, storage, or consumption of sales taxable goods and services. Thus, the intent is to ensure that the sales tax is paid on taxable goods or services that are purchased outside the District for use or consumption in the District. Exemptions from the use tax are granted when the sales tax has already been paid to the District and for sales where the tax has been paid in another state. In many cases, the purchaser is required to remit the use tax. Services in the Base The District, like most other jurisdictions, approaches the taxation of services very differently from goods. As a general rule, goods sold at retail are taxable unless a specific exemption is granted. Services, on the other hand, only are taxable if they are specifically enumerated. Across the country, this approach to taxing services often has made it politically difficult to expand the base to new services, because the affected industries lobby strongly to prevent their specific inclusion in the base. The District has extended the base to include a relatively broad number of services compared with many states. The set of enumerated, taxable services in D.C. includes production, fabrication, or printing of tangible personal property on special order; local telephone service (but not toll calls or private communication services); repair of tangible personal property; duplicating services; laundering and cleaning; admissions (but not for concerts or plays), and landscaping. The Federation of Tax Administrators (1997b) recently prepared a comprehensive list of the services that are taxable in each state and the District. The median state taxes 37 of the 164 listed services, while the District taxes 63 services. An aggregated version of the set taxed by the District, Virginia, and Maryland is in Table 3. D.C. taxes many computer; fabrication, repair, and installation; and utility services. However, D.C. does not tax any professional services 4, and taxes a relatively narrow set of personal, amusement, and other services. The District taxes many more services than either Maryland or Virginia, though Maryland taxes more business and amusement services. Further discussion of the appropriate tax base for services is provided below. Tax Rates Five different tax rates are imposed on sales, depending on the specific commodity or service: (1) 5.75 percent is the standard rate for tangible personal property and services; (2) 12 percent for parking or storing vehicles; (3) 10 percent for sales of food or drink for immediate consumption, or for on-premises use; (4) 13 percent for transient room rentals; and (5) 8 percent for liquor, beer, or wine for off-premises use. The different rates make it seem as if there are five sales taxes rather than one. A number of states allow lower rates for certain transactions, but the imposition of a series of higher rates is very rare. 5 Several states levy higher tax rates on alcohol, vehicle rentals, or hotel rooms. Of course, states and the District often impose differential excise tax rates on a set of items such as gasoline, alcohol, and cigarettes. The District has had a history of raising sales tax rates. For example, the general sales tax was initially imposed in 1950 at a 2 percent rate. The standard rate was raised from 2 percent to 3 percent in 1963, from 3 percent to 4 percent in 1970, from 4 percent to 5 percent in 1973, from 5 percent to 6 percent in 1980, from 6 percent to 7 percent temporarily in June 1994, and back to 5.75 percent in October 1994. Numerous changes have occurred in the other sales tax rates as well. For comparison purposes, combined state and city tax rates were identified for a major city in each state (see Table 4).6 The 5.75 percent sales tax rate in D.C. is lower than the median combined state and local sales tax rate of 6.0 percent. The combined rate in 37 of the cities is higher than in D.C. The highest rate is 9.0 percent in Louisiana, and the lowest rate is 0 percent in Delaware, Montana, New Hampshire, and Oregon.7 Rates are generally lower along the eastern seaboard of the U.S. New York and Rhode Island are the only states along the eastern seaboard with rates among the top 19 highest states. Maryland imposes a 5.0 percent rate and Virginia a 4.5 percent combined rate. The Districts' other four rates are much higher than the median of the rates shown in Table 4. The median sales tax rate that is imposed only by the state governments is 5.0 percent. The states have demonstrated a strong tendency over the years to raise tax rates. The median rate rose from 3.25 percent in 1970, to 4.0 percent in 1980 and to the current 5.0 percent. A general tendency for the base to decline has been the major reason. Tax rate changes have been very common across the states, as evidenced by the pattern of rising rates during the 15 years illustrated in Figure 1. Minnesota and Arkansas are raising their rates for fiscal year 1998. Tax Base at Each Rate Between three-fifths and two-thirds of the D.C. sales tax base has been taxable at the 5.75 percent rate (see Table 5). This percentage has fallen slightly since 1989, but this is mostly attributable to more of the liquor sales (taxable at 8 percent) being reported separately in the data starting in 1992. Approximately one fifth of sales are for food and drink for immediate consumption (taxable at 10 percent), and one-tenth is for hotels rooms and other transient accommodations (taxable at 13 percent). Combined, liquor and parking are about one-twentieth of the tax base. The sales of certain industries, such as apparel and furniture stores, are essentially all taxable at 5.75 percent (see Table 6). The sales in many other industries, such as food stores, eating places, and hotels, are taxable at multiple rates. Thus, it is frequently necessary for firms to not only identify what transactions are taxable, but also at which rate. 2 Portions of the summary are based on Commerce Clearing House (1997). 3 Motor vehicle sales in the District are subject to the titling tax and are not included in the sales tax base. This reduces the Districts' sales tax base relative to other states. 4 Only seven states tax any professional services, and in two of these cases (Delaware and Washington) a special business tax is imposed rather than the sales tax. 5 See Due and Mikesell (1994), pp. 53-54. 6 Many states permit local governments an option on the specific local tax rate. 7 Alaska has no state sales tax, but allows local sales taxes. Return to the Table of Contents Contribution of D.C. Sales Tax Revenues to Government Finance Sales tax revenue performance can be evaluated along three dimensions: the current revenues collected, the growth path of revenues over the long term, and the stability of revenues across the business cycle. In terms of current revenues, the sales tax generated $495.4 million during fiscal year 1996 (see Figure 2), representing 19.5 percent of total D.C. tax revenues. Combined, U.S. states and cities raised 23.8 percent of their revenues from the sales tax in 1994, second only to the property tax in importance. The role of sales taxes in state and local government finance is generally lower in the mid-Atlantic and New England areas. The sales tax provides 13.6 percent of Maryland state and local government revenues (24.5 percent of state revenues) and 16.6 percent of Virginia state and local revenues (22.4 percent of state revenues). The sales tax is the third biggest generator of tax revenues for the District of Columbia, following the property and income taxes (see Figure 3). The District uses the sales tax heavily, compared with other cities, and lightly compared with states. Overall, the District's reliance on the sales tax is somewhat below the average of cities and state combined, though this results in part from the unique character of D.C. as neither a state nor a city in a state. Major reasons for this difference are that D.C. raises relatively more property tax revenues than states, and relatively more personal income tax revenue than local governments. D.C. revenues were 2.46 percent of personal income in 1996, somewhat higher than the national average of 2.23 percent for state tax revenues (but lower than the national average of 2.84 percent for state and local governments in 1994). The District generates relatively more revenues from its sales tax because of the higher rates imposed on the four special sales categories and because the D.C. rate is higher than the state average. On the other hand, the D.C. base is smaller as a share of personal income than in the average state. State and local sales taxes in Maryland are 1.53 percent of personal income and in Virginia are 1.68 percent of personal income. Revenue Growth Revenue growth is important to ensure that sufficient revenues are available to provide for the District's expenditure needs in future years. The historical pattern of revenue growth can be used as an indicator of how well revenues will expand in future years. The Districts' revenue growth has been acceptable when viewed across the entire period from 1982 to 1996. Revenues have grown 4.6 percent annually since 1982,8 though this is only 1.0 percent annually after adjusting for inflation. However, nominal revenues have grown little since 1990, and real revenues are down 16 percent since then. The income elasticity of tax revenues is a frequent way to evaluate revenue growth performance. The elasticity is defined as the percent change in revenues divided by the percent change in personal income. Income elasticities are calculated in two ways here, one based on actual revenues and the other based on revenues adjusted for rate and base changes. The former, often termed buoyancy, illustrates how well revenues have performed when revenue changes resulting from policy decisions (rate and base changes) and revenue growth in response to the economy are aggregated. The elasticity adjusted for rate and base changes only measures growth in response to the economy. Tax Adequacy The long-term elasticity (calculated over a number of years) measures the sales tax's ability to generate sufficient revenues over time. This can be used to examine the adequacy of the sales tax to finance public services. Annual elasticities measure the volatility of sales tax revenue growth across the business cycle, and can be used to examine the sales tax's stability. The long-term elasticity, adjusted for rate and base changes, has been 0.90 since 1982 (see Table 7). This means that revenues have grown nine-tenths as fast as personal income. This is in the normal range of the estimated elasticities of state sales taxes. The sales tax revenue buoyancy was 0.95 from 1982 to 1996, evidencing that policy changes have slightly increased revenue growth relative to personal income over the past 14 years. The elasticity has dropped dramatically in recent years, and a major concern is whether sales tax revenue growth (along with growth in other tax sources) will be sufficient in the future to finance growth in public service needs, without policy changes such as rate increases. The elasticity has been only 0.45 since 1990 and the buoyancy has been an even lower 0.30,9 but from 1982 to 1989, the elasticity was 1.02 and the buoyancy was 1.17. Revenues actually fell each year from 1991 through 1993, and grew each year from 1994 through 1996. The combined result is the low elasticity, and annual growth rate of only about 2 percent per year in the 1990's. The elasticity and buoyancy estimates suggest that the relationship between revenue growth and the economy has been severely weakened, and the sales tax has been increasingly unable to contribute to meeting growing demands for public services. Several explanations can be offered for why the pattern relative to economic performance has shifted so remarkably:
The average long term trend around the U.S. has been for sales tax collections to rise as a percent of income (see Figure 4). The increasing share results from higher rates, as the base has been falling relative to income. The tendency, both in D.C. and elsewhere, is for revenues to decline as a share of personal income between rate increases (this occurs because the elasticity is less than 1) and to grow as a share of personal income in discrete jumps with rate hikes. The District's revenues as a share of income have fallen because no general rate increase has been enacted since the general rate was decreased in 1994 (except for the rate increase for one quarter in 1994). It is unclear whether sales tax revenue growth will return to the pattern of the 1980's, or continue the slow growth path of the 1990's, but there are no obvious quick fixes to the problems of the 1990's that will cause revenue performance to return to the pattern of the 1980's. Better administration is a key to improved revenue growth. A broader base, including more services, could help. At a minimum, the District must shy away from further decisions that narrow the tax base. Tax rates must be kept competitive with surrounding areas to ensure that businesses and consumers do not have a tax incentive to shop outside the District. These and other policy issues are discussed in more detail below. Whether future revenues grow more like the 1980s's or the 1990's, the long-term elasticity will probably remain below 1.0, but the implications for overall revenue performance of the growth path in the two time periods is important to D.C.'s revenue future. In either case, an elasticity below 1.0 means better revenue growth will need to come from other tax sources, or sales tax rate or base increases will be necessary if revenues are to maintain a constant share of personal income. Issue 1: Can revenue performance be returned to the pattern of the 1980's?11 Tax Stability Sales taxes normally are unstable across the business cycle.12 An important reason is that consumer purchases of major durable goods and business purchases of investment goods tend to be much stronger in expansion than in recession years. Rapidly rising expenditures for these big ticket items result in much larger elasticities during expansions, and particularly in the years immediately following recessions. Even in expansion years (or recession years), volatility in the size of the elasticity can result from fluctuations in interest rates, inflation rates and other economic variables, and from randomness in the timing of purchases in the District. Increases in D.C.'s sales tax revenues have been characterized by very erratic growth over the past 20 years, and by actual declines in four years (see Figure 5). With the exception of 1994, when the rate was temporarily increased, there appears to be a general tendency towards lower real revenue growth in more recent years. Annual elasticities and buoyancies from 1982 through 1996 are very volatile across the years, and the timing is generally consistent with business cycles (see Table 7). Some differences in timing are to be expected because of when recessions affect the District versus other parts of the country.13 The D.C. elasticity was low in the 1982 and 1991 recession years, and was negative in 1992 and 1993. 14 Overall, the elasticity varied from a high of 6.4 in 1995 to a low of -3.5 in 1993. The wide variation in elasticities creates problems for funding government because service demands continue during the recession. Also, swings in the elasticities make it difficult to estimate revenues. 8 The time period since 1982 is used since it immediately follows the high inflation of the 1970's and the recessionary environment of 1980 through 1982. 9 The major reason for the difference in the tax elasticity and tax buoyancy since 1990 is the reduction in the tax rate during 1994 from 6 percent to 5.75 percent. 10 Service expenditures may be growing more rapidly in part because the price of services is growing more rapidly than the price of goods, and not only because the quantities of services are increasing more rapidly. 11 Options are given for the issues raised later in the paper. No options are listed here, because the available strategies are included below as options associated with other issues. 12 See Fox and Campbell (1984). 13 Some of the difference may result from the methodology used to adjust revenues for base and rate changes. The revenue consequences of base changes were calculated using revenue estimates made by the Department of Finance and Revenue prior to implementation of each change. Data used in making such estimates are always very limited and effects on behavior of tax changes are difficult to pre-determine. Thus, the Department's estimates should be viewed as approximations, and the elasticity calculations are in error to the extent that the estimates are imprecise. 14 The negative elasticity indicates that revenue growth was negative, but income growth was not. Return to the Table of Contents Evaluating the Consumer Sales Tax Economists have traditionally evaluated the sales tax as a consumption tax. The presumption is that the tax is a levy that is intended to be paid by households on their consumption, even though the tax may be collected by businesses. A consumption framework is useful and will serve as a basis for much of the evaluation that follows. Nonetheless, the sales tax base deviates from consumption by households in a number of important ways. First, the sales tax continues to be primarily a tax on the purchase of tangible goods, not on all consumption, despite the District's attempt to expand the base to selected services. Major omissions include health care, housing, and professional services. Second, the tax normally is levied on transactions, not on consumption (though the combined sales and use tax are closer in theory to representing a consumption tax). Consumption occurs when an item is actually enjoyed and the transaction occurs when the item is purchased. A major difference arises with the purchase of durable goods. For example, the sales tax is levied at the time an automobile is purchased, but the consumption benefits from the vehicle may be received over many years. Another difference is that the Department of Finance and Revenue is not able to collect use taxes on many out-of-state purchases by residents, even though the purchases are for consumption in the District. Third, businesses purchases are frequently taxed. Exceptions include for certain manufacturers' purchases and sales for resale. Ray Ring (1989) estimated that 48 percent of the District's sales taxes were paid by businesses or tourists. Not surprisingly, this is higher than the 41 percent for the average state. The large number of tourists in the District likely explains the difference.15 Based on Ring's estimate, almost $250 million of District sales taxes were paid by businesses and tourists in 1996. Despite the importance of business sales tax payments, the following analysis of equity is couched in terms of the sales tax as a consumption tax. A separate section on issues associated with imposing the sales tax on businesses is presented below. Equity There are two dimensions to equity, horizontal equity and vertical equity. These concepts allow examination of fairness in different contexts. Vertical equity refers to the distribution of tax burdens across people with different incomes. Horizontal equity refers to the relative tax burden imposed on people with similar incomes. The District's sales tax will be examined in terms of each concept in this section. Equity is best evaluated in terms of the final incidence of the tax, after taxes have been shifted. Here, the tax on consumer purchases is assumed to be borne by the consumer. Taxes imposed on businesses can be shifted to consumers through higher product prices, to workers or other input suppliers through lower wages, or to owners through lower profits. Unfortunately, there is little information on who actually bears the tax. Therefore, no attempt is made in this section to allocate the tax burdens that are initially incident on business. Vertical Equity The appropriate degree of vertical equity of a tax system is in the eye of the beholder. Some feel that taxes should be progressive, some believe they should be proportional, and others feel they should be regressive. A tax is described as progressive if the percentage of income paid in taxes rises as income goes up, as proportional if the percentage of income paid in taxes is the same for all income levels, and as regressive if the percentage of income paid in taxes falls as income rises. It is important to remember that higher income households probably pay more tax dollars than do lower income households, regardless of whether the tax is progressive, proportional, or regressive. Thus, discussions about whether taxes should be regressive or progressive actually should be centered around how fast the tax burden should rise with income, not whether it should rise with income. This section contains a description of the vertical equity characteristics of the sales tax. Data drawn from the Consumer Expenditure Survey (CES) were used to estimate the sales tax liability for D.C. residents in different income brackets. The CES reports data on how consumers in different income brackets spend the resources that are available to them. For example, the CES shows how much money consumers in the $5,000 to $9,999 income bracket spend on apparel for men and boys, major appliances, health insurance, and dairy products and so forth. The first step in the analysis was to classify each category of expenditures as taxable, partially taxable, or non-taxable. The second step was to estimate the tax liability for all taxable expenditures using the five different tax rates. Finally, tax payments for each category were summed and divided by the average income in the bracket to determine the percentage of income paid in taxes for each bracket.16 Households in the category earning less than $5,000 annually represent a very diverse group, including some retired individuals, some students, some people who lost their job, and some of the long-term poor. Many households in this category may have substantially more capacity to purchase than is reflected by their income. For example, some students may be receiving significant amounts of money from their parents that are not included in the student's income. One evidence is that the average annual expenditures for the category are more than 7 times greater than the category's average income. Thus, this category is excluded from tax burdens comparisons. The expenditure pattern analysis evidences that the District's sales tax is regressive when compared with current income. Households with incomes between $5,000 and $9,999 pay 3.54 percent of their income in sales taxes and households with incomes above $70,000 pay 1.55 percent of their income in sales taxes (see Figure 6 and Table 9). Even households in the $15,000 to $19,999 income bracket pay 3.06 percent of income in sales taxes, about twice the percentage of the highest income group. The regressive sales tax is much more the result of lower income households spending a higher percentage of their income, than of the specific types of purchases that they make. The percentage of income that is spent, as opposed to saved, falls as income rises. In fact, every category with income up to $30,000 has higher expenditures than income. Some economists have argued that lifetime income is a better basis for comparing tax burdens than is annual income. The concept is that people set their expenditure patterns based on the overall consumption level they expect to maintain over their life. The consumption level depends on expected income over one's lifetime rather than for a single year. For example, people who recently lost their job may spend more than would be expected from their current income. Both retirees and young people consume more than is expected compared with their income, because their lifetime income is greater than their current income. Peak income earners, on the other hand, spend less relative to their income because they are saving for retirement. Poterba (1989) has argued that annual (or current) expenditures are a good proxy for lifetime income. Therefore, estimated sales tax burdens were compared with annual expenditures for each income category. The distribution is approximately proportional when the tax burden is compared with consumption instead of annual income, except for the lowest income bracket where the tax burden is lower than for other groups (see Table 9 and Figure 7). Thus, the sales tax is not regressive when compared with lifetime income. Improving Vertical Equity As noted above, equity is in the eye of the beholder, and some feel the sales tax burden is fair because people are taxed according to what they take from the economy in consumption or because people are taxed in proportion to lifetime income. Others may think it is unfair because the tax burden is regressive when compared to current income. If the sales tax burden is regarded as unfair, a frequent question is how can the tax be made more fair. An important point to remember is that the sales tax's regressiveness compared with current income results from a propensity for lower income households to spend more relative to their income, not from the pattern of expenditures. In fact, households with incomes above $70,000 spend a relatively larger percentage of their consumption on sales taxable commodities than do households with income below $15,000 (partly because of the different tax rates), but the big difference is that households with incomes above $70,000 have much lower consumption relative to their income. One often suggested approach for reducing regressivity is to exempt transactions heavily consumed by low income residents, and to tax those consumed by high income residents. Unfortunately, low income households spend more of their income on almost all goods and services than do high income households. Higher income households do spend relatively more for a narrow set of services, including fees and admissions, entertainment equipment, and education. Consumption of personal services and restaurants is proportional up to incomes in the $50,000 to $70,00 range. Otherwise, the sales tax's regressiveness against current income will not be eliminated by exempting certain categories of consumption that are consumed heavily by low income residents, unless the tax base is to be a very narrow assortment of items. For example, food and household utilities already are exempt and the tax remains regressive relative to current income. Similarly, broadening the base to additional services is unlikely to result in any significant improvements in equity. An appropriate response to concerns about fairness of the sales tax is that the wrong issue is being raised. A strong case can be made that the issue is whether the overall D.C. tax burden is fair, not whether each individual tax is fair. Based on this perspective, it can be argued that changes in the sales tax base are a clumsy means for enhancing equity because the benefits of exempting items from the base cannot be targeted to the intended beneficiaries. High income taxpayers benefit from sales tax base exemptions just as do low income taxpayers, and the high income residents probably save a larger dollar amount of taxes. Thus, changing the tax base can be a very expensive means (in terms of lost revenues) for reducing tax burdens for low income households. Perceived fairness in the tax system can be overcome more efficiently through taxes levied directly on people, such as an income tax, because the benefits can be targeted to the desired beneficiaries. One method for improving equity is to combine characteristics of the sales and income taxes. For example, the sales tax could be broadened to include exempt items, such as food and utilities. Then, the tax rate can be lowered and an income tax credit equal to the sales tax paid on these taxable items can be given to reduce any perceived equity. This system can make the overall tax burden less regressive (or more progressive) against current income if all households are given the same value of credit. The effects of such a policy are discussed and included in the section below on issues in the sales tax. Horizontal Equity Taxes are horizontally equitable when people with the same ability to pay have the same tax liability. Thus, a horizontally equitable sales tax would impose the same tax burden on all people with the same level of income (or consumption). The sales tax only will score well on horizontal equity when essentially all consumption is taxable. Otherwise, variation in tax liabilities will occur as people make different decisions about which items to consume. Despite these guiding principles, exemptions and exclusions for certain expenditures are granted because of high administrative or compliance burdens associated with the tax, perceived vertical equity problems, constitutional or legal restrictions, and political judgements. All of these exemptions and exclusions violate horizontal equity and make the tax less "fair," though other goals may be helped. The sales tax fails on horizontal equity grounds because most household consumption is exempt. This means that tax burdens differ simply because of how people choose to spend their resources. Expenditure patterns given in the CES indicate that only about 40 percent of the expenditures made by households in each income bracket are for sales taxable commodities (see Table 9).17 In other words, the District exempts much more of consumption for households in all income brackets than it taxes. Large exempt categories include, health care, food, gasoline, personal services, and most housing expenditures. Thus, for both those in low income and in high income groupings, those households that are relatively heavy consumers of housing, food, health care, and so forth will have lighter tax burdens than those that are heavy consumers of clothing, automobiles, reading materials, and household supplies. The best way to reduce horizontal equities is to broaden the sales tax base to the maximum extent possible. Other goals, of the tax structure, such as vertical equity, can then be achieved through alternative means, such as the income tax. Effects of Taxes on the Location of Retail and Economic Activity All taxes distort economic behavior in some way and one of the challenges in designing tax structures is to balance the various consequences of the overall system so that the effects are acceptable. Effects of taxes on the location of business are an important effect that all governments analyze carefully. The smaller the geographic area under consideration, the greater the potential implications of taxes for business location, so the diminutive geographic size of the District provides a case where location effects must be addressed. Businesses have the potential to serve the broad Washington D.C. market from a wide set of locations in the area. Similarly, firms that are producing for national or international markets often can locate their activities anywhere in the area and feel that they have the advantages of being in the national capital. Thus, high costs for doing business in one place versus another, whether induced by high taxes or some other factor, have the potential to significantly alter where businesses locate in the metropolitan area. An effective use tax can reduce locational effects of the sales tax. For example, D.C. residents must pay the titling tax on autos purchased outside the District, so there is no tax advantage to shopping for vehicles at vendors outside the District. This has the potential to help D.C. retailers. Nonetheless, in many other cases there can be tax savings from purchasing outside the District, because the use tax is difficult to collect. Also, the use tax should be collected on inputs that all businesses buy outside the District. The use tax precludes firms from lowering their costs of producing in the District by purchasing inputs in places where the sales tax burden is lower. In this case, the use tax can make it more attractive for firms to locate their productive activity outside of the District. A number of factors go into determining the effects that taxes have on where sales occur. First, taxes only matter to the extent that there are tax rate or base differentials across governments. There is only an incentive to shop across the border when one side of the border has lower effective tax rates than the other side. The savings from the lower taxes must be larger than the costs of traveling across the border, when both travels costs and the value of people's time are included, before any advantage is reaped from shopping in a low tax area. Thus, the greater the differentials in effective tax rates, the larger the locational effects. Second, the entire tax structure, not just the sales tax, must be evaluated to determine what effect taxes have on the location of sales. For example, other consumption taxes, such as cigarette and alcohol taxes, can be an important consideration of where consumers decide to shop. Also, higher property and corporate income taxes can raise the cost of doing business in a state. These costs can offset any advantage that results from lower sales taxes. Third, taxes and expenditures are linked, and a reduction in D.C. taxes that is intended to make the District more competitive may lead to lower service levels. Lost benefits in the form of infrastructure or other services could offset gains from lower taxes. Empirical research on effects of tax differentials along state borders (the best parallel to the effect that taxes would have inside the Washington D.C. metropolitan area) supports the expectation that taxes affect where people shop.18 Research over the past several decades has generally demonstrated that consumers will cross state borders to purchase in lower sales tax jurisdictions. For the 1978 D.C. Tax Commission, Fisher analyzed the effect of sales tax rate differentials on sales in the District during the period 1962 through 1976. Prior to exemption of food from the sales tax, he concluded that tax differentials caused a 7 percent loss in food sales for every one percent difference in the tax rate. He did not find any effect of the sales tax on the location of non-food sales. Walsh and Jones (1988) found that sales in West Virginia border counties are affected by tax differentials with other states, but sales in interior counties are unaffected. A synthesis of the research leads to the conclusion that a one percentage point increase in the sales tax differential reduces spending in the high tax area by between one and ten percent, with the most likely impact being somewhere in the middle, even though Fisher found no effect in the D.C. area.19 The greatest effects appear to be on the purchase of bigger ticket items (such as furniture, appliances, and electronic equipment) and much smaller effects occur for drug store, convenience store and restaurant sales. These results suggest that lower sales tax rates could have a small positive effect on sales in D.C., but these gains could be offset if tax rates on other bases are increased to replace the revenues. There has been a dramatic, and consistent decline in the District's share of retail sales, which can be seen both in retail employment and retail sales data. The District's share of retail employment for a selected portion of the metropolitan area declined from 34.1 percent in 1969 to 14.4 percent in 1994.20 The District has a somewhat smaller share of retail sales than of retail employment, but the decline in retail sales as a share of the region's activity has been of a similar relative magnitude since 1982. Retail sales have fallen from 16.1 percent of the selected area in 1982 to 11.9 percent in 1992 (see Table 10). The decline in sales has occurred across all types of retailing, but has been relatively less pronounced in eating and drinking establishments, gas stations, and drug stores.21 Also, retail employment in the District is smaller relative to the District population than is true for the selected region. The key issues are whether the D.C. sales tax rates have caused the large relative decline in D.C. sales and retail employment and whether lower tax rates would reverse the pattern. The somewhat higher general sales tax, plus the high tax on parking, could be discouraging retail sales in the District. If the higher rates, which have been consistently above the surrounding areas for many years, have caused a loss in economic activity, are the effects are irreversible, so that lowering the rates now either would have no effect or would only shift sales back to the District over a very long time? In an effort to provide some answers to these questions, several regressions were run relating the relative D.C. sales tax rate to the share of the selected area's retail employment that is in the District. 22 The sales tax rate is negative and statistically significant in the equation. The sales tax rate remains statistically significant when the share of personal income in the District is also included in the regression. However, the sales tax rate was not found to have a statistically significant effect when the share of population in the District was included in the equation (in place of personal income) with the sales tax rate. This is consistent with Fisher's findings. In other words, the shift in relative population does a better job of explaining the trend in retail employment than does differentials in sales tax rates. This suggests that the sales tax rate has not been the driving force in the loss of retailing activity. Nonetheless, recent experience with raising rates on selective excises, described below, seems to indicate that a loss of those sales is associated with the higher tax rates. Nothing definitive can be said about whether the trend of retail activity out of the District can be reversed by lowering tax rates. Shopping habits and shopping locations have been formed over many years and it seems likely that a considerable period of time would be necessary for more favorable tax rates in D.C. to have a noticeable effect on the location of retailing activity. The D.C. sales tax has the potential to discourage other businesses as well. The 12 percent tax on parking, likely intended as a tax on commuters, could require firms to pay higher wages and could discourage firms from locating in the District. The 10 percent restaurant and 13 percent hotel taxes can encourage people to eat or stay in the surrounding areas, or at a minimum, reduce the prices that can be charged by restaurants and hotels in D.C. Little research has been done on the effect of these sales taxes on the location of non-retail businesses, although Fox and Murray (1990) found some evidence that sales taxes reduced the number of firms in the 12 to 50 employee range. Bartik (1989) determined that lower sales tax rates on business equipment increase the start up of small firms in a state. Issue 2: Should the general sales tax rate be reduced?
15 Caution should be exercised in applying Ring's findings too precisely because the data are for 1979 and the methodology should be seen as providing a broad indication of business and non-residents' liabilities. 16 Expenditure data for the southern region were used to approximate the District's expenditure pattern. A single expenditure category in the CES may include purchases that are taxable and purchases that are non-taxable. For this reason, it was necessary in some cases to assume a percent of expenditures on the item that is taxable. 17 The percentage spent for sales taxable commodities ranges from 37.7 percent (by households earning between $5,000 and $9,999) to 45.2 percent (by households earning between $20,000 and $29,999). 18 See Stephen T. Mark, Therese J. McGuire and Leslie E. Papke (1997) for further discussion of economic development effects. 19 Also, see Fox (1986) and Mikesell (1970). 20 The selected area includes the District of Columbia, Montgomery and Prince George's Counties, Maryland; Arlington, Fairfax, and Prince William Counties Virginia; and Alexandria, Fairfax, Falls Church, Manassas and Manassas Park Cities, Virginia. 21 Per capita retail sales are lower in the District than in the selected area for all categories except for eating and drinking places, drug stores, and miscellaneous retailers. 22 The sales tax rate is the D.C. general sales tax rate divided by the weighted average of the Maryland and Virginia tax rates. The weights are the percent of retail employment in the Virginia versus Maryland portions of the selected area. Return to the Table of Contents The District imposes selective sales taxes on gasoline, cigarettes, beer and other alcoholic beverages. Gasoline is taxed at $0.20 per gallon, cigarettes at $0.65 per pack, beer at $2.79 per barrel, spirits at $1.50 per gallon, and wine at $0.45 per gallon. All of the rates have been increased in recent years. Approximately $54.4 million was collected in 1996 from imposition of these taxes (see Table 11), but the revenue performance has been very poor. Issues related to the selective sales taxes, revenue growth, equity, and border effects, are the same as with the general sales tax, and will not be repeated in-depth. A key characteristic of these taxes is that the rate is levied on the quantity of consumption, not the price. As a result, the revenues only rise when consumption grows, and not surprisingly, revenue growth from these taxes has been very low, because taxable beer, gasoline and cigarette consumption has declined recently in the District. Across governments, high taxes on cigarettes, alcohol, and gasoline have been justified by an argument (that is only partially true) that consumption of these commodities will decrease very little as prices are increased. However, the option to purchase these commodities in neighboring states allows the potential for significant responses of purchases in D.C. to higher tax rates. The $0.65 cigarette tax levied by D.C. is one of the highest tax rates on cigarettes at any place in the U.S. (see Table 12). Maryland has a $0.36 per pack tax and Virginia has the lowest tax in the U.S. at $0.025 per pack. The result is that District revenues only doubled from 1989 to 1996, while the rate was increase 3.8 fold. Revenues have declined since 1992, even though rates were increased both in 1992 and 1993. The cigarette tax rate was increased from $0.17 to $0.30 in 1991, to $0.50 in 1992, and to $0.65 in 1993. This suggeststhat the higher tax rate has discouraged the purchase of cigarettes in the District, and likely increased their purchase in other locations. The high cigarette tax rates give consumers another incentive to shop outside of the District for other purchases. Also, higher tax rates may lead to a greater propensity for vendors to evade payment of the tax to D.C. Purchases of gasoline and beer have been falling in the District, and the option to buy in Maryland or Virginia may be a partial explanation. The gasoline tax's buoyancy was 0.47 between 1988 and 1996, despite the rate being increased from $0.155 to $0.18 per gallon in 1989 and to $0.20 in 1992. Gasoline tax consumption is lower than in 1990. D.C.'s gasoline tax rate is above the median of the states (see Table 13), below Maryland's $0.235 per gallon tax and above Virginia's $0.175 tax. The beer tax rate was increased in 1989 and consumption and revenues have fallen since 1990. Maryland levies the same tax rate as D.C. ($2.79 per barrel) and Virginia has a much higher $8.81 tax. A recent study concluded that differences in beer prices on opposite sides of government borders can be an important cause for cross border shopping (see Beard, Gant, and Saba, 1997). They estimate that the District of Columbia loses 4.8 percent of its beer sales because of border crossing. The authors did not find that border crossing to purchase liquor was statistically significant. Nonetheless, the greatest quantitative measure (0.42 percent of sales) of consumers crossing the border for liquor purchases was in D.C. The authors believe that the demographic differences between consumers of the two products, beer is consumed by a much younger population group, explains much of the difference between border crossing for liquor and for beer. Taxes on these selective goods tend to be regressive. Based on spending reported in the Consumer Expenditure Survey, alcohol taxes are proportional to $30,000 of current income and slightly regressive for higher income levels. Tobacco and gasoline taxes are regressive across the entire current income spectrum. A major concern in the District is whether the selective sales tax rates are too high. Dropping consumption levels for the taxed commodities are indicative of greater evasion, potential problems with administration, and consumers shifting their purchases outside of D.C. Rates that are competitive with Maryland and Virginia could encourage purchase of taxable commodities in the District, help D.C. merchants, and potentially cost little or no revenues. Issue 3: Should selective sales tax rates be lowered?
Return to the Table of Contents Structure of the Sales Tax Base Decisions on the best tax structure involve weighing the relative importance of several goals and making the appropriate tradeoffs. The goals for the tax system include:
These six goals often will conflict. For example, the factors that make a tax good for administration often make it bad for compliance. Characteristics which enhance equity often harm economic development or economic efficiency, and so on. Thus, the best tax system is likely to vary across areas. This section begins with a conceptual discussion of the sales tax base in the context of the goals described above. The conceptual discussion is followed by examination of the appropriate tax policy for a number of categories of transactions. A Conceptually Sound Tax This discussion of a conceptually sound tax base assumes that the intent is to tax consumption. However, as originally enacted sales taxes were levies on purchases of tangible personal property by both individuals and businesses, not taxes on all consumption. The consumption tax structure described here is an attempt to take a tax of convenience and convert it into a more conceptually appealing base. All household purchases are final consumption and are appropriately targets for sales taxation. This should include all purchases of both goods and services. The consumption value should be taxed, whether the good is to be used over many years (such as a house) or to be used up immediately. A pure consumption tax would have in its base the value of consumption for which payments are made and for which the benefits are received in kind. Sales by for profit firms and sales by government and not-for-profit firms belong in a consumption base.24 Taxation of government sales requires careful consideration. For this analysis it is best to think of governments as public producers, much as business firms are private producers. Parks and recreational facilities, bus transportation, water and other services are often substantially financed with user prices. The price or user fee is a measure of the value in consumption. However, it may be undesirable to levy the tax on a service which has a price, but which is mostly financed with tax revenues. Applying the sales tax on the sale of government services to households is appropriate as the tax is conceptually being levied on consumption (even if the tax is legally on the seller), and whether the service is privately or publicly provided is immaterial. The selling government agency is merely collecting the tax for remittance to the taxing authority; the consumer is the intended taxpayer. This concept is broadly accepted for many government sales of commodities, such as when a state university sells a soft drink, but has been infrequently applied to other government sales of services. Similar arguments can be made for levying the tax on sales by not-for-profit firms. In sum, a consumption tax should be levied on:
It should be noted that a retail sales tax is a cumbersome means to create a pure consumption tax because vendors sell to different levels in the production chain and many decisions must be made on what is taxable. Using a retail sales tax necessitates a pragmatic approach to taxation that balances the different goals for taxation. The remainder of this section evaluates some major deviations of the D.C. sales tax base from the consumption tax ideal, to determine whether changes in the tax base are desirable. Taxing Business with the Sales Tax The business community is concerned with three dimensions of the sales tax: taxation of purchases by businesses, taxation of sales by businesses, and compliance costs associated with collecting the tax on behalf of the government. This section is focused on the taxation of purchases by business. As already noted, business purchases should be exempt from a con-ceptually sound consumption tax. Nonetheless, business purchases are often taxed because of:
Taxation of business purchases leads to a series of problems including:
Decisions on which business purchases to exempt and which to tax must be based on a tradeoff between the degree of pyramiding and distortions of business which the District is willing to accept and the collection of revenues. Most states and the District use a component parts rule to make decisions on many manufacturing exemptions. Under a components part rule, purchases which become part of the buyer's final product are exempted and other business purchases are taxed. In practice, careful decisions must be made on how to apply this rule and these may vary by state. An example of its application is that purchase of cloth by an apparel factory would be exempt but purchase of a desk by the same firm would be taxable. Purchases usually are exempt if the item is to be resold. The District imposes the sales tax on the purchase of manufacturing equipment.25 There has been a strong trend across the states towards exempting equipment purchases. California, Illinois, Minnesota, and Texas are some of the states that have enacted legislation reducing the sales tax on manufacturing equipment.26 Many states have reached the conclusion that they do not want to create a disincentive for business to locate and invest. The District should consider exempting manufacturing investment, though the exemption would reduce revenues. Issue 4: Should manufacturing equipment purchases be exempt from the sales tax?
Taxing Purchases by the Federal Government Sales to the federal government, other states and political subdivisions, and D.C. are exempt from the District's sales taxes. Government is not a final consumer of goods and services, so government purchases, like business business purchases, should be exempt from a conceptually sound consumption tax. Also, there is also a constitutional prohibition against directly imposing the sales tax on the federal government. A properly structured sales tax can permit states to collect taxes on some purchases by the federal government. Arizona and South Carolina tax sales to federal contractors operating with a fixed price contract. New Mexico has been relatively aggressive in seeking to tax sales of services to the federal government27 by structuring its tax as a business privilege tax, not as a sales tax on consumers. All business transactions are taxable to the seller unless specifically exempt. New Mexico does not grant an exemption to sellers of services to the federal government as long as the "first use" of the service is in New Mexico. The federal government has agreed to reimburse service providers with nexus in New Mexico. Presumably, the District could impose a tax on vendors of goods or services to be used by the federal government in the District. Firms with nexus in D.C. would be required to pay the tax, even if they are physically located outside of the District. The sales tax (or at least the relevant sections) would need to be set up so that the tax is on the vendor, not on the buyer. This would require substantial restructuring of the legal basis of the tax. Two major problems with this approach should be considered. First, the federal government could act to prohibit a tax that is effectively on its vendors. The federal government would be particularly likely to act if certain transactions with the federal government, like some services, were singled out for taxation. Second, firms without nexus in the District would be advantaged over firms with nexus, and this could harm the District's economic environment. Indeed, the District may find it difficult to identify taxpayers with nexus but not a physical facility in the District, and the inability to administer the tax on such firms could encourage some businesses to locate outside the District. The District suffers from a relatively unique problem of having many international organizations and embassies, and the sales tax cannot be collected on many of their purchases. It is possible that the sales tax could be collected on transactions with international organizations in the same manner if the tax were technically on the vendor and not the buyer. The idea of imposing the sales tax as a business privilege tax is not unusual. New Mexico is one of 13 states where the sales tax is levied on vendors (see Due and Mikesell, 1994). Seventeen states impose the sales tax on the consumer (though it is collected by the seller) and 15 states and D.C. have taxes that are a hybrid between the two. Issue 5: Should the sales tax be structured to collect taxes on transactions with the federal government?
Food for Consumption at Home Twenty-eight states plus D.C. exempt food for consumption at home, with Georgia and Missouri being the latest two states added to the list (both states have legislation that will exempt food over time). D.C.'s exemption is complicated because the distinction is not based on where the food is consumed, but how the food is prepared. Food prepared for immediate consumption is taxable at a 10 percent rate and snack foods are taxable at the general rate. Otherwise food is exempt from taxation. The notion seems to be that food taken home is a necessity but food prepared for immediate consumption and snack foods are not necessities. Vertical equity is the major justification for the exemption, with the arguments being that a tax on food places an inequitable burden on low income households because the purchases are regressive and food purchases are a necessity. The gain in vertical equity is often less than anticipated since food stamp purchases already are exempt throughout the US, so food purchases by the lowest income households are not subject to the tax. Still, taxing food would make the sales tax more regressive, since the percentage of income spent on food for consumption at home falls with income across all income brackets. The gains in vertical equity come at the expense of a number of other problems for the sales tax. Horizontal equity is violated, since households with the same income or consumption will be taxed differently based on decisions, such as whether they eat out or eat at home. Economic efficiency is distorted because taxes can play an important role in determining consumption patterns. The 10 percent tax paid on restaurant food, versus 0 percent on food for consumption at home has the potential to significantly distort consumption decisions between these two. Distortions will also occur if people choose to purchase food in other areas because it is taxable in one place but not another. Food sales are taxable in Virginia, so there would be little incentive to go to Virginia if food was taxable in the District, but food is not taxable in Maryland. Note that per capita food store sales already are low in the District by comparison with sales in the remainder of the selected area that was described above. Compliance and administration are greatly complicated by the decisions that must be made on what is taxable. Decisions must be made on whether dog food, soft drinks, potato chips, candy, toilet paper, and so forth are taxable. In many cases a young clerk working in a convenience store and with no explicit knowledge of sales taxes is placed in the position of making decisions on what is taxable, and numerous errors should be anticipated. Auditing of stores carrying food becomes much more difficult because many of their transactions are exempt, though many of their sales are taxable (see Table 2). Failure to tax food makes the remaining sales tax even more unstable, because the purchase of food for consumption at home is one of the most stable part of the potential sales tax base.28 The sales tax volatility that was evidenced by the elasticities provided in Table 7 arises in part because food is not in the tax base. Because of these problems economists have frequently recommended that states tax food for consumption at home, and provide a credit against the income tax for the sales tax that is implicit in food purchases. The District followed this policy from 1970 to 1976. The credit was eliminated and food for consumption at home was exempted from the tax 1976. A decision to tax food purchases and grant an income tax credit is often believed to offer a number of advantages including: (1) sales tax administration is eased because there are fewer decisions regarding what is taxable; (2) the credits only are given to residents, so non-residents pay the tax on food purchases; (3) the sales tax will be more stable; (4) the sales tax will be more horizontally equitable and will cause fewer distortions in decisions; (5) additional revenues will be collected in total if the credit amount is based on food purchases made by lower income households, with the same dollar value of a credit granted to all income taxpayers. The two disadvantages of the credit approach are that an income tax return must be filed to get the credit (though the credit could be set up as refundable even if no tax is otherwise due) and taxpayers receive the return of their sales tax revenues in a lump sum at the year's end. The major advantage for D.C. of taxing food and granting an income tax credit would be a reduction of the compliance problems of determining what food purchases are sales taxable. Otherwise, the credit approach appears less advantageous in the District than it would be in many other areas of the U.S., because the amount of food sales that is not taxed is relatively small. Data from the 1992 Census of Retailing are available for sales from food stores in the District (including grocery stores, convenience stores, and so on). Assuming that 50 percent of sales in such stores are already taxable or could not be taxed (either as non-food items, food for immediate consumption, or food stamp purchases), the District would have generated about $18.5 million from taxing such purchases in 1992.29 Little of this revenue would be gained on net after an income tax credit was granted. Issue 6: Should the sales tax be levied on all food sales (except food stamp purchases)?
Snack Foods The District taxes snack foods, including many foods sold through vending machines, at 5.75 percent. Expansion of the sales tax to snack foods was made to raise revenues. In addition, snacks are food for immediate consumption and should be taxable to be consistent with the taxation of other food for immediate consumption. There is a problem in deciding which food are snacks, but the problem arises because of the exemption of food for consumption at home. A line must be drawn in deciding what food is taxable and what food is not, regardless of whether snack foods are taxable, so there are no administrative savings from exempting snack sales. If snack foods are exempt, but not other foods for immediate consumption, vendors still must decide which foods are exempt. The only solution to the problem of making decisions on what food is taxable is either to tax all food or to tax no food (and even here there could be some decisions to make). Because it is very unlikely that the District wants to cease taxing restaurant food sales, the taxation of other food for immediate consumption, including snacks, may provide the most effective means of having parallel treatment of similar items. Issue 7: Should snack foods be exempted from the sales tax?
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Send mail with questions or comments to webmaster@dcwatch.com
Web site copyright ©DCWatch (ISSN 1546-4296)
