The Social Impact of Sales Tax

Most discussion of sales tax takes place at the company level – from nexus determination to tax remittance and all the processes in between. We know how to quantify the impact sales tax has on a company. But what about the wider impact?

There are so many great things about working in this field. The challenge, the varied career opportunities, the continuous learning. One less talked about aspect of the job is the impact the funds from our favorite indirect tax can make in our communities and our states.

Sales tax fuels a host of social services that are a part of our everyday lives. Regardless of how perfect or imperfect the system of taxation and fund allocation is, let’s take a moment to look at the broader impact of sales tax – the impact it has on LIFE.

Sales Tax: The Backbone of Budgets

Sales tax is an effective ‘tool’ for governments to generate large sums of money at relatively low rates to consumers. Even though it can be difficult for businesses to set up sales tax collection and remittance processes, sales tax is seen as a straightforward percentage in the minds of taxpayers and easy to pay as part of a retail transaction.

Governments use tax revenue to fund and maintain state and local directed services like roads, public schools, and medical facilities. Sales taxes, specifically, are the second largest source of state and local tax revenue. Sales taxes accounted for 23.6 percent of total U.S. state and local tax collections according to the Tax Foundation using Census Bureau fiscal year 2016 data.

States’ budgets have varying reliance on sales tax revenue given that every state has a different sales tax regime. Delaware, Montana, New Hampshire, and Oregon do not have a state or local sales tax. Alaska allows locally imposed sales tax but doesn’t have a statewide sales tax. The remaining 45 states impose a statewide sales tax and 38 of them also allow local jurisdictions to collect their own separate sales tax. 45 states rely on sales tax revenue to support public services.

Research from the Tax Foundation shows that reliance on sales tax to generate revenue is highest in Washington where its gross receipts tax makes up 46.4 percent of its total tax collection. Tennessee and Louisiana follow with sales tax consisting of 41.5 and 41.0 percent of their tax collection.

Where does the money go?

Most states funnel sales tax revenue into a general fund that broadly supports a variety of public services. The largest areas of state spending are public education and health care. Tax dollars also support services such as transportation and infrastructure projects, police and fire departments, parks and recreational facilities, and economic development projects.

Sometimes states or localities earmark portions of sales tax revenue to a particular purpose, specific fund, or special project. In some cases, a state or local jurisdiction may implement a temporary sales tax increase to finance that specific purpose, fund, or project.

Michigan earmarked 100 percent of sales and use tax revenue from the state’s additional 2 percent levy approved in 1994 (2 percent out of a full rate of 6 percent) for the 2018-2019 fiscal year to the state’s School Aid Fund which funds K-12 education.

In 2016, Philadelphia voters agreed to a controversial city-wide soda tax to fund pre-kindergarten classes for underserved and low-income families. The Denver Preschool Program was approved by voters in 2006 and reauthorized in 2014 to extend to 2026 and is funded by a 0.15 percent sales tax.

Des Moines voters passed an additional one-cent local option sales tax in 2019 to lower the property tax rate and put additional funds towards public safety, street improvement, flood control, and abandoned house demolition – all things that improve property values. In this case, sales tax shifts the balance away from another tax while simultaneously fulfilling a specific purpose.

Sales tax is frequently a ballot item come election time. For example, the town of Mead, Colorado will ask voters this fall for a one percent sales tax increase that would fund transportation projects for trail, road, and drainage improvements.

Many states are seeing growing sales tax revenues in the wake of the Wayfair decision and taxation of online sales. Legislators and voters must decide the best use for this additional revenue. Mississippi House leaders have tried to earmark online sales tax collections for roadwork. A number of Nebraska senators have argued that the state should put additional revenue towards property tax relief.

The 30,000 Foot View

There’s something significant about working in a profession with a tax that supports so many of the services that touch aspects of our daily lives and that can improve the lives of others.

Sales tax pros can take pride in the fact that getting sales tax collection and remittance right for their companies or clients has a larger social impact. You can see the effects of your carefully calculated sales tax materialize in your community when you see a pothole filled, kids at the bus stop on the way to public school, or improvements made to your local park.

You don’t always have to agree with how states and localities allocate sales tax funds to know that your work makes a difference for other people in your community or state. Sales taxes support public services that bolster a sense of community such as libraries and parks, public services that make us feel safe such as police and fire departments, and public services that make us healthier such as hospitals and mental health facilities.

You can feel good as a sales tax professional and individual taxpayer that in most cases, sales tax revenue is used for good causes. The outcome of our work spans well beyond our offices.

Posted on September 30, 2019