By Jeffrey Dorfman
A U.S. Supreme Court ruling last month means even companies without a physical presence in a state can be required to collect sales taxes if states so choose. The ruling, in South Dakota v. Wayfair, levels the playing field between online and brick-and-mortar retailers but comes with a bad side effect: an effective tax increase.
Consumers will pay a little more in taxes, and state and local governments that receive that money will spend more. Neither is a good thing.
The amount of money at stake is not huge, but it’s not trivial. Online sales represent about 9 percent of total retail. However, many e-commerce transactions are with stores that already have a physical presence in that state and collect and remit the sales taxes. Amazon has also agreed to collect sales taxes in most states and represents over 40 percent of internet sales. Thus, a likely estimate of the revenue gain is an additional 1-2 percent of existing sales tax collections.
Georgia passed enabling legislation this year. Effective January 2019, online retailers who make at least $250,000 or 200 sales a year in Georgia must collect and remit to the state sales taxes on purchases or send “tax due” notices each year to customers who spend at least $500 on their site.
This is expected to bring $100-$200 million per year in new state revenue, or less than 1 percent of total revenue. Still, on principle, as more states pass enabling legislation to begin this wider sales tax collection (if they so choose), they should be encouraged to include some sort of tax cut in the same bill so that this leveling of the playing field comes in a revenue neutral manner.
How can states roll back taxes at the same time they pass enabling legislation? Some options include: lowering the sales tax rate, exempting certain products, a sales tax holiday or a cut in other taxes. Let’s take each in turn.
Lowering the sales tax rate by 1-2 percent is an awkward solution because most locations in Georgia have sales taxes in the range of 5-8 percent, and nobody wants a sales tax that has tenths or hundredths. For example, in most of Georgia, combined state and local sales taxes add up to 7 percent, meaning the rolled back sales tax would be something like 6.9 percent.
Choosing something to exempt from sales tax means politicians selecting something to favor, always a risky proposition. They could choose some sort of necessity – food products, inexpensive clothes – but there is no rhyme or reason to any specific choice. That makes this option rather arbitrary.
A sales tax holiday is a simple and familiar option. It has been used in many states, including Georgia, so everyone knows how it works. Sales tax holidays don’t boost economic growth and retailers hate them. While they simply shift consumer spending, they do lower taxes by a fairly predictable amount. One weekend a year would do the trick.
Other tax cuts are the final option I mentioned. For example, the state could increase the exemptions filers get for household members or expand the size of one of the lower tax brackets by a few thousand dollars. Either could easily accomplish the small tax cut of $25 to $50 per household needed to roughly offset the extra revenue from full taxation of internet sales.
These options all would be slightly progressive, but sales taxes are regressive so the tax increase from taxing internet sales would hit the poor somewhat harder. Thus, any offsetting tax cut should start with first dollars earned, not last ones.
An income tax cut makes the most sense. It is simple, doesn’t distort any economic decisions and imposes no costs on businesses. Any of these options could work if paired with the expansion of sales tax collections, in order to keep such a change revenue neutral. A level playing field among retailers is all well and good, but it should not become a back-door tax increase on Georgia consumers.
Jeffrey Dorfman is a professor of economics at the University of Georgia, Senior Fellow at the Georgia Public Policy Foundation and author of the e-book, “Ending the Era of the Free Lunch.” The Foundation is an independent, nonprofit think tank that proposes market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.
© Georgia Public Policy Foundation (July 06, 2018). Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.