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Thursday, December 18, 2008

New York Proposal for Non-diet Soda Tax

Desparate times unfortunately tend to end up with a few odd solutions. This week, New York Governor Patterson offered several proposals to address a budget deficit. The proposals include ones dealing with tax revenues. Here is his explanation from a 12/16/08 press release:

"Revenue Actions: The Executive Budget includes a balanced package of revenue enhancements. These proposals do not include any broad-based income tax proposals, but do include $3.1 billion in recurring General Fund revenue actions. These proposals ensure that tax burdens are fairly distributed, improve consistency with other taxing jurisdictions, and close loopholes, among other objectives. The budget also includes new or increased fees or fines, most of which finance specific activities and have not been changed in several years.

Some notable revenue increases include: A new, additional 18 percent sales tax on non-diet soft drinks to combat obesity and related diseases, with revenues directed to health care; eliminating the sales tax exemption on clothing and footwear under $110, replacing it with two exemption periods during which clothing and footwear under $500 would not be subject to sales tax; imposing a sales tax on cable and satellite TV/Radio services consistent with the practice of 23 other states; conforming the state sales tax to New York City's practice of taxing personal services, such as barbering, massages, and hair salons, and credit rating services; repealing an ineffective sales tax cap on gasoline, for which there is no documented evidence provides savings that are passed on to consumers; permanently increasing the assessment on utility companies from 1/3 of one percent to one percent of gross intrastate revenues plus an additional one percent temporary surcharge on those revenues; and other actions. "

This is not the way to improve a tax system. While the proposals might raise the requisite revenue to balance a budget, they don't help improve the tax system. A few comments:
  • A tax on a single type of product with the money earmarked for a particular purpose will make the law more complicated, takes funding decisions out of the hands of the people elected to manage the budget (the legislators), and is just not the way to go. If there were a particular cost to the government caused by sugar sodas and the government wanted users of sugar sodas to pay, that makes sense and a fee would be appropriate. The dollars raised would be applied to the cost. This is similar to professional license fees . The sugar soda tax is apparently being offered in that sodas cause obesity problems and the related health problems likely do cause costs to the state. However, why sugar sodas? Why not the many other sugar and fatty items that kids consume - like the juice cups? Typically, these drinks are made of corn syrup (usually less than 10% real fruit juice) and worse yet, they are usually packaged with non-recyclable materials. What about candy? What about french fries? The proposed tax is poorly designed and targeted.
  • Eliminating the sales tax exemption on clothes and footwear under $110. That is great. It simplifies the law, makes it more rational and raises revenue. While the exemption may have been targeted to benefit low-income individuals, it also benefited high income individuals. To provide sales tax relief to low-income individuals, it would be better to provide a refundable credit on their income tax form.
  • New sales tax holiday for clothing under $500. Again, this is not the way to provide tax relief to low-income individuals. A refundable income tax credit would be better and would ensure continued collection of sales tax on consumption by high income individuals.
  • Extending the state sales tax to some personal services. Great idea! There is really no difference between consuming a taxable bottle of shampoo and consuming the services of a hair stylist. Both are consumption and should be subject to sales tax. (I've written on this before - click here.)

Reworking tax systems should be a continual activity. Systems should be checked regularly to be sure they still make sense given economic and societal changes. For example, for the past few decades, consumption of tangible personal property which is what most sales tax system have applied to since the 1930s, has declined while consumption of services and intangibles (such as digital downloads) has increased. Sales tax systems should have been modified years ago to reflect changed consumption patterns. When they are changed in tough economic times, it is less likely to be done effectively or well received by taxpayers.

This type of shift in consumption causes the sales tax base to erode. In California, the California Budget Project found:

"The yield of the state’s sales tax has declined over time, reflecting the shift in economic activity from goods to services and the rise of Internet and mail order sales that escape taxation. If taxable purchases accounted for the same share of personal income in 2008-09 as they did in 1966-67, the state would collect an additional $15.9 billion in sales tax revenues." [Two Steps Back, 2/08, slide 33]

So, during a budget crisis, is it possible to achieve appropriate tax changes that follow the principles of good tax policy? It should be and really must be. Enacting new or modified taxes that do not help move the tax system into the 21st century or follow the principles of good tax policy is just making for more work in the future to fix a broken system.


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