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Monday, March 28, 2011

Sales Tax Exemptions - outdated and inequitable

An editorial in The State (South Carolina) on March 27, 2011 - "Overhaul broken tax system" points out problems with the numerous sales tax exemptions. These are problems in many states including California. The paper points out that South Carolina has 85 exemptions that end up exempting more items from sales tax than are subject to it. One special rule that I had not heard of before, but is quite inequitable is that the sales tax on cars is capped at $300 of purchase price. So a college student who struggles to buy a used car for $6,000 pays the same amount of sales tax as a high-income individual buying a $73,000 Jaguar (at 5% tax rate, they both pay $300 of sales tax on the purchase).

This seems odd and is something that the South Carolina Tax Realignment Commission proposes phasing out. Per their December 2010 final report, "The cap, entirely appropriate and necessary in 1984, 26 years later, represents one of the most regressive aspects of the State‘s entire sales and use tax code today." The cap was added years ago because neighboring North Carolina had one.

The editorial notes other problems with the South Carolina sales tax: "The tax that was created when we spent nearly all of our money on things hasn’t kept up as we became a service economy. Between the untaxed services and all those product exemptions, a full 72 percent of gross sales in our state go untaxed. The result is a sales tax that doesn’t grow with the economy, that forces poor people (who buy mostly things) to pay a far higher portion of their income than wealthier people and that is much higher than it needs to be. As the Legislature’s own Taxation Realignment Commission found, we could easily reduce the sales tax by a penny or two simply by expanding the reach of the sales tax more in keeping with other states."

This is true for California as well. We could broaden the base and lower the rate and use some of the money to create an exemption for businesses to avoid pyramiding of the tax. For more on this, please see my reports and op eds here.

What do you think?

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