Smart Tax Policy Protects the Home Team

April 28, 2017 by Jon Hurst

"Don’t tax you, don’t tax me, tax the fellow behind the tree;” so said former Louisiana Senator Russell B. Long when describing “tax reform.”  This is a pretty clear description of the political process behind tax debates at the state and federal levels.  And this message is worth keeping in mind as we face major tax changes and debates over the next year on Capitol Hill concerning the Border Adjustment Tax; and on Beacon Hill and the state ballot on the so-called Millionaires Tax.

There is no better example of Senator Long’s “behind the tree” saying than the sales tax.  Big business prefers to have consumers pay more rather than them, and big non-profits like healthcare providers don’t care where the tax dollars come from, so long as they are exempt from taxes and they keep getting increased taxpayer support for their growing bottom lines. 

Always the most regressive tax on the books, the sales tax has also been a sticky political and economic issue for Massachusetts because of our common border with New Hampshire.  Consumers of means have always been able to avoid it since they had the transportation options to take the drive north.  The billions of dollars which regularly leave the state due to consumer taxing incentives to invest elsewhere is obvious with the commercial development, the retail jobs, and the multitude of Massachusetts license plates in shopping districts north of the border. 

But NH is the least of our worries today for hundreds of thousands of local jobs, and the preservation of our local Main Streets and shopping districts.  The internet and mobile commerce is changing everything and making it increasingly difficult for local sellers to overcome that 6.25% head start state government grants out of state competitors. 

We must face the facts: in the age of the smartphone, state government tax policy is incenting our consumers—which constitute 70% of the economy—to spend their dollars elsewhere.  Consumers of means with credit cards and smart phones are sending too much of their discretionary dollars outside of our economy.  The consumers “behind the tree” who are forced to pay a disproportionate share of state sales taxes are low income families with neither the credit and technology, nor the transportation to avoid it.  Always regressive, the sales tax has only become more regressive in the age of mobile commerce. 

And at the same time, we are hammering the home team—Main Street Massachusetts and the retail sector—with tax policy which incents our consumers to send billions of their dollars out of state.  The out of state internet sellers are in effect granted by government a 365 day a year Massachusetts Sales Tax Holiday; and local stores couldn’t even get 2 days last year from Beacon Hill. 

The sales tax today is both more regressive, and more avoidable for consumers of means who are incented to spend their dollars in someone else’s economy.  Twisted government tax and economic incentives to say the least.  

For 20 years now, the retail industry and state governments have urged Congress to level the taxation playing field by changing federal law and granting states the authority to collect from all remote sellers.  But in this case, the seller behind the tree—the internet merchants—have been left widely untouched.  After all of these years, many have thrown up their hands, and determined that the only viable solutions to tax fairness under the sales tax are to lower existing state rates, or to force a court challenge to a 1992 US Supreme Court decision which restricted state collections from out of jurisdiction sellers.  RAM supports both avenues—lowering the state sales tax, and forcing a revisiting of the Quill case before the Supreme Court.

The Retailers Association of Massachusetts recently conducted public opinion polls by Princeton Research Associates to determine the views of voters and consumers in the Commonwealth about the state sales tax and about the fairness alternatives.  The polling clearly shows that consumers and voters are perfectly willing to reform the sales tax by expanding it to internet sellers, to large exempted non-profits, to certain exempted products, IF coupled with a tax rate reduction.  (They were split on extending the sales tax to services).

Following are the highlights:

  • 95% of the voters view the retail sector as important for our economy.  You would be hard pressed to find any other sector with those levels of voter favorability numbers.
  • 52% opposed sales tax collections on internet sales, a view which would seem to be in conflict with the first bullet, yet shows their honesty and motivation as they shop for the lowest cost.
  • Yet, a wide shift in voter sentiment occurred when asked if they would support the sales tax on internet sales IF it boosted local, small retailers, was coupled with a reduction in the tax rated from 6.25 to 5% or lower, and didn’t mean an overall loss in state revenues. 
  • 60% also supporting a broadening of the sales tax to items like soda, if it was coupled with a sales tax rate cut.
  • After having no Sales Tax Holiday in 2016, a whopping 79% said they strongly supported authorizing a MA Sales Tax Holiday.
  • 56% supported applying the sales tax to nonprofits like universities and foundations if accompanied by a sales tax rate cut for consumers.
  • Voters were split 44-47% on the idea of extending the sales tax to certain services in exchange for a sales tax rate cut.
  • Given the potential upcoming “Millionaires Tax” vote, a very strong 79% said they supported a reduction in the sales tax to about 4%-4.5% to make the overall tax system fairer and to support local retailers.
  • Given that nationally 18% of all holiday gift purchases this past year were made online—and many of those internet sellers do not collect the sales tax—83% said it was important to lower the 6.25% sales tax to help local retail shops.
  • 78% supported sales tax relief soon.
  • And finally 66% of the voters believe the proper sales tax range for Massachusetts would be in the 4% to 4.5% range.

As discussions move forward on tax challenges with our industry, our voters, consumers, and public policy leaders, these numbers provide and important options and possibly a roadmap for reforms. 

 The poll numbers are from two surveys; one conducted 11/11-14/16, N=495, +/- 4.4%; and the other 3/14-19/17, N=550, +/-4.4%

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