State sales tax collections stall

Perhaps one of the reasons that the Idaho Tax Commission was so tough on the kids selling pumpkins from their front yard is that collection of sales taxes is stalling nationwide.

Things are so bad in Washington state that voters there are being asked to approve on Nov. 2 ballot Initiative 1098, which would tax wealthier residents.

If the ballot question passes, Washington state individuals with annual incomes of more than $200,000 (and couples making more than $400,000) would owe a 5 percent tax on the money. A 9 percent tax would apply to individuals with income exceeding $500,000 or $1 million for couples.

The proposal has been polling surprisingly well, reports Stateline. "We've got a fairly strong history against the income tax in our state,” Marty Brown, Washington's budget director, told the magazine. "I don't think anybody would have guessed that (Initiative 1098) would be doing as well as it is."

So why are Evergreen State voters even thinking about instituting any type of income tax? The state's sales tax, which in 2009 accounted for more than 61 percent of the state's revenue, is no longer paying the state's bills.

And that's a trend across the whole country.

Too much reliances on sales tax: Federation of Tax Administrators data for last year shows seven states — Arizona, Florida, Hawaii, South Dakota, Tennessee, Texas and Washington — relied on sales tax collection for more than 50 percent of their revenue.

The U.S. average for sales tax collection in 2009 was 31.9 percent.

Washington was the most dependent on sales taxes, with 61.2 percent of its treasury fed by that tax. Tennessee and Florida also topped the 60 percent mark. 

Thirteen other states — Arkansas, Georgia, Idaho, Indiana, Kansas, Michigan, Mississippi, Nebraska, Nevada, New Mexico, South Carolina, Utah and Wyoming — counted on sales taxes to pay their bills in excess of the U.S. average.

The problem for these states is the economy. People aren't buying. Many have lost their jobs. Others are afraid of losing their jobs. Either way, they're hunkering down and not spending, which means less sales tax collection.

"More than economists expected, the current downturn has rattled consumer confidence and challenged the commonly held notion that the sales tax, unlike personal and corporate income taxes, is a relatively stable one for state budgets," reports Stateline.

Tax policy complications: Economists and tax officials say that in addition to the economic travails, some state tax policies also contribute to the lagging sales tax collections.

For example, 36 states don't collect sales tax on groceries. And in the 14 states that do tax groceries, that tax rate is often reduced or offers residents some sort of tax rebate on grocery purchases.

Shoppers as well as politicians agree that exempting groceries from taxation is a worthwhile move, saving pooer residents critical dollars.

But from a strict operating cash standpoint, it's not a good idea. If a state taxed necessities such as food, which sell even during tough times, it would have a more stable revenue source.

"I don't think it has really sunk in that by enacting (grocery tax exemptions), these states have left their sales tax base dominated by discretionary purchase items that people do without in a crunch," the Tax Foundation's Bill Ahern told Stateline.

Changing tax scene: And then we have the way America has changed. Sales taxes initially were applied to products created when the U.S. economy was based primarily on manufacturing. Now services dominate, not to mention the growing online economy.

That's why my home state of Texas last month sent Amazon.com a $269 million bill last for uncollected sales taxes for purchases that I and my fellow onlilne shoppers made through the online retailer. It's an e-tax battle being fought across the country.

Personally, I know my Amazon statements show that my payment included sales tax charges, so I think the Seattle-based company needs to pay up.

Lone Star State tax officials also have revised tax rules to now impose sales taxes on more online companies. The state has  expanded its view of a company's nexus, or its physical presence, to say that a company is engaged in business in Texas, and therefore required to collect sales tax, if it either owns or uses a computer server located in the state.

This is the opposite of the position by many other states, which say providing the use of a server is not enough on its own to create nexus for sales tax purposes. Will online companies with servers in Texas now move to those locales?

Such are the entangled tax questions that face state lawmakers as they try to come up with ways to pay their bills. And it could make for some interesting legislative sessions across the country as state lawmakers struggle with ways to pay bills and, if tax hikes are required, to enact those that tick off the fewest possible voters.

Related posts:

• State tax collections have improved; Wait, no they haven't
• Idaho family's pumpkin stand cited by tax officials for permit, sales tax violations
• Amazonian sized state tax battles
• Are Amazon taxes costing states money?
• Streamlining various state sales taxes
• End of sales tax on Massachusetts' liquor?
• Highest personal state income tax rates
• Tax-cut crazy Colorado
• States that get the most federal money
• New tax laws now in effect
• State Tax Departments

Want to tell your friends about this blog post? Click the Tweet This or Digg This buttons below or use the Share This icon to spread the word via e-mail, Facebook and other popular applications. Thanks!