Eliminating the Sales Tax
June 28, 2003 (letter to Lansing State Journal)

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Shifting away from sales would aid tourism, too

Expanding the state sales tax to cover services as well as goods would certainly make it more equitable, but another option is to eliminate the sales tax altogether.

We can replace the lost revenue by increasing the individual income tax rate.

Doing so would eliminate the state's cost of administering the tax, and it would relieve merchants of the cost of collecting and reporting sales taxes. If we eliminate the use tax as well, we'd no longer have the problem of collecting taxes on Internet and catalogue purchases.

Proceeds from our 6 percent sales and use taxes were $7.79 billion in 2004.

To determine how much the income tax rate would have to be increased to make up the revenue lost from eliminating those taxes, I first calculated how much additional revenue 1/10th of a percent increase would produce.

Proceeds for 2003 from our then 4 percent income tax were $5.2 billion. All other things being equal, a 4.1 percent tax would have generated $5.33 billion, a gain of $130 million. So, $7.79 billion divided by $130 million is 59.9 - let's say 60.

So our current 3.9 percent income tax rate would have to be increased by 6 percentage points, bringing the total to 9.9 percent. (Add another 1.7 percentage points and we can also eliminate the Single Business Tax, revenues from which were $2.211 billion in 2002).

Since the income tax is based on ability to pay, low-income households would pay little or no tax.

For a family with two adults and two children, exemptions total $13,600 ($3,100 for each exemption plus $600 for each child), so the 9.9 percent rate would be applied only to the income in excess of that amount.

Not taxing the working poor encourages them to be self-supporting rather to depend on public assistance. (Easing the tax burden on low-income households is the reason there is no sales tax on food.)

But even for high-income households, a 9.9 percent income tax rate does not mean that the full 9.9 percent of adjusted gross income is paid.

Due to the homestead and other tax credits, the "effective" rate is lower. In 2003, when the rate was 4 percent, the effective tax rate for taxpayers with an adjusted gross income between $130,000 and $400,000 was actually 3.3 percent.

The only drawback from eliminating the sales/use tax is that we will no longer be able to get visitors to pay part of our taxes. A study has shown that 3 percent to 7 percent of sales tax revenue comes from non-residents.

But, with elimination, we could gain this marketing pitch for tourists: "Great Lakes, great times - and no sales tax!"