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A 30% national sales tax? It’s got momentum amid calls to scrap IRS. How would it work?

By Todd J. Gillman, The Dallas Morning News
Published: April 15, 2023, 6:02am

WASHINGTON — Taxpayers scurrying to file before the IRS deadline may well be wondering if there’s another way to pay the piper.

One decades-old idea has suddenly gotten traction in Congress: replacing the income tax and just about every other federal tax with a national sales tax.

Consumers would pay 30% on nearly every purchase: diapers, new car, hamburger, six-pack of beer, insulin, carton of eggs or visit to the dentist. That’s on top of state and local sales tax.

To offset taxes on food, medicine, school supplies and other essentials, everyone rich or poor would get rebates.

Payroll taxes would be scrapped, along with gift, capital gains and inheritance taxes. No more wrestling with paperwork every April. The IRS could be replaced by an agency just big enough to accept deposits from state tax collectors.

Backers call it the FairTax, though critics say it’s anything but.

“The only losers are people like members of Congress and others in the tax industry,” said Steve Hayes, president and chairman of Americans for Fair Taxation, the Texas-based group behind the idea.

Very common

From Afghanistan to Zimbabwe, 174 countries already have some sort of national sales tax. But in the United States the idea was going nowhere until January, when a few rebellious House conservatives got Kevin McCarthy to promise an eventual floor vote in exchange for backing him for speaker.

Critics see a windfall for the affluent.

Lower-income families spend a far bigger chunk of income on things like groceries, clothes, health care and energy. And this system taxes every transaction, rather than every paycheck.

Corporate profits become tax free. For families with generational wealth, portfolios could grow much faster, largely unchecked by taxes unless they splurge on new limousines, mansions, yachts and Rolex watches.

“It cannot be understated how devastating this would be to just about every family,” Senate Majority Leader Chuck Schumer, D-New York, said recently, arguing the middle class would shoulder an even bigger share of funding the government.

The White House depicts the FairTax as a “MAGA Republican” fever dream.

“They want to eliminate the IRS. Sounds great. Except they want a 30% sales tax on every single thing. They want the poor and the middle class to pay everything,” Biden said in February.

Who’s right?

It’s complicated.

What are the prospects?

Low, for now. But McCarthy’s concession to the right flank generated more momentum than it’s ever had.

For over a generation, conservative presidential hopefuls have vowed to shrink the IRS, cut taxes and simplify the code.

Sen. Ted Cruz, R-Texas, pitched a one-rate “flat tax” during his 2016 run for the White House, with the ultimate goal of replacing the income tax with a national sales tax.

Mike Huckabee, the former Arkansas governor who now chairs AFT’s advisory board, made the FairTax a centerpiece of his 2008 presidential campaign.

Between campaign cycles, though, the idea always faded.

The breakthrough secured by McCarthy’s right flank caught FairTax architects by surprise. They concede the public isn’t ready for such a dramatic overhaul of the tax code, despite the perennial grumbling ahead of Tax Day — April 18 this year, because April 15 falls on the weekend and Monday is a holiday in Washington.

“Nobody was expecting that we were going to have a chance to get it until 2024,” when Republicans might reclaim the Senate and White House, said Hayes. “Nobody was ready for this.”

The House GOP majority is so slim, it’s unclear if the bill would pass. It would certainly die in the Democratic Senate.

How would it work?

The tax would apply to every candy bar, video game, mani-pedi, winter coat or emergency appendectomy. A new car, but not a used one, since taxes were due the first time it was sold.

The battle lines would be obvious.

Most states exempt groceries. But the national FairTax would apply to milk, eggs, rice, flour and potatoes and everything else on the shelves, including feminine hygiene products — the so-called “tampon tax” that 23 states have eliminated in response to public outcry.

“It rewards people for earning money and saving money … Nothing is taxed until you spend it,” Hayes said.

University of Texas law professor Calvin Johnson, a tax expert, has a dimmer view.

The impetus, he said, is that “the people who own the country have decided they don’t want to pay tax anymore. This will aggravate increasing inequality.”

Regressive, but there’s a plan for that

On its own, Hayes acknowledged, a national sales tax would be “incredibly regressive.”

Lower-income people spend a higher share of income on groceries, housing, transportation, medicine and other necessities. Higher up the income ladder, there’s more flexibility to save, invest, travel and buy luxury goods.

Basic economics.

The income tax uses steps and standard deductions to level the playing field. A couple pays nothing on the first $25,900 of income, then 10% on the next $20,550 and so on, topping out at 37% on income above $693,750.

FairTax uses “prebates” — monthly payments calculated to cover the sales tax on $40,000 worth of annual purchases for a family of four.

“They have the money in their account to pay the tax, so it’s a wash. There is no net cost to them,” Hayes said.

It’s a tested concept. Canada sends quarterly rebates to lower-income households to offset its own national sales tax.

In developing autocracies and industrialized democracies alike, economists embrace consumption taxes because compared to other options, they don’t distort investment and spending choices much.

There are few loopholes to exploit. Compliance is far higher. And a tiny rate hike can generate a gusher of revenue.

Is it 23% or 30%?

Take your pick.

Let’s say you buy a $1,000 laptop. The FairTax adds $300, or 30%. That’s called the “exclusive rate.”

Your receipt shows the total: $1,300. The tax part is 23% of that. That’s the “inclusive rate.”

Both rates are accurate. It’s just a question of marketing — which, by the way, would also incur the FairTax.

Either way, that’s just the federal rate.

In most Texas cities, the combined state and local sales tax is 8.25%, per state comptroller data. (A dozen states have higher rates, according to the nonpartisan Tax Foundation.)

With FairTax added in, a $3 loaf of bread would cost $4.15 at checkout in Dallas.

An $80 case of infant formula would cost $110.60.

But under FairTax, the buyers would keep their entire paychecks.

On an entry level Ford F-150, the sales tax alone would be $20,655. Amazon founder Jeff Bezos would have paid $191 million on his new 417-foot, $500 million mega yacht.

“States certainly wouldn’t just roll over and let the federal government tack 30% onto all their purchases,” Leonard Burman, the top tax economist in the Clinton administration’s Treasury Department and former director of the nonpartisan Tax Policy Center, argued during Huckabee’s 2008 campaign.

Social Security at risk?

The National Committee to Preserve Social Security and Medicare calls the FairTax “radical,” warning it puts the social safety net at risk by eliminating the payroll taxes dedicated to funding it.

“Current retirees would be forced to pay for their benefits twice — once through the payroll taxes they already paid through their working lives and again every time they buy a loaf of bread or pay for a prescription,” the group warned recently.

Hayes downplays that concern.

The FairTax isn’t intended to choke government, he said. And Congress can’t escape backlash for cutting a popular program like Social Security just because the funding mechanism changed.

But foes say the rate needs to be far higher to replace all the taxes that would go away — $60 on every $100, or double the FairTax proposal, according to an analysis by the left-leaning Brookings Institution.

Status in Congress

The current FairTax bill, filed by Rep. Buddy Carter, R-Georgia, has 25 co-sponsors, all Republicans.

McCarthy has distanced himself, despite assuring backers he’ll let it move forward.

A version has been filed every two years since 1999. At its peak a decade ago, it drew 75 co-sponsors, including 16 Texas Republicans. There’s currently only one, Rep. John Carter of Round Rock.

It’s never gotten a hearing, though the new Ways and Means chairman, Rep. Jason Smith, R-Missouri, has co-sponsored FairTax in the past and has said he will rectify that.

The concept has some Democratic support.

Maryland Sen. Ben Cardin, a liberal Democrat, has promoted a 10% national consumption tax since 2014, as part of a hybrid plan that would shield all but the wealthiest from income tax, and cut the corporate rate in half.

Patchwork of rules

The FairTax would add to a crazy quilt of rules on what goods and services incur a sales tax.

Most states put a tax on cell phone service, electricity and other utilities. Only about half tax streaming services like Netflix. Hardly any collect tax when you see a doctor, lawyer or accountant, according to the Federation of Tax Administrators.

The FairTax would apply to all of those transactions.

Would states change their rules to fall in line?

Five other states have no sales tax and therefore, no agency to collect such a tax: Delaware, Montana, New Hampshire, Oregon and Alaska.

If they refuse to go along, Washington could step in, or hire a nearby state to collect taxes from clothing stores, Pilates instructors and barbers.

Hayes foresees little resistance, though, despite the overlap between anti-Washington sentiment and interest in the FairTax. That’s because states would get to keep 0.25% for their troubles.

“It becomes a revenue center,” he said. “I think almost all of them will collect it.”

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