MacIver News Service | January 20, 2014
by Haley Sinklair
[Madison, Wisc…] Tax reform has been discussed at length leading up to the spring session of the Wisconsin legislature. Ideas include eliminating the income tax, raising the sales tax and even a proposal for a sales tax holiday.As this debate continues, the MacIver Institute will continue to share the available research on different types of tax reform.
A higher sales tax, however, usually means more sales tax exemptions according to a new report from the Mercatus Center at George Mason University. Such exemptions can occur during specific time periods – such as a back to school tax holiday in August – or on specific items like food or health related items.
The study revealed a correlation between higher sales taxes and more sales tax exemption in a sample of 44 states.
When deciding on whether or not to raise a state’s sales tax, politicians must strike a balance between two groups: those who prefer tax decreases, and those who prefer increases in tax exemptions. This decision is also constrained by a predetermined revenue goal, according to the report.
Wisconsin’s current sales tax rate of 5.5 percent sits just below the study’s mean sales tax of 5.6 percent.
The report found that a one-unit increase in the number of exemptions is associated with a 0.10 to 0.15 percent increase in the sales tax rate for a broad measure of exemptions, and a 0.14 to 0.25 percent increase for a narrow measure of exemptions.
If Wisconsin decides to add another sales tax exemption, the study shows it could lead to increasing the state sales tax rate from 5.5 percent to between 5.6 and 5.75 percent.
Therefore, in estimating the effect of a sales tax rate increase on tax revenues, a likely increase in the number of sales tax exemptions must be taken into account, which in turn will lower sales tax revenues.
The report also finds a positive correlation between sales taxes and sales tax revenues, but the correlation weakens at higher revenue levels. If the sales tax were raised to compensate for lower taxes elsewhere, it could lead to a greater amount of exemptions.
The full report can be seen here.