Economic Basis and Sales Tax Policy Considerations

Question 1

What are 5 reasons why the government imposes sales tax? (5 reasons)

Answer 1

• The 2nd most important tax imposed by states.
• Stable share of GDP.
• Generates revenue for gov. programs/services
• Influences consumer behavior (exempting certain items vs taxing other items at a higher rate)
• To help ensure everyone pays a fair share of taxes.

Question 2

Why is it important to have destination-based tax as it relates to business production?

Answer 2

• By taxing based on destination, a business is being taxed where the good/service is consumed or used, rather than where it’s produced/sold.
• This can change where the company decides to produce since there’s no incentive to produce in a specific jurisdiction with lower tax rates.

Question 3

What are some of the general goals for a government when it comes to defining the tax base?

Answer 3

• To tax consumption (Ex. It’s a more fair tax compared to income tax)
• To not tax businesses (Businesses don’t consume, they produce)
• To have low rates and high income
• Limit admin and compliance costs
• To ensure horizontal and vertical equity (progressive tax structure)

Question 4

What are some of the problems with imposing sales tax on businesses? (5 problems)

Answer 4

• Sales tax is a consumption tax. Businesses don’t consume, they produce.
• Businesses will all adapt to vertical integration to avoid tax which can:
  - Hurt equity and competition
  - Stunts economic development
  - Incentivize businesses to apply tax avoidance strategies such as shifting profits to different levels of the supply chain and minimizing their tax liability.

Question 5

What are some things that potentially might happen in the future in respect to implementing sales tax? (5 possibilities)

Answer 5

• Pressure to increase rates
• Changes to the tax base (business purchases, services, etc)
• Changes to Interstate transactions
• Changes to Nexus
• Changes in Sourcing (D vs O)