Time to move the sales tax into the 21st century

Added July 29th, 2013 by Pat Sorenson | Email This Entry Email This Entry
Pat Sorenson

A recent study by the Center on Budget and Policy Priorities concludes that most state sales taxes, including Michigan’s, are ill-suited to a 21st century economy because states have not kept pace with such trends as the growth of the service sector and e-commerce.

The report recommends four steps that Michigan could take to modernize its sales and use taxes to ensure that there is adequate and stable funding for services that are vital to economic growth such as effective public schools, affordable higher education, adequate public safety, and supports for families struggling in low-wage jobs. They are a broadening of the sales tax to include more services, laws to increase the collection of taxes on out-of-state and Internet commerce, the extension of the sales tax to online products such as books, music and movies, and  closing tax loopholes for online travel companies.

An important first step for Michigan lawmakers would be the expansion of the sales tax to selected services.  According to the report, nationwide, nearly half (45%) of total household purchases were for services in 2011, up from 30 percent in 1970. Yet, Michigan taxes very few services relative to other states. As a result, many nonessential and luxury items such as spa services, entertainment and recreation go untaxed, and the state is losing millions in potential funding for essential public services.

The Michigan Legislature should also move legislation (House Bills 4202 and 4203) to increase tax collections on e-commerce and other out-of-state purchases. According to the House Fiscal Agency, an estimated $460 million in use tax is due on consumer remote sales this year, with use tax owed growing by about 6% each year due to the explosion of Internet sales. However, because the responsibility for reporting and paying use taxes falls on consumers, many of whom are not even aware of their tax liability, most of those taxes are not paid, and less than $6 million was collected in 2011.

State actions to broaden the sales tax to include services and Internet sales must be carefully crafted. A broader sales tax is one necessary building block in what must be a balanced state and local tax system that includes a strong and more progressive personal income tax and equitable tax contributions by businesses.

Broadening the sales tax, while reducing personal income tax credits and deductions and slashing business taxes, will hit lower-income households harder because they pay a higher percentage of their family income on sales taxes related to daily necessities. According to the Institute on Taxation & Economic Policy, the lowest-income Michigan families (bottom 20%) currently spend 7% of their income on sales taxes, compared with less than 1% for the wealthiest 1%.

Michigan can and must do more to create a tax system that lets the state invest in the services and infrastructure that have been proven to drive economic growth.  And, tax reforms must be crafted in ways that ensure that the contributions of low-wage workers are not disproportionately high, discouraging work and destabilizing families.

— Pat Sorenson

One Response to “Time to move the sales tax into the 21st century”

  1. […] other municipalities across the state. Detroit was dealt a double dose of revenue sharing cuts. A modernized revenue system is needed to restore revenue sharing and provide enough to pay for needed healthcare, education, […]

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