Could Missouri be the first FairTax State?
Missouri House gives final approval to FairTax amendment
The Missouri House gave final approval to a proposed constitutional amendment to abolish the state income tax and replace it with a FairTax system.
The proposal would raise the state sales tax from 4.225 percent to 5.11 percent and eliminate the 6 percent personal income tax and 6.25 percent corporate income tax on business earnings. Accompanying the sales tax rate hike would be a substantially broadened sales tax base that would include all purchases. Estate taxes would remain on the books.
The proposal would create the distribution of a monthly tax rebate check to cover the cost of any taxes incurred up to the federal poverty level, which is $26,000 for a family of four.
If the Missouri Senate approves it, the measure will be submitted to Missouri voters in November 2010 without need for consideration by the governor. If approved by the voters, the measure would take effect on Jan. 1, 2012, and Missouri would become the first in the United States to test the macro-economic benefits of the fair tax, according to the release.
I’m confused? The last time I was tracking the Missouri Fairtax, it was in the form of HB1034, the Fairtax Act of 2007. The draft bill required the Missouri Dept. of Revenue to provide a report with details of how a sales tax could be implemented. I’m not aware that the bill ever became law, nor that any of the studies were ever accomplished?
Now it seems that there is a House Joint Resolution, (HJR 36), proposing to amend the Missouri Constitution and get rid of the individual and corporate income taxes in favor of a sales tax. No mention of providing any details, just a vote by the citizens of Missouri in November, 2010 provided the Senate approves the joint resolution.
How on earth can the folks in Missouri vote on a pig in a poke such as this? The resolution claims that the rate would be 5.1%, but allows the Revenue Dept. to make a one time adjustment in order to assure revenue neutrality. However, ITEP has issued a report blasting the Missouri Fairtax. The report claims that the rate would have to be 12.5%, that only the rich would benefit, that cross border spending would run rampant, and that putting all the eggs in one basket at this time would be a huge mistake.
Frankly, I don’t see this effort as leading to Missouri being “the first state to test the macro-economic benefits of the Fairtax”. I might add that the release is incorrect in claiming that the poverty level for a family of four is $26,000. The 2009 poverty level for a four person family is $22,050 according to HHS. There is nothing in the Missouri legislation that would eliminate the marriage penalty as was done by AFFT.
I think that such efforts by the States will prove harmful to the national sales tax effort. The Missouri thing is going nowhere, and can only harm the AFFT grass roots program when the folks from the “Show me” state shoot it down! Perhaps the Missouri Senate will show more sense?
P.S.,
KCTV reports that the Missouri Senate did not consider the House passed Fairtax Constitutional amendment. The 2009 legislative session is now over.
So is that 5.11% inclusive or exclusive?
I actually hope a state implements its own version of the FairTax, whether its Missouri my own state of Georgia. that should give us all at least some opportunity to observe its pros and cons — including, in particular, the “revenue neutral” rate and ease of tax avoidance. Plus, if its a total disaster, it will be a lot easier to fix in one state than in the entire federal government.
So I say — more power to ‘em. I just wish it would go into effect sooner than 2012.
Hayden,
While I don’t disagree with your desire to see the Fairtax in action, I don’t believe that a state Fairtax would be a fair test of the potential for tax avoidance. For instance, there are several bridges across the Mississippi that the folks in St Louis might use to do their shopping in Illinois. What is Missouri going to do–station revenue agents at every bridge to catch tax avoiders? Not likely!!! Cross border purchases would be a huge problem, imho. Only a national sales tax could alleviate that problem to a large extent.
As for the rate, Fred, I have no idea if it is inclusive or exclusive, but at 5%, there isn’t much difference as you know.
Ah yes, the ITEP - big opponents of the FairTax - funded by such liberal groups as the Tides Foundation (Teresa Heinz Kerry), the Open Society Institute (George Soros), the Streisand Foundation (Barbra Streisand), and the Ben and Jerry Foundation. The FairTax would be contrary to the socialist Karl Marx doctrine.
I don’t think the border is going to an issue. I’ve often lived close to a boarder (live 30 min from one now) and I don’t know of anyone that goes across state lines to gain a small percentage off taxes, which is not to say that the product would be any cheaper due to the other taxes involved from that state. It’s not worth the effort and gas spent going. People shop where it is covenant. I have heard of people living across the state line due to taxes, but that is mainly property and local county taxes. No... I believe the empirical evidence points to the opposite - those states that have a sales tax-only system attract people and businesses. Business will flow to Missouri (as the tax gain is worth their time and effort) and thus economic growth.
I agree with Hayden here. While we all have our own views of what the rate and effects would be, we don’t have a solid example of it in use. So this would be great opportunity to prove or disprove some of our positions (praise or criticism).
Like Hayden, I think the biggest disappointment concerning this is the 2012 date. I really wish this would go into effect much sooner. I’ll admit that a failure of the MO FairTax would give me pause and make me seriously reconsider my position on this issue. However, if the MO FairTax were a success, would opponents accept that as a valid test case for the national FairTax or would they simply disregard this success. My feeling on this is that even if the MO FairTax were a HUGE success bringing in tons of new business and achieving revenue neutrality at the proposed rate, opponents would indeed continue to attack the FairTax saying that the MO system couldn’t possibly work on a national level.
Come on, Morphh. I thought we were beyond demagoging groups or individuals that don’t support the Fairtax? As for who funds ITEP, am I supposed to believe that Ford, J.C.Penney, the Rockefeller Foundation and the Vanguard Fund are all communist fronts?
You might want to check with your wife before waxing eloquent about the lack of benefits of cross border shopping. St Louis residents might be willing to drive 15 minutes to Illinois in order to purchase tax free groceries rather than pay the Missouri 12.5% tax? Or they might call an Illinois repair service which currently charges no sales tax versus the service guy in Missouri that would have to add 12.5% to the bill? And while in Illinois, you might want to fill up the gas tank at prices well below those in Missouri under the Fairtax? I don’t know if a 12.5% swing is enough to shop around, but I can’t argue with my spouse who says it is!
I’d agree with you and Hayden about the value of a test case, but I can’t think of any Fairtax issue that would get resolved by one state adopting some version of the Fairtax. Enlighten me about what we may learn?
Morph — You clearly don’t know my wife. She will drive across the county line just to buy something at a 6% sales tax rate rather than a 7% sales tax.
However, the big test will be whether the proposed 5.11% rate will do the trick. That seems awfully low to me, particularly since I believe we’ve previously learned that state and local spending is generally about half that of federal spending. (Presumably, Missouri, like Texas and Flordia, must rely heavily on property tax, but I don’t know that for certain.)
If a 5.11% sales tax rate really does enable Missouri to eliminate its personal income tax and still be revenue neutral, then — believe me — I would be the first in line asking for Georgia to do the same thing. But, we’ll see.
Morph — You do disappoint me a bit by impugning the motives of ITEP simply becasue of who supports it. If the FairTax is as “progressive” as its supporters claim it would be, then all of the those “socialist” groups would support it, woulnd’t you think? Also, BHI is funded by the Adolf Coors foundation, but you never mention that in disussing the BHI study on the FairTax. I don’t mean to be overly critical here (and I know you well enoughto assume that you were just being a bit sarcastic), but I think FairTax supporters are living in a glass house when they criticize the studies that oppose the plan. After all, the ONLY studies supporting the FairTax are done by BHI and are paid for by AFFT.
I know, but I find it interesting that there is no qualification in the proposed amendment. It’s almost as if they expected people to assume a sale tax is exclusive.
Also, I don’t see how increasing the rate from 4.2% to 5.11% could possibly replace the revenue lost by repealing the income tax. The Missouri Department of Revenue shows in 2008 the sales tax collected $3.2 billion. They collected $6.7 billion from the income tax. Even with an increase in the tax base (good luck collecting from that base), how is a less than 1% increase in the sales tax rate going to generate more than three times the revenue the current sales tax rate does?
Morph — I didnt’ mean my last post to be as snarky as it sounded. Sorry if I offended you. You don’t need to post it.
Hank, I think that a single state adopting the FairTax model could yield lots of relevant data. Let’s first paint the picture as a huge win for the opponents...
Let’s say MO adopts their FairTax at the proposed 5.11%. Upon seeing this increase in sales tax, 50% of individuals living in close proximity to the border divert 75% of their spending across the border to avoid the higher sales tax. This is measurable in reduced sales at these businesses on the MO side of the border. Depressed business along the border might lead to a kind of slum area along the border where businesses simply can’t compete effectively with their neighbors in the bordering states (this is an extreme example).
Similar to the cross border shopping is the new booming underground economy further eroding the tax base with 50% of MO residents using this mechanism to avoid paying the sales tax. For practical purposes, let’s say that 50% of the people shopping across the border are also shopping in the underground economy to save on gas for some purchases.
Now you have a situation where roughly about 25% of the residents of MO are buying a majority of their goods and services in a manner in which they are paying the FairTax. This would result in MO rapidly going bankrupt or repealling the FairTax as a failed experiment, or MO raising the FairTax rate to something like 40%. All of the above would be horrendously bad news for the FairTax.
Now the possible positive outcome. The FairTax is implemented and avoidance is a relative non-issue. Some cross border and underground shopping occurs, but it is not enough to significantly impact the revenue neutrality of the system at the implemented rate of 5.11%. The lack of a corporate income tax however make MO extremely attractive to business leading to an influx of industry. Furthermore, the residents of MO all receive a small increase in take home pay as a result of no income tax being withheld (I am assuming here that state taxes in MO are withheld).
The net measurables here would be the influx of new business to the state. This business influx would produce additional consumption to be taxed and produce a budget surplus for the state. MO residents also gain the advantage of no longer having to deal with state income tax filings each year, and since MO already has a sales tax system this should be cost effective for the MO state government in being able to reduce the costs associated with the income tax collection/auditing.
These are rather extreme ends of the spectrum, and the truth is likely to be somewhere between the two. I think however that there would be some very valuable lessons to be learned from a single state implementation of the FairTax. Personally, I think that this would significantly advance one side of the debate as I doubt that the market and socio-economic forces would conspire to make things simply balance out in the end.
I live in California and would need to remember back to the mid 70’s to have a sales tax under 5.25%. Our sales tax varies city to city, my home city is currently 9.25% and where I work is 8.75%. I don’t drive anywhere to shop because of the sales tax difference and most people will not change their habits even if it’s a significant difference. One of the colleges I attended was close to the California and Oregon boarder. Oregon has no sales tax and California was 6.25% at the time, the local businesses did just fine. While some people did go to Oregon for some items, it did not have a big impact.
Haha - I new that would get you guys riled up. Hayden got it... I was being a bit sarcastic and wild (tends to spur up discussion :-p). To clarify though... I would not distrust an organization solely on who funds them. That would be hypocritical and emotional. I judge them based on my experience with their past studies and tax policy recommendations. I don’t overly distrust an organization until they give me reason to do so. ITEP lost my trust, but that does not mean I’m not open for them to regain it if I see honesty, reason, and sense in their future work.
Good point Fred... they would need to collect around $9.96 billion. I think I read somewhere that the base would be increased by 125%. Using that figure, this would put their current 4.2% collection at $7.2 billion, still $2.76 billion short. A .91% exclusive increase would add about $1.56 billion for $8.76 billion, still 1.2 billion short. If it was 5.11 inclusive, I think that would put it around $9.25 billion. Hmmm... does anyone have a link to the rate analysis submitted for the 5.11 rate?
I live in Texas and my sales tax is 8.25%. I buy online all the time to avoid the sales tax. In fact, I pay for the Amazon Prime service that gives me “free” 2-day shipping on anything I buy so I end up buying a lot of stuff without paying sales tax. The UPS guy is here at least once a week.
Fred, I think this would be more difficult with services, which make up a good portion of the new base, than with goods. I guess the question is how much such activity would increase due to the change. Avoidance, at the current rate, is already built into the sales tax base.
The most probable way to get the fairtax enacted at the national level would be to first have some states try it out. That way citizens could be educated on the subject at the local level. If they buy into it, enterprising politicians will use it to get elected at the national level. I think this strategy is much more likely to work than to first get rid of the income tax at the national level.
Some states will even be able to sell the idea without the need to get the major political parties’ support, by referendum. Since I believe this will be a major shift of power away from politicians and back to the people, the politicians will need alternative motivation to support it (like job security).
I still think it needs to be stated that there is no good reason why people who purchases goods in MO today, would do otherwise if the state collected revenue via consumption rather than income. The real prices will stay the same on average. I guess the biggest shift in prices is onto imports from exports. So MO exports will be relatively cheaper and MO imports will be relatively more expensive. And of course, since the income tax is a tax on labor, labor intensive goods/services will be on a more level playing field with goods/services that require less labor (not to mention the distortion on higher paid labor).
The amount of cross border traffic to avoid paying sales tax (Fair Tax, or whatever it’s called by a particular state) is dependent on a number of factors:
• Population density in close proximity to the state line (maybe high in the Northeast - low in the Midwest). I can think of a number of big states where there isn’t much along the border relative to the economic activity elsewhere in the state.
• cross border tax rate difference
• Ease of border crossing - this similar to the proximity issue, but driven more by traffic congestion or time to get to the desired retail outlet. If it takes an hour to go 10 miles across the border and save $20, then I doubt many would bother.
• Cost of fuel to make the trip – currently gas isn’t too high, but if the present administration has their way, that will change soon, essentially making what used to be a short cheap trip into a short expensive trip.
These are the things that came to mind as I was reading through this post.
Some services yes, some no. I just refinanced my house. If my state is charging 10%+ on the fees and a portion of the interest, I’m going to try and find a source out of the state. I would imagine the elective, including cosmetic, surgery business would be dead in Missouri. As would orthodontists. I could see insurance companies paying Missourians a cash bonus to have other non-emergency surgery/treatments done out of state. How much do you think it would take to get someone in St. Louis to drive a few minutes to cross the state border for their surgery? Kansas City is right on the border, too. More than half Missouri’s population live in the St. Louis and Kansas City metropolitan areas - minutes from the state border. Do you think someone wouldn’t drive to what is essentially the other side of town to save several hundred dollars on their kid’s braces?
The FairTax would be a disaster for Missouri.
People in this thread, so far, are fixated on cross-border shopping (and perhaps the adequacy of the rate) and are disregarding the real issue: relocation of non-retail business to Missouri. A FairTax in Missouri would be bad news for my state, New Jersey. Our loss would be its gain.
I, too, think MO, or any other state, trying out a sales-tax-only approach to revenue generation is a great idea. Isn’t this along the lines of what the Founding Father’s had in mind?
If the experiment for MO turns out not so good. Opponents will use the failure as an excuse to fight the Fair Tax implementation at the Federal level. If it’s a huge success, the proponents will use that success to push for passage at the Federal level.
How many opponents will take an honest look at why it may not have worked? Are their aspects at the Federal level that may not apply at the state level? For instance, at the Federal level, taxation from income, SS, medicare, corporate taxes, and others are all removed and replaced with the Fair Tax. In theory this shold make the relative cost of American made products less expensive relative to their counter parts. But at the state level, Federal income taxes are not removed, nor are SS. The only thing removed is state income and property taxes. So that will encourage buying state produced products over out of state products (perhaps). While that may not be a bad thing, many states do not produce much of what their population consumes. I suppose that’s true at a national level too, but I suspect it’s more a function of relative costs as opposed to lack of resources. Arkansas produces rice, I don’t think it’s a product that Arizona could produce (okay, yes if someone spent millions of dollars on a biosphere to create an environment suitable for growing rice then it’s possible) due to taxation issues. Although, it seems reasonable that many US manufacturers are hurt by foreign competition which could be eased by a favorable tax situation.
Fred,
That’s just not realistic. What’s the rate difference now? Does that not already create the huge loss of business? Would adding just over a point to the sales tax really change people’s habits? NOT....
Jim,
I’m not so sure that your NJ manufacturers would pull up stakes and move to Missouri if the “show me” state passed their version of the Fairtax. There are many considerations that impact business location decisions, and state taxes certainly aren’t the most important.
Decisions as to where to locate generally involve looking at the qualifications of the work force, proximity to raw materials, market size, quality of life for employees, transportation, taxes, etc. etc. Missouri certainly isn’t a garden spot, and I would question whether or not a business board or CEO would even consider moving to Missouri where employees would suffer the highest sales taxes in America–sales taxes on goods and services that have never been attempted anywhere else successfully.
I certainly don’t think our focus on cross border shopping is a fixation. Remember, 70% of the 6 million Missouri citizens live on the border (definition of border living isn’t clear?), and I suspect that Missouri citizens would be happy to take the prebate and then do their shopping in another state, thus saving the 12.5% sales tax that ITEP believes would be necessary for revenue neutrality. 4 million folks shopping out of state would raise the sales tax revenue neutral rate considerably!
Of course, only by trying it will we know for sure, but I think the results won’t be a positive for Fairtax enthusiasts. Better to wait for the national sales tax to get some traction(?) rather than risk the whole concept on a couple of State experiments which don’t really reflect the Fairtax.
Tell you what, Jim. You are probably going to owe me $10 when HR25 fails to exceed last years cosponsor numbers, and I’d be willing to go double or nothing on the likelihood of any state passing the Fairtax? What say you?
Again, the cost of goods/services in MO will remain the same on average. Only the method that the government collects money from the sale of goods/services will change. The cost of goods in MO will be the same before as they are after. If someone goes across the border to save the MO sales tax, they will be paying for the other state’s income tax. The relative price between MO products and bordering state products will NOT change.
Andrew,
You might be able to sell your tortured cost logic on the national scene, but I don’t think it works for Missouri alone. We are talking about price, not cost. Taking away a 6.5% income tax on retail business profits and adding a 12.5% state sales tax doesn’t seem to me to be a wash. Prices in Missouri will rise, and I’d be willing to bet that many of those 4 million border residents will take the prebate and shop in a neighboring state. Time will tell, I guess. Americans are known for their tax avoidance mind set, and the opportunities in Missouri would be quite tempting, imho!
I guess that depends on if the rate is closer to 5.11% as defined, or the 12.5% suggested by ITEP. That’s a massive difference - more than double the revenue. Part of the situation is that ITEP includes local taxes in the 12.5% figure. Currently the local tax is 2.8% for a total sales tax of 7.1% (not the 4.22%). If you took out the local taxes and focus on the state change (which is the comparable 5.11%), ITEP suggests 9.9% for revenue neutrality. The other part of the situation is that the bill is not intended to be revenue neutral, but a tax cut. The official fiscal note for HJR 36 notes that a 5.11 percent basic state tax rate would not be sufficient to make the bill revenue-neutral overall, and predicts an annual revenue loss of between $2.2 and $6.6 billion from changing the rate to 5.11 percent. The tax cut alone would be an economic boost for the state. If Missouri is looking for a tax change to boost economic growth, I can’t think of a better combination - reduce taxes and apply it to a broad consumption base.
Morphh,
Where did you get the notion that the legislation is not intended to be revenue neutral? HJR 36 states in several places that the revenue from the sales tax must be substantially equal to the revenue lost from the income tax. The fiscal note you referenced simply states the obvious. The 5.11% rate would not be revenue neutral, but would need to be changed in order to comply with the revenue neutral intent of the resolution.
So far, I have been unable to come up with an estimate of the taxable Missouri consumption base. Anyone got any ideas? Given the base and knowing the revenue requirements including the prebate, we should be able to confirm the rate. I’ve sent ITEP an email asking for details of their study, but no response as yet.
By the way, HJR36 does state that federal government consumption won’t be taxed (thus avoiding a constitutional confrontation), but does the State intend to tax the consumption of all local government entities?
The last ITEP study I saw was missing two components:
1. data
2. methodology.
Was there a more recent one?
~Jim
Hank,
You may want to talk to our Norm Simms about the relative importance of the tax environment in locating a business. Norm lives in Barnegat, New Jersey, but his production is in Oklahoma. He’ll tell you taxes are a major reason.
~Jim
Hank, your right... my fault. I misunderstood the context as I was reading it from the ITEP report and not the bill itself. Too bad, perhaps people will protest the increase and be able to keep it lower.
I don’t know of any state that taxes health-care services. So if I have a $10,000 procedure and the Missouri sales tax is 8%, I could save $800 by driving to the Illinois side of the St. Louis metro area.
Adding a point to the sales tax rate wouldn’t even come close to replacing the revenue from their income tax.
Jim,
State business income taxes are important I’m sure. But in the case of your NJ friend with a business in Ok, the state income tax difference would be a max of 3% higher in NJ, and only that if he is making profits of $100,000 or more. On the other hand, the median hourly labor rate in NJ is 25% higher than in Oklahoma. Aren’t his labor costs a greater consideration than state taxes on profits?
I wonder if you are on close enough terms with your business friend to ask him what his businesses federal income taxes are as a percent of gross sales? I’ve been thrashing around on the Fairtax for over five years now, and have yet to have any business owner provide any anecdotal data. I really don’t work for the IRS!
Hank,
With regard to post 25, what you call “tortured cost logic” is actually basic economic theory. Price is a function of cost. When cost changes, so does price.
If a revenue neutral rate is chosen, it is a wash, by definition. If people are paying more, but the government is collecting the same, where does that extra money go? They can’t just pay more without someone collecting more. That’s NOT possible.
Fred,
You could not save $800 by driving to Illinois. Why? Because their procedure is already $10,800. They are just going to give the $800 to their government via income tax rather than sales tax.
I’m not sure why it is so hard to grasp, but the state government cost of products/services will remain the same under a revenue neutral plan. The only thing that will change is how the tax burden is allocated amongst the various products/services.
Cross-border shoppers will have one more problem with a higher state tax. Most states have a “use” tax, similar to New Jersey’s. Residents of New Jersey, for example, are liable to their state for tax differential where they purchase a product in a neighboring state at a lower sales tax rate and bring the product back to New Jersey for use.
Clearly the states will not snare residents for bagatelle purchases. But for larger items such as an automobile, residents are running a risk by not declaring the purchase. I was nearly caught in a crackdown myself when I purchased a laser printer in New York, but fortunately was able to produce proof of tax payment for the printer. Somehow the New Jersey authorities knew. State tax authorities can, and do, cooperate.
Under the FairTax, states that enact “conforming state taxes” can enter into a compact with the Federal Government for assistance in capturing out-of-state purchases that are destined for their states.
~Jim
Andrew, the corporate rate in Illinois is only ~7%. Even if the entire $10,000 was profit the business would only pay a little more than $700 in state income tax!
Hank,
Regarding post 32, is it possible that the labor rates are higher in NJ than OK, because NJ taxes are higher for the population and thus NJ business must pay higher salaries? I am not suggesting that the taxes make up the entire difference in salaries, but is a non-trivial component.
John
Fred,
You miss the entire point. IL already has its tax burden priced in. So does MO. If you remove MO income tax burden and replace it with a consumption tax burden the relative burdens remain exactly the same. On average if the the IL and MO governments are taking the same tax burden, prices in IL and MO will be exactly the same. Again, if people are paying more and the government is paying the same, where does that extra money go? Answer? There is no extra money. Revenue neutral means the cost stays the same, on average. I qualify with “on average” because I’m sure the current tax regime has distortions based on the amount and expense of labor used in producing products/services. Moving to a consumption tax smooths out those distortions (of course, exempting education starts to bring them back).
Just to summarize and be completely obvious, the relative tax burdens between MO and IL won’t change. So if IL has a smaller tax burden now, they will have it after the “MO fairtax”. If MO is smaller now, they too will be smaller after (assuming revenue neutrality). That’s not to say that some things being more heavily taxed now won’t be smoothed out, but, on average, prices will remain exactly the same (not accounting for growth, etc.)
While cross border shopping may occur, sales taxes across the border from St. Louis are 8.6% in Bellville, IL compared to 9.241% in St. Louis and in Kansas City, KA they are 7.55% (http://www.kansastreasurers.org/kstax.htm) compared to 8.725% in Kansas City, MO.
Since no one can really say what the actual rate will be (5.11% or 12.5%) perhaps a realistic expectation would be somewhere in between (8-9%?).
If an indivdual living in St. Louis were to purchase a car for $25000 (maybe a lot less now that dealers are trying to shed themselves of inventory) they would pay somewhere between $1277.5 and $3125 in sales tax in MO after the fair tax as opposed to somewhere around $2310 pre-fair tax (a few hundred less if he lived in Kansas City, MO and much less living in rural areas). Pre-fair tax he would be paying a few hundred dollars more in sales tax than either Kansas City, KA or across the boder in IL. ($422 and $160 respectively). So people may already be shopping across the border to save money. Post Fair tax he would be paying somewhere between $1277.5 and $3125 in sales tax. If the rate ends up at the high end, then maybe more cross border shopping, on the low end the cross border shopping would actually be in the opposite direction. And who’s to say that the $25000 car in St. Louis can be purchased for $25000 in IL anyway....it may well be higher negating any advantage of crossing the border to get a lower tax rate.
John
John,
I think you are missing the whole point of the cross border shopping scenario. Doesn’t matter what the sales tax rate is in Illinois, what matters is that they don’t tax services or basic groceries, so we should be comparing zero sales tax in Ill. to 12.5% (or 9.9% if we ignore local sales taxes) in Missouri. The important issue here is not so much what the existing sales tax rate is, but what gets taxed.
As for prices, the most likely outcome in Missouri would be that retail merchants would apply all the 6% income tax savings to cost reduction and prices would rise by around 6% after adding the 12.5% sales tax. (1.00 x .94 x 1.125 = 1.06). But, because Missouri residents will be getting an increase in take home pay due to elimination of the state income tax withholding, plus the Missouri prebate, real prices or purchasing power should remain essentially unchanged.
Here’s a new consideration.
Goods and services produced in Missouri and delivered for retail sale out of state would not be subject to the Missouri sales tax and would have a competitive advantage. A St. Louis, MO, car dealer could sell a car to an East St. Louis, IL, customer at a lower price than a car dealer in East St. Louis - even if the customer has to pay Illinois use tax on the Missouri car.
Thus, there would be reverse cross-border shopping.
~Jim Bennett
Well Hank, at least you are consistent in your insistence on quoting the most negative of tax rates. You persistently quote that the national FairTax rate would have to be upwards of 50% exclusive, and you are similarly latching on to this 12.5% for the MO proposal even though it is written as 5.11%. It’s a highly annoying habit of yours, but at least you are consistent.
Fred, you have a great point on #35. Yes the medical procedure is going to be subject to the FairTax in MO, however the procedure should be cheaper in MO to offset the tax component. Additionally, if I have been going to the same doctor for the past 10 years and he tells me about an elective procedure he can perform for me. I seriously doubt that I’m going to go to a doc over the state line to save maybe a couple of hundred bucks. Personally, when I’m dealing with my health I’m going to stick with the people I know and trust.
Hank, you will never really be comparing zero tax to even your outlandish 12.5%. Let’s say your wife is going to go get a pedicure. The price in IL might be say $50 and no sales tax. The price in MO might only be $45 due to the lack of income tax and other factors making the difference (45 x 1.125 = 50.625) all of 63 cents. Now, is it worth her extra time and gas to drive an extra 20 minutes to get to the salon in IL?
I do have one question about my example above... Whether the MO or national FairTax, would the salon owner have to pay sales tax on his supplies? This is what seems to me a gray area. He is purchasing finished goods, but these are used to provide a finished good. He is buying lotions, polish, nail files, etc., but he is providing and collecting tax on a service. Seems that he should be making all of his purchases tax free, and this is where he can charge $5 less on his pedicures in the above example.
Jim,
Nice try, but where did you get the idea that a Missouri car dealer wouldn’t have to charge the Missouri sales tax to an Illinois resident customer? Nothing in HJR 36 supports your claim as near as I can tell. The only exemptions from the Missouri sales tax are for federal government purchases, investors, and business purchases needed to produce a taxable good or service. Rather than making Missouri the best place in the country to purchase a car, it seems to me that it would be the worst?
Scott,
Both HR25 and HJR 36 exempt business to business purchases.
Hank,
“The language of the constitutional amendment, lines 11-12, calls for a “tax upon all sales, use, or consumption of all new tangible personal property, rental property or taxable services in this state.”
There is no doubt in my mind that the enabling legislation will provide for the state equivalent of the federal export credit. If a car is sold for delivery to a bona fide Illinois resident, the sale is not necessarily “in this state.” Line 12.
~Jim
Hey Hank... I just realized that I made a slight mistake in my calculations above. The state of MO is applying the FairTax to all services purchases, but I don’t know that there is any reason to assume that local municipalities will make this change also. If they do not, and still continue to tax only goods and not services the rate on your wife’s pedicure would only be the 9.9%, I believe. If this is the case, the $45 pedicure in MO would actually be a few cents cheaper than the $50 pedicure in IL (45 x 1.099 = 49.455).
The point persists to be that even on services where the comparison between no sales tax and the highest assumed rate of 9.9%, I think NO does just fine. You take into account the reduced tax burden on the business in the form of no state income tax and the reduced operating costs by saving on sales taxes for it’s materials and businesses will do pretty good. Beyond that, I still think that for most people it’s simply not going to be worth the time and trouble to go shop 20 miles further away. Personally, I live about 30 miles from Dallas and I specifically avoid driving there for pretty much anything but Stars games. I think the cross-border shopping is only going to be limited to people within a very few miles of the border, and this is only if the price difference is truly significant. From the example above, I don’t think that is really going to be the case.
Jim,
The language on lines 11-12 is crystal clear. A tax will be charged on all sales of etc. etc. in the state. You may believe that the Missouri legislature will want to create a tax waiver for sales to the other 49 state residents, but I really think that is just wishful thinking.
How would Missouri benefit from such a waiver? You might make Missouri the car sales mecca of the US, but not one dime in revenue would go to the Missouri treasury. Not going to happen, Jim, and if it was proposed, what reaction might you expect from the states bordering on Missouri? What do the Interstate Commerce rules have to say about your scheme?
Scott,
You may have made more than a minor error in your calculations. Are you sure that you can reduce costs by 6% in the case of Missouri getting rid of the income tax?
Let’s use your pedicurist business as an example. Assume the business has annual costs of $100,000 including a $10,000 or 10% profit, and each customer pays $50 per visit. The business currently pays $600 in income taxes to the State of Missouri.
Now, the Missouri Dept. of Revenue notifies the business owner that the income tax has been eliminated, but the business must charge a 12.5% sales tax on all sales. How much can the business reduce prices?
Income tax costs were .6% of total costs, so costs are now down to $99,400. Rather than reduce the cost of a pedicure, in order to send 12.5% off to the Revenue department, prices will have to rise by almost 12%.
The math experts on this blog may correct me, but I don’t think that you can subtract 6% from your prices when total costs only are reduced .6% Your $50 pedicure in Illinois is going to cost $56 in Missouri if the local governments comply, or $54 if they don’t.
Smart shoppers in Missouri might get the pedicure in Illinois, fill up the gas tank with cheaper gas, and do the weekly food shopping at the same time. And bank the prebate which the Missouri government has naively sent you.
Pretty bad plan for a single state to adopt the Fairtax or some version of it. Only if all states adopt the plan can it work, imho!
Well Hank, I’m sure this is gross simplification, but let me take a shot.
If our pedicure business is taking in a total of $110k (100k in costs + a 10k profit), they are saving $4200 (100k X 4.2% which is the current sales tax they pay) plus the $600 in income tax for a total reduced cost of $4800. At $50 a pop on the service they provide that breaks down to 2200 customers to total $110k of income which yields $2.18 off the price of a pedicure. This means that their final price at this point would be $52.56 ((50 - 2.18) x 1.099 = 52.55418).
Now let’s look at the numbers using the actual proposed rates. The current cost savings don’t change since we are comparing to pre-FairTax. The only real change is in the final math. This simple example results in a massive price change to $50.27 ((50 - 2.18) x 1.0511 = 50.263602).
The bottom line with the proposed rate is a higher cost of less than 1/2 of 1%. You mentioned the trip to the grocery store, well the consumer is probably going to pay more in IL since non food items like toilet paper, laundry detergent, and beer will get charged the state sales tax in IL most likely negating any benefit here.
Hank,
It’s the way every sales tax in the country works. If a vendor ships outside the state, there’s no sales tax. The home state may not pick up revenue on that sale, but it would attract the business to that state.
The hypothetical Missouri-origin car would be subject to sales tax, or use tax, in Illinois, though not Missouri, on the same bases as any other car sold in Illinois. The Missouri vendor would still enjoy a competitive advantage over the Illinois vendor because there is no state tax component in the cost of his product.
The Missouri legislative intent is clear, and my interpretation is very reasonable. In few words: It’s going to happen.
~Jim
PS: I’m not talking about a tax waiver. There simply is no tax in the first place if the product is delivered outside the state. The FairTax is a destimation-principle tax.
Hank,
If this pedicure now costs more in MO than it did before the “MO fairtax”, then what costs less? Remember, revenue neutral means the government is collecting the same amount of revenue under both scenarios. So if they are now generating more revenue from pedicures, something else has to be generating less revenue. Since the cost of government won’t change, the mean cost per product won’t change, only the specific tax collected for each item. The only direct cost that changing the tax regime would alter is compliance costs.
I think Jim’s MO-car proves the point exactly. Imported items from IL will have all the income taxes embedded in the price of the product. Then it will be necessary to add the additional MO sales tax on top. Under this scenario, it seems reasonable that cross border purchases will be a problem, for the IL government. In IL they can buy the cheaper car in MO (since the dealership income taxes won’t be in the price) and then use it with their own sales tax (which I am assuming will be much lower than that of MO).
Scott,
What is your basis for claiming that our pedicurist business is paying a 4% Missouri sales tax under current law? Aren’t most services such as our example exempt?
Andrew,
You might set aside your self appointed role of economics professor and take on the role of a Missouri retail shop owner. Please explain to me how a retail business can reduce costs caused by the current 6% income tax and then add a 12.5% sales tax without raising retail prices in order to have the same profit? Surely you aren’t going to insist that everyone give up their state income tax withheld amounts so that retail prices might remain the same?
Andrew, let me first say I’m normally not the one to come to Hank’s defense but... The thing that “costs less” would be the corporate and personal income taxes. Since these are being eliminated, the tax and therefore the price of consumption items goes up. This is at least my guess.
That said, I’m on your side. I don’t deny that prices may go up, but I think this rise is going to be minimal or even insignificant. In fact, I think when compared to other states that have a sales tax already in place the final cost of especially goods and even services, as demonstrated in my example, will not be a determining factor in spending behavior. About the only way I think this would make a difference for me personally is if I lived extremely close to the border and had the same store almost equal distant from my home. If this were the case, I might start shopping at the IL store more frequently to save on groceries. The reality however is that I’m still going to head down to my favorite restaurant, SportClips, doctor, etc. for the majority of my business. I honestly think it wouldn’t change my shopping habits one bit even if I lived 5 feet from the border because I don’t think that there is going to be enough of a difference to make it worthwhile.
This is a great discussion. I really hope this passes in MO. I think this would be a great opportunity to see the FairTax in action, for good or for bad. The value of this as a test case for the national FairTax cannot be discounted.
Jim,
Re #48, here is a bit of news hot off of yesterdays press.
“NH House passes border sales tax bill
CONCORD, N.H. (AP) The New Hampshire House has passed a bill intending to protect retailers from becoming tax collectors for other states.
The bill, which had passed the Senate, bars retailers from sharing sales information with out-of-state tax collectors. It was filed in response to action in Massachusetts revenue agents took against a Connecticut-based tire store chain that has stores in New Hampshire.
Massachusetts attempted to collect $108,000 in ”use” taxes from Town Fair Tire for sales it made to Massachusetts customers at its New Hampshire stores.
New Hampshire does not have a general sales tax, a selling point it uses to attract out-of-state retail dollars.
The House had amended the bill, so now it returns to the Senate for final action before heading to the governor.”
I’m wondering if this supports your claim that if a vendor ships out of state, there is no tax. It seems that Massachusetts doesn’t agree, and the NH response is to try to legislate a stonewall response.
Any comments?
Hank,
I have appointed myself nothing. I just talk facts. But if that’s how you see me, here is a question for extra credit: If the state of MO is collecting no more revenue, but the price of MO products is higher, where does the extra money go?
Why do you quote 12.5%? You’re right. Why does the number need to be that high? Answer. It doesn’t. Using Fred’s 2008 numbers of 3.2B sales tax and 6.7B income tax with Morph’s 125% increase in the consumption base (which actually sounds pretty good. I did these same calculations for CA awhile ago and my research came up with 40% as the amount of our consumption base we are currently taxing).
Given these numbers and 4.2% as the current rate, the new rate is 5.78% (9.9B/((3.2B*2.25)/0.042)).
Scott,
By thing that “costs less” I was referring to what product or service will cost less. Because if one product/service costs more and the government is taking in the same revenue, then another product/service must cost less (or we go back to my question in the first paragraph.) In other words, we no the government isn’t getting more money (revenue neutral), so who is reaping the rewards of these higher priced items?
I sell auto parts nationally. Oklahoma does not require me to charge, collect, or remit sales taxes for credit card purchases made by out of state customers over the phone or internet. (i have to put ‘out of state’ on the tax# line, and have a out of state shipping/billing address on the invoice)
Because Oklahoma recognizes they are ‘losing’ those sales tax dollars to out of state residents, they assume that Oklahoma residents are equally not paying sales tax dollars on their own phone/internet purchases. So, oklahoma has an assumed pre-set use tax based on income levels, and the only way to get around it on the income tax returns is to produce receipts that prove you bought less tax-free than the use tax assumes.
of course, the use tax is so low for most people that just a couple online purchases gets you over that limit, so most people can’t produce few enough receipts to make fighting it beneficial. the rest of the people are trying to prove they didn’t do something, and legally proving a negative gets really really difficult.
as for the tax evasion buy jumping the border suggestions...
Oklahoma has several tax levels on cigarettes. our local tribes have all sorts of covenants setup with the state to offer lower taxed cigs where their nation’s borders meet with oklahoma’s border states. if you live in oklahoma city, you can buy full tax cigs at your local tax station, you can buy mid-tax cigs at your local indian smoke shop, or you can drive about two hours in any direction, and buy low-tax cigs at one of the border shops.
guess what? full-tax cig retailers don’t seem to have any problem selling smokes.
smokers in oklahoma spend a boat load on their smokes, we are a smoker-heavy state. but, we are also too lazy to drive across the street for cheaper smokes....much less drive halfway across the state.
we’ll drive to gainesville texas for the tax-free weekend at the outlet mall, but we’ll stock up on cigs at our local gas station before we make that 2 hour drive.
so, yeah, you can suggest that there will be a mass exodus of sales in missouri based on their State FairTax....but at least one example in history suggests you might be wrong.
regarding the car issue...
is the excise tax missouri currently charges being replaced with their state fairtax?
i don’t know how missouri works, but in oklahoma (and i’m guessing they work in a similar fashion), my car dealer doesn’t charge or remit sales tax on a car’s purchase. the taxes aren’t paid on the car until the car is registered with the state (in oklahoma, at one of our tag agencies, we don’t have a centralized DMV for that crap). this is true for new and used cars, retail or private sales.
the tax is collected at the time the title of ownership is transferred. the state assumes a value for the car (prevents people from getting under-taxed by under-valuing the car), and taxes that value accordingly.
if MO loses their excise tax structure, i could very easily see buying a ‘tax-less’ in NE oklahoma (or IL if their system works like ours), then registering it in tax-less MO.
but, with that said....every state does their taxes and tags differently....Oklahoma changed their system about ten years ago. our one-time excise taxes went up, but our yearly tags went way down.
Hank,
Re 54
Thank you for sending the interesting article. Here’s my analysis. First, New Hampshire is one of 7 states that have no sales tax. New Hampshire has no income tax either. Neighboring Massachusetts has a sales tax and has a use tax similar to that of my state. I.e., Massachusetts residents who buy goods out of state at a lower sales tax rate - or at no sales tax at all - and bring those goods back into Massachusetts for use there must pay the differential.
In the case of Massachusetts residents buying goods in New Hampshire and bringing them back into Massachusetts, the residents must pay the full Massachusetts sales tax rate because they paid no sales tax in New Hampshire. This kind of tax is commonly called a “use” tax. It is not always easy to enforce except for large purchases.
From your article it is evident that New Hampshire is saying it will not help Massachusetts enforce its use tax on goods purchased in New Hampshire. New Hampshire understands that the New Hampshire economy benefits by encouraging Massachusetts residents to buy in New Hampshire and take advantage of the absence of a sales tax.
This as a qualitatively different issue from the hypothetical Missouri car sale to a bona fide Illinois resident. In this hypothetical, both states have sales taxes and use taxes. The difference between the two states is that one state, Illinois, has corporate income taxes, and the other state, Missouri, does not.
I do not disagree that there will be Illinois use tax on the transaction, and I do not think Missouri will withhold cooperation.
~Jim
Andrew,
Re #55. In order to get all those extra points, here is my answer. First, there is no “extra money”. Under the current law, Missouri general revenue is raised from two sources, income taxes on individuals and businesses, and a sales tax on a select list of goods and a few services, I think.
Under the proposed Missouri Constitutional amendment, all general fund revenue will have to come from sales taxes. No help from income taxes. Assuming that the general fund rate is 9.9% as per the ITEP computer study, then prices must go up. Businesses can only reduce total costs by around .6% (income tax savings) and must then add the 9.9% sales tax. Prices in Missouri will go up roughly 9%. If the retail merchant doesn’t raise his prices, he won’t be able to send the sales tax revenue off to the Dept of Revenue without seriously drawing down his profits.
Another way of looking at the situation is simply to note that there is no free lunch. The Missouri citizens are going to have more money in their pockets by keeping their income tax withholding plus the prebate. More money chasing the same amount of goods equals higher prices. Econ 101.
Hank,
This statement “there is no “extra money”. ” contradicts this statement “The Missouri citizens are going to have more money” unless someone else is going to have less money. You also state “More money chasing the same amount of goods”. Again, you’ve already stated there is no extra money. MO does not produce its own currency, so the “no accomodation” model is extraordinarily likely.
If MO labor gets more money (by keeping their income tax), but ownership is going to take less that is fundamental shift in the ownership-to-labor compensation ratio. If you really believe this is going happen (which I believe it absolutely will not), this would really be a great selling point. Reduce the gap between rich(ownership) and poor(labor). What’s more progressive than that?
Andrew,
No contradiction intended. You were the one to claim that if prices rose, there would be “extra money”, presumably for the State coffers. I was simply trying to show that there can still be revenue neutrality with a price increase. Sorry you still don’t get it?
If you continue to believe that the State withholding amounts will go to the employer and prices would remain basically unchanged ((no accommodation), then please tell me who gets the dollars withheld from retirees pensions including SS? Never mind all the BS about “owner/labor compensation ratio”, those withheld dollars are contractually the property of the worker, and there is no legal way that owners can confiscate that money. If you think that’s a good thing, then stand by to be happy, because workers take home pay will rise. And they will need the added funds in order to cope with the higher prices.
It seems clear to me that while nominal prices will rise, real prices should be relatively unchanged. As a practical matter, how stupid do you think workers are? If the boss told you he was going to reduce your contractually obligated pay by the amount of your withholding in order to possibly reduce his costs, would you be happy? I don’t think so! Only “legalman” would benefit from that situation.
Hank,
The MO fairtax will not affect SS one bit. That is a federal program. The SS money goes to the same people it always has, Washington politicians.
Now I’m not sure what labor contracts you keep referring to, but most implicit labor contracts can be altered (including termination) within two weeks. If you were to get a job at Jack in the Box, how long do you think they are contractually obligated to pay you your originally agreed up wages? And your social security wages are not contractually your money. The second you earn them they are “contractually” federal government tax dollars. As a digression, what gives the idea that employers can’t pay their employees less money (please be specific)?
The whole nominal/real price debate changes when you consider a single state. MO doesn’t print its own currency. If the US dollar is inflated based on the MO fairtax, it will be for the whole nation. Surely the probability of the federal government doing anything to “accomodate” the change in the MO taxation scheme must be considered extremely low.
So I was correct that you assume labor will get more money relative to ownership? Feel free to ignore “owner/labor compensation ratio” BS, but if you don’t want to consider pertinent facts in this discussion maybe it should end.
Looks like I will be moving to Missouri.
For those of you who tended to downplay the issue of cross border shopping, here is an extract from a New Hampshire paper reporting on the latest NH legislative action which deals with the Massachusetts effort to have NH collect sales taxes from Mass residents who shop in NH.
“”New Hampshire has chosen not to have a sales tax, and we will not allow other states to force New Hampshire businesses to collect their sales taxes,” Lynch said yesterday. “This legislation will protect our businesses and strengthen our state’s economy. I am pleased to see this bill received strong legislative support, and I look forward to signing it into law.”
New Hampshire’s lack of a general sales or use tax is a strong selling point its retailers use to attract out-of-state customers. Seabrook in particular has benefitted from being a Granite State border community to Massachusetts, which could soon see a rise in its sales tax from 5 to 6.25 percent.
Seabrook’s Route 1 stretch has become a retail mecca, attracting Massachusetts shoppers and large national retail outlets like The Home Depot, Lowe’s, Kohl’s, Target and Town Fair Tire. ”
If NH won’t act as the tax collector for Mass, why would they act as tax collector for the federal government should Fairtax be implemented?
Hank,
The relationship between states and the relationship between state and federal government are very different.
Why do all states have 21 as the drinking age? Highway funds. MA has no leverage over NH. The federal government does. Note: I don’t advocate this relationship, but it does exist.
Hank,
NH is free to do what they would like regarding Mass. But as Andrew pointed out, it’s different than with the Federal government. NH can benefit by with no state sales tax while their neighbor has a higher sales tax. I don’t believe that NH doesn’t want to cooperate just because they don’t want to be a tax collector. If they collect the tax for Mass, then there is no incentive for Massachusians (is that what they are called?) to shop in NH and business in NH would suffer. One thing that may happen if the US goes to the Fair Tax is people may decide they want to shop in Canada or Mexico to save on sales tax. And I think they should be free to do so (Isn’t there is already a system in place to collect revenue on good purchased out of the country over a set amount?). Somehow I don’t think that would be significant.
Andrew,
But there are limits to just what the federal government can impose on the State and Local governments. For example, the States had to be given an option to having their employees join the federal Social Security program, and many State and Local employees are not part of the plan.
More to the point, even HR25 recognizes those limits by giving the States a choice as to whether or not they act as the federal tax collector. Adding the 1/4 of 1% “bribe” may make a difference, particularly in California? Based on population numbers, the Fairtax fee could range from $25,000 per day in Wyoming to $1.6 million per day in California. Is that enough to pay for the added responsibilities?
I agree with you that the relationship between Federal and State has gotten out of balance in recent years, but don’t you hear the rumble of State discontent growing louder each day?
I hadnt read this in the above posts, forgive me if its in there. In Missouri, there is also Personal Property Taxes, paid to the counties, that the Fairtax does not address. so the totals shown are a biot skewed since the state tax totals include this addional county tax in the net total. Also people by and large shop where they shop, regardless of taxes. People usually wont cross the street to save $10 if they are already at their regular store.
Hopefully the Missouri Fairtax (even if its by another name) will eventually come to pass.
Florida has a regressive property tax, which would be best cured by replacement with a state version of the FairTax Act.
The retirement crowd down in Florida, however, does not move very fast anymore (since they moved to Florida and retired), and, hence, the Missouri folks will probably have to lead the move, as the Florida folks have misplaced their political viagra for the time being......