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Considering The Real Impacts of Sales Taxes
According to the Census Bureau’s report, “Census of Governments” in calendar year 2022, 789 billion dollars was raised through general and special sales taxes across the country. In California, the California Dept. of Fee and Tax Administration, reports that in FY 2023, 80 billion dollars was raised by sales and use taxes.
During this same period, consumers and businesses buying taxable items in Marin County paid an estimated 562 million dollars in sales taxes. On average, that’s over $4,800 per household.
Anyone think they paid that much in 2022 or 2023? As the sales tax is only on taxable items, how could the amount be so large per household? Aren’t sales taxes also paid by local businesses when they purchase taxable items?
Therein lies the dark secret about sales taxes.
Of course, you don’t think you’ve paid that much because much if not most of the sales taxes that you pay are indirect and hidden from you. These are the sales taxes businesses pay. Those costs are incorporated in their pricing of all the goods and services they sell, not just the taxable items.
For instance, consider what happens when you buy an orange at the local market.
Food is tax exempt. Your local market isn’t. There is no sales tax for the orange on your receipt. However, the market has paid sales taxes on the taxable goods needed to manage its offices and stores. It also paid taxes indirectly in the pretax price of goods and services it purchased. It’s part of the cost of doing business and much of that cost is passed along in the pretax retail price, even when the item – like the orange – is tax exempt.
No sales tax appears on the receipt, and you may think you didn’t pay any tax. Of course you did. The grocery store buys goods from across the country where a tax is directly paid and indirectly paid, because it’s in the pretax price of what the store purchases.
Businesses set their prices charged to consumers after accounting for all their costs. It should be obvious they also account for taxes they pay, whether they see them or not. It’s part of the cost of doing business. And it means businesses pass these costs onto consumers through pretax retail prices, even on non-taxable items and services.
Sales taxes are ubiquitous.
46 states have general sales taxes. All of them have specific sales taxes (e.g., cigarette taxes, fuel taxes, etc.). The revenues fund state and local governments across the entire nation. While there are differences among the states as to rates and what items are tax exempt, state and local governments use them because they are regularly approved by local voters.
Maybe that’s because most voters don’t know about the hidden nature of the tax and don’t have a clue how much they’re paying. Since they can’t see it, they don’t know how much of the pretax price is the cost of sales taxes.
As a consumer, how much you pay directly in sales taxes is dependent on your overall income and spending patterns, whether you’ve purchased taxable goods in other counties, and whether you’ve bought an expensive taxable item (e.g., a car or appliance). You see this amount specified on receipts even when buying taxable goods online. Unfortunately, most taxpayers don’t realize that the amount they see isn’t close to what you ultimately pay.
According to the liberal think tank, the Institute on Taxation and Economic Policy (ITEP),
“These business-input sales taxes add to the cost of producing goods and services and are therefore mostly passed forward to consumers in the form of higher retail prices.” [Emphasis added]
What makes the tax particularly egregious? On taxable items you’re actually paying the tax twice because part of the pretax price includes the costs of sales taxes hidden in the cost of the good or service the business pays. And if it’s a taxable item that cost is taxed.
Another example is when you go to the dentist. Services are exempt from the sales tax. But your dentist has paid sales taxes on equipment needed to run the office and it isn’t cheap. It’s the cost of doing business for the dentist and you can be assured that this cost is incorporated in the how the dentist prices his or her services.
If you doubt what I’m telling you, go ahead and ask your dentist about this. And it means that much of the sales tax is hidden from consumers as well as from businesses. In fact, the full cost buried in the price of any purchase can only be known by estimating how different businesses absorb extra costs in the goods and services they purchase. The ITEP thinks “most” of the cost is buried in retail prices.
So do I.
What’s even more damning? Sales taxes are the most regressive tax there is that is commonly used to fund local governments. Why is that?
Less affluent households save a lot less of their income than more affluent households do. By definition, those households and families with less income, purchase fewer goods and services, but have less opportunity to save much of their income. This means they spend proportionally more of their income, on goods and services and pay proportionally more of their income in sales taxes than more affluent households do. This is the definition of tax regressivity.
As everyone knows, the economy is not producing equitable results. It is likely to get worse in the coming years and this bothers many of us. Liberal voters regularly decry the unfairness of our economy and support many programs that help the less affluent. Yet, as soon as a sales tax is proposed for a cherished purpose, the inequities and burdens of the tax on the less affluent are ignored.
For instance, the City of Novato recently easily passed a sales tax increase. SMART Board members regularly ignore the inequities that the sales taxes paid by the less affluent are used to subsidize the more affluent SMART riders. County voters passed an extension to Measure A with almost 75 percent in favor. The measure funds parks and open space with revenues from a quarter-cent sales tax.
Maybe if voters understood how much they were paying, they’d think twice about supporting sales taxes to fund their favorite local government service.