Oregon needs a flat tax, not sales tax

By Jason Williams

Also featured in Brainstorm Magazine May 2005

The tax reform Oregon needs is to flatten our income tax into a flat tax.  Reduce, simplify and streamline is the answer to our state’s tax woes.  An ideal state flat tax would tax all income levels at a flat rate, and deductions would be capped at a certain percentage.   A 1995 Joint Senate-House Economic Committee Report praised a national flat tax model system as simple, pro-growth, and “vital to America”. The National Center for Policy Analysis did an economic study of that flat tax, and demonstrated that all income levels would grow at the same time growing government revenues as well.   This win-win national model is something Oregon should consider adopting on a statewide level.

Ever notice how in light of the praise for a flat tax, all the politicians can talk about is the need for a sales tax.  The differences between the two taxes are striking.  A flat tax is simple for the tax collector and the taxpayer — who could fill out his tax form on a postcard.  The benefits of a flat tax are so basic and self-evident that it doesn’t need much explaining in this article.  The sales tax however, is the exact opposite.  It is by nature complex with its shortcomings hidden.  I feel obliged to peel away the multi-layer faults of the sales tax system to show how unfair and unreliable it is.

Sales tax declining revenue

A University of Tennessee study estimates that in 2003, $15 billion in sales tax revenue was lost to internet commerce.  That number is expected to grow to $23 billion in 2008.   Expanding internet commerce, catalog sales, and cross-state shopping is gutting the modern sales tax system.  The fact that sales taxes do not keep up with inflation, also contributes to its decline.  The shrinking sales tax crisis is so pervasive that every single state with a sales tax is expected to experience continued shrinking of their sales tax base (as calculated as percentage of personal income).

A dwindling tax base only guarantees disappointing news headlines and a permanent state of tax warfare with government.  Taxpayers will eventually lose this war because a diminishing tax base will hand the media and the politicians the moral high ground to argue for increased sales tax rates. Taxpayers have consistently lost this war over sales tax rates for the past 30 years. In 1970 the average state sales tax rate was 3.25%, in 1980 it grew to 4%, in 1990 it grew to 5%, and in 2004 there are already 17 states at 6%.  It is inevitable that adopting a sales tax will mean that individual taxpayers will pay more and more, while government gets less and less.

When a sales tax is established, local government find it irresistible not to join and plug into this revenue machine.  This has contributed to an incredible 7,000 different sales tax jurisdictions nationwide.  As expected, these local sales tax machines follow the national model in that they rise predictably over time.  The total state-local sales tax for our friends in Seattle is an astonishing 8.8%.  Is that the model for Portland?

Bureaucracy and inequality

The massive size and items covered under a sales tax have made it extremely bureaucratic and unequal.  The unresolved weakness of a sales tax is in dealing with business to business transactions.  Many products get sold from one business to another before the final purhcase by the consumer.   This causes double and triple taxation.  To avois this, many governments have built a fortress of legal paperwork to fix this problem, but the end result is commonly disorderly and unfair.

The bureaucracy and inequality gets significantly worse when a thousand special interest groups begin poking holes and exemptions into the tax.  It is easier for a powerful produce lobby to exempt their product from a sales tax, than for the same lobby to exempt their grocery store employees from an income tax.

The first special interest to get an exemption from a sales tax is government itself. Under Oregon’s income tax, government employees pay their fair share in the form of payroll taxes. Under Washington’s sales tax, the service government provides is exempt, while the service private business provides is not.  Why should we build a new tax system that gives a massive tax break to government?

The more one researches into a sales tax, the more it boggles the mind on how complicated it is.  In Florida, they argued over how much chocolate can go into a chocolate chip cookie before it becomes a taxable product.  With a flat tax we move closer towards simplicity, certainty, and fairness.

A sales tax is regressive

A sales tax is regressive because lower income taxpayers will pay a greater percentage of their available income in the tax than higher income taxpayers.  The wealthy don’t pay double for their light bulbs, laundry detergent, or a can of Pepsi.  The more money the highest income earners make, the more likely they are to spend it outside the state in the forms of travel and vacation homes. In many circumstances, the sales tax overtaxes the state’s poorest and undertaxes the wealthiest.  A flat tax would tax everyone equally.

Taxing productivity is better than taxing survival

An income tax system taxes people for being productive, whereas a sales tax system taxes people for surviving.  People shouldn’t be taxed when they are not productive.  There are three stages of life where people find justifiable shelter from the income tax: during unemployment, during disability, and during retirement. Taxing the unemployed does not help people get back to work.  Taxing people during their retirement guarantees that government will haunt you to the day you die.   Erecting a sales tax system also effects those Oregonians who have spent a lifetime paying high incomes taxes on the front end, only to retire to a system where they have to now pay it all over again as they spend it.

Because Oregon’s income tax system taxes productivity it has been criticized for impeding economic growth.  The chief tax barrier to economic growth is not the income tax itself, but the income tax brackets.   These tax brackets penalize taxpayers at a higher rate the moment they begin making more money.   A flat tax removes this penalty because all income would be taxed at the same rate.

There an old study showing that sales tax states have greater economic growth than income tax states.  One should proceed with great caution on such comparisons.  Massachusetts, New York and Oregon are the top-heavy income tax states.  These states also happen to be the most liberal and business unfriendly states in the country.  There are dozens of reason why Oregon’s heavy handed government chase away businesses that have nothing to do with taxes.  On the other hand, Alaska, Nevada, South Dakota, Wyoming, and Texas are sales tax heavy states, and just happened to be conservative states.

Loss of the Oregon advantages

Internet companies and border businesses have built themselves around Oregon’s no-sales tax advantage.  Even the small border town of Ontario reaps a huge reward from Idaho taxpayers shopping in Oregon.   Ontario stores handle over 60,000 shoppers every month, which is extrodinary considering the town has a population of 11,000. Californians, Washitonians, and Idohoans cross the border for our high priced items, helping to deliver Oregon just the type of customers we want. Sales tax proponents counter the tourism benefit by saying their tax captures tourists missed by the income tax.  The statement is true, but not helpful in light that Oregon tourism is dominated by Oregonians themselves.  All we would be doing is taxing ourselves.

Sales tax rejected nine times

It cannot be overlooked, that Oregonians have rejected a sales tax nine times.   To constantly resurrect the sales tax argument is a slap in the face to self-government.  Oregonians deserve to determine the future of their choosing without having to be maligned by politicians because Oregonians refuse to make the same mistakes as other states.

A flat tax would be win-win situation for both taxpayers and government.  A sales tax and all of its bureaucracies is a lose-lose situation for both taxpayers and government.   The national lessons of a sales tax show that they inevitably increase in size (rates), shrink in lost revenue collections, and are bureaucratic.   Oregon would be wise in taking what works and making it better by creating a flat tax.

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