Sales and Excise Taxes Anderson: Sales and Excise Taxes

Copyright © by Houghton Mifflin Company. All rights reserved. 2 Introduction In this chapter we consider: General sales taxes applied to all final goods and services. Excise taxes applied to specific goods.

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4 Excise Taxes History of excise taxes in the U.S. Efficiency aspects of excise taxes Equity Aspects of excise taxes Excess burden Federal excise taxes State excise taxes

Copyright © by Houghton Mifflin Company. All rights reserved. 5 History of Excise Taxes in the U.S. Excises have frequently been associated with war time. After adoption of constitution—a long and elaborate list of excises was adopted. Taxed goods included carriages, liquor, snuff, and items purchased at auction. Public reaction against these taxes hitting the poor disproportionately lead to the Whiskey Rebellion in 1794.

Copyright © by Houghton Mifflin Company. All rights reserved. 6 History of Excise Taxes in the U.S., [continued] Jefferson administration abolished all federal excises in 1802, except for tax on salt. During the War of 1812 federal excises were revived. During the Civil War taxes were placed on liquor and tobacco products. They have remained in place to this day.

Copyright © by Houghton Mifflin Company. All rights reserved. 7 History of Excise Taxes in the U.S., [continued] First World War brought additional taxes on occupations, theatre admissions, telephone calls, jewelry, toilet preparations, and luggage. After the war, taxes on tobacco and stamp taxes on legal documents were retained as the major federal excise taxes. Liquor taxes remained in place through the Prohibition era.

Copyright © by Houghton Mifflin Company. All rights reserved. 8 History of Excise Taxes in the U.S., [continued] During the Depression, federal excises were placed on automobiles, trucks, buses, appliances, and other consumer durables. Those taxes were eliminated in the reforms of New taxes on wagering and diesel fuel were added during the Korean War.

Copyright © by Houghton Mifflin Company. All rights reserved. 9 History of Excise Taxes in the U.S., [continued] In the post Second World War era, federal excises have tended to be earmarked for specific purposes. In 1956, for example, the Federal Highway Trust Fund was established with federal excises on gasoline, diesel fuel, oil, and tires dedicated to the fund. In 1970 a similar innovation funded the Airport and Airway Trust Fund with taxes on passenger tickets, air freight, gasoline, tires, and tubes used in aviation.

Copyright © by Houghton Mifflin Company. All rights reserved. 10 History of Excise Taxes in the U.S., [continued] Again, in 1980, a similar funding mechanism was introduced with the Hazardous Substances Superfund to clean up chemical pollution. Taxes on crude oil and an array of forty-two hazardous waste-creating chemicals were implemented.

Copyright © by Houghton Mifflin Company. All rights reserved. 11 History of Excise Taxes in the U.S., [continued] After the Korean War, a long process of reducing and eliminating federal excise taxes began. The result is a relatively limited set of federal excises, generating a small amount of revenue. Federal excises account for less than 4% of total receipts currently.

Copyright © by Houghton Mifflin Company. All rights reserved. 12 Efficiency Aspects of Excise Taxes Since excises are applied to goods with relatively inelastic demand, the excess burden of excises taxes is relatively small. These are relatively efficient taxes.

Copyright © by Houghton Mifflin Company. All rights reserved. 13 Equity Aspects of Excise Taxes, [continued] Incidence of excise taxes. Since excises are applied to goods with relatively inelastic demand, the burden of the tax falls primarily on the consumers. See Figure 1. See Table 1 on the distribution of expenditures on tobacco, alcoholic beverages, and motor fuels.

Copyright © by Houghton Mifflin Company. All rights reserved. 14 Figure 15.1: A Unit Excise Tax Applied to a Good with Relatively Price- Inelastic Demand

Copyright © by Houghton Mifflin Company. All rights reserved. 15 Federal Excise Taxes General excise taxes Dedicated excise taxes

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Copyright © by Houghton Mifflin Company. All rights reserved. 17 State Excise Taxes Gasoline excise taxes Cigarette excise taxes Alcoholic beverages excise taxes

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Copyright © by Houghton Mifflin Company. All rights reserved. 20 Sales Taxes Tax base Tax rates Administration of sales taxes Origin or destination tax? Nexus Taxing electronic commerce Smuggling and border effects Use taxes

Copyright © by Houghton Mifflin Company. All rights reserved. 21 Tax Base Sales taxes are typically applied to final goods sold in the jurisdiction. Intermediate goods should not be taxed in order to avoid cascading. Question of taxing services is becoming increasingly important.

Copyright © by Houghton Mifflin Company. All rights reserved. 22 Administration of Sales Taxes The sales tax is typically applied to the seller of products, not the buyers, in order to make collection easier and more effective. Other administrative issues arise.

Copyright © by Houghton Mifflin Company. All rights reserved. 23 Origin or Destination Tax? A origin-based tax applies to all goods originating from the jurisdiction. Under an origin-based tax imports are not taxed while exports are taxed. A destination-based tax applied to all goods destined for the jurisdiction. Under an destination-based tax imports are taxed and exports are not taxed.

Copyright © by Houghton Mifflin Company. All rights reserved. 24 Nexus Nexus involves the legal test for presence in the jurisdiction, resulting the the obligation to pay the sales tax. Issues of nexus arise for mail-order and internet retailers.

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Copyright © by Houghton Mifflin Company. All rights reserved. 26 Figure 15.2: Share of U.S. Cigarette Market by type of Cross-Border Activity, Source: From How Excise Tax Differentials Affect Interstate Smuggling and Cross-Border Sales of Cigarettes in the United States by Patrick Fleenor, Tax Foundation Background Paper #26, October 1998, p. 16. Reprinted by permission.

Copyright © by Houghton Mifflin Company. All rights reserved. 27 Use Taxes Sales taxes are always paired with use taxes that apply to goods not taxed by the sales tax. For example, if you live in Kansas City, Missouri, and you go over to Kansas City, Kansas to buy a new car, you will owe Missouri use tax on the new car equal to the sales tax that you would have paid had you bought the car there. Use taxes apply to mail order purchases, but are not effectively collected by the states.

Copyright © by Houghton Mifflin Company. All rights reserved. 28 Harmonization of Indirect Taxes in a Federation of Governments When several local governments in a federation have access to taxing sales, there may be an efficiency gain from harmonizing the rates charged. Suppose there are two jurisdictions taxing at high and low rates t h, t l. Figure 4 illustrates.

Copyright © by Houghton Mifflin Company. All rights reserved. 29 Figure 15.4: Efficiency Gain From Harmonization of Indirect Taxes

Copyright © by Houghton Mifflin Company. All rights reserved. 30 Harmonization The excess burden of the high tax is abc. The excess burden of the low tax is ade. If the rate were harmonized to.5(t h + t l ) the total excess burden is reduced to: bcfg – defg.

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