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1
Sales Taxes
© Allen C. Goodman, 2015
http://taxfoundation.org/article/facts-figures-2015-how-does-your-state-compare
State and Local Sales Tax RatesAs of January 1, 2015
State State Tax Rate Rank Avg. Local Tax Rate (a) Combined Rate RankAla. 4.00% 38 4.91% 8.91% 3Alaska None 46 1.76% 1.76% 46Ariz. 5.60% 28 2.57% 8.17% 11Ark. 6.50% 9 2.76% 9.26% 2Calif. (b) 7.50% 1 0.94% 8.44% 8Colo. 2.90% 45 4.54% 7.44% 15Conn. 6.35% 11 0.00% 6.35% 31Del. None 46 0.00% 0.00% 47Fla. 6.00% 16 0.65% 6.65% 29Ga. 4.00% 38 2.96% 6.96% 24Hawaii (c) 4.00% 38 0.35% 4.35% 45Idaho 6.00% 16 0.01% 6.01% 36Ill. 6.25% 12 1.94% 8.19% 10Ind. 7.00% 2 0.00% 7.00% 21Iowa 6.00% 16 0.78% 6.78% 27Kans. 6.15% 15 2.05% 8.20% 9Ky. 6.00% 16 0.00% 6.00% 37La. 4.00% 38 4.91% 8.91% 4Maine 5.50% 29 0.00% 5.50% 42Md. 6.00% 16 0.00% 6.00% 37Mass. 6.25% 12 0.00% 6.25% 33Mich. 6.00% 16 0.00% 6.00% 37
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Minn. 6.88% 7 0.33% 7.20% 17Miss. 7.00% 2 0.07% 7.07% 20Mo. 4.23% 37 3.58% 7.81% 14Mont. (d) None 46 0.00% 0.00% 47Nebr. 5.50% 29 1.30% 6.80% 26Nev. 6.85% 8 1.09% 7.94% 13N.H. None 46 0.00% 0.00% 47N.J. (e) 7.00% 2 -0.03% 6.97% 23N.M. (c) 5.13% 32 2.22% 7.35% 16N.Y. 4.00% 38 4.48% 8.48% 7N.C. 4.75% 35 2.15% 6.90% 25N.D. 5.00% 33 1.56% 6.56% 30Ohio 5.75% 27 1.35% 7.10% 19Okla. 4.50% 36 4.27% 8.77% 6Ore. None 46 0.00% 0.00% 47Pa. 6.00% 16 0.34% 6.34% 32R.I. 7.00% 2 0.00% 7.00% 21S.C. 6.00% 16 1.13% 7.13% 18S.D. (c) 4.00% 38 1.83% 5.83% 40Tenn. 7.00% 2 2.45% 9.45% 1Tex. 6.25% 12 1.80% 8.05% 12Utah (b) 5.95% 26 0.73% 6.68% 28Vt. 6.00% 16 0.14% 6.14% 34Va. (b) 5.30% 31 0.33% 5.63% 41Wash. 6.50% 9 2.39% 8.89% 5W.Va. 6.00% 16 0.07% 6.07% 35Wis. 5.00% 33 0.43% 5.43% 44Wyo. 4.00% 38 1.47% 5.47% 43D.C. 5.75% (28) None 5.75% (41)
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Table 22State Gasoline Tax Rates (Cents Per Gallon)As of January 1, 2015
State Excise Tax Other Taxes and Fees Total RankFederal 18.4¢
Ill. 19¢ 11.72¢ 30.72¢ 15Ind. 18¢ 11.85¢ 29.85¢ 19Iowa 21¢ 1¢ 22¢ 35Mich. 19¢ 11.26¢ 30.26¢ 17Minn. 28.5¢ 0.1¢ 28.6¢ 20Ohio 28¢ 0¢ 28¢ 21Wis. 30.9¢ 2¢ 32.9¢ 12
http://taxfoundation.org/article/facts-figures-2015-how-does-your-state-compare
Gas taxes
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• Note: The American Petroleum Institute (API) has developed a methodology for determining the average tax rate on a gallon of fuel. Rates may include any of the following: excise taxes, environmental fees, storage tank taxes, other fees or taxes, and general sales tax.
• In states where gasoline is subject to the general sales tax, or where the fuel tax is based on the average sale price, the average rate determined by API is sensitive to changes in the price of gasoline. States that fully or partially apply general sales taxes to gasoline: California, Connecticut, Georgia, Illinois, Indiana, Michigan, and New York.
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http://taxfoundation.org/article/facts-figures-2015-how-does-your-state-compare
Table 24State Cigarette Excise Tax Rates (Dollars Per 20-Pack)As of January 1, 2015
State Tax Rate RankFederal $1.0066Ala. $0.425 46Alaska $2.00 11Ariz. $2.00 11Ark. $1.15 29Calif. $0.87 32Colo. $0.84 33Conn. $3.40 4Del. $1.60 21Fla. $1.339 26Ga. $0.37 47Hawaii $3.20 5Idaho $0.57 41Ill. $1.98 16Ind. $0.995 31Iowa $1.36 25Kans. $0.79 35Ky. $0.60 39La. $0.36 48Maine $2.00 11Md. $2.00 11Mass. $3.51 2Mich. $2.00 11Minn. $2.90 7
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Miss. $0.68 36Mo. $0.17 50Mont. $1.70 18Nebr. $0.64 37Nev. $0.80 34N.H. $1.78 17N.J. $2.70 9N.M. $1.66 20N.Y. $4.35 1N.C. $0.45 44N.D. $0.44 45Ohio $1.25 28Okla. $1.03 30Ore. $1.31 27Pa. $1.60 21R.I. $3.50 3S.C. $0.57 41S.D. $1.53 23Tenn. $0.62 38Tex. $1.41 24Utah $1.70 18Vt. $2.75 8Va. $0.30 49Wash. $3.025 6W.Va. $0.55 43Wis. $2.52 10Wyo. $0.60 39D.C. $2.50 (11)
Table 8Sources of State and Local Tax Collections, Percentage of Total from Each SourceFiscal Year 2012
State Property General SalesIndividual
IncomeCorporate
IncomeOther
Taxes (a)
Ill. 38.4% 14.5% 23.3% 5.3% 18.5%Ind. 26.5% 27.0% 24.9% 3.2% 18.4%Iowa 33.5% 23.7% 23.1% 3.1% 16.6%Mich. 36.7% 24.7% 20.3% 2.2% 16.2%Minn. 28.0% 18.0% 28.4% 3.8% 21.8%Ohio 29.0% 21.6% 28.7% 0.8% 20.0%Wis. 37.9% 17.5% 25.5% 3.5% 15.6%
8http://taxfoundation.org/article/facts-figures-2015-how-does-your-state-compare
9
Table 2State and Local Tax Burden Per Capita and as a Percentage of IncomeFiscal Year 2011
State State-Local Tax Burden as a Share of State IncomeRank Total Tax Burden (per capita)US 9.8% $4,217Ala. 8.3% 41 $2,886Alaska 7.0% 49 $3,319Ariz. 8.9% 34 $3,194Ark. 10.3% 12 $3,405Calif. 11.4% 4 $5,136Colo. 9.0% 32 $4,220Conn. 11.9% 3 $7,150Del. 10.1% 15 $4,209Fla. 9.2% 31 $3,699Ga. 8.8% 35 $3,237Hawaii 9.6% 20 $4,259Idaho 9.5% 24 $3,189Ill. 10.2% 13 $4,658Ind. 9.5% 22 $3,385Iowa 9.3% 29 $3,740Kans. 9.4% 26 $3,849Ky. 9.5% 23 $3,169La. 7.6% 46 $2,872Maine 10.2% 14 $3,836Md. 10.6% 7 $5,598Mass. 10.3% 11 $5,586Mich. 9.6% 21 $3,505
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Minn. 10.7% 6 $4,858Miss. 8.4% 40 $2,620Mo. 9.0% 33 $3,380Mont. 8.6% 38 $3,137Nebr. 9.4% 25 $3,991Nev. 8.1% 43 $3,221N.H. 8.0% 44 $3,769N.J. 12.3% 2 $6,675N.M. 8.6% 37 $3,044N.Y. 12.6% 1 $6,622N.C. 9.8% 17 $3,564N.D. 8.8% 36 $4,057Ohio 9.7% 18 $3,687Okla. 8.5% 39 $3,187Ore. 10.1% 16 $3,861Pa. 10.3% 10 $4,374R.I. 10.5% 8 $4,676S.C. 8.3% 42 $2,784S.D. 7.1% 48 $3,052Tenn. 7.6% 45 $2,777Tex. 7.5% 47 $3,088Utah 9.4% 28 $3,304Vt. 10.5% 9 $4,351Va. 9.2% 30 $4,469Wash. 9.4% 27 $4,366W.Va. 9.7% 19 $3,160Wis. 11.0% 5 $4,477Wyo. 6.9% 50 $3,500D.C. 9.7% (20) $6,641
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Sales Taxes are Excise Taxes
• Sales, or consumption, taxes provide largest source of revenue for state governments.
• General sales taxes are used in 45 states w/ rates varying from 1.76 to 9.45%.
• In 2013, they generated about $809 per person in revenue. Close to $2,500 per household.
• Michigan’s total (in 2013) was $852 rank = 21.
12
Not Everything is Taxed
• In principle, one could argue that sales taxes might serve as consumption taxes, and hence encourage saving, but …
• Not everything is taxed.• Food in grocery stores is not taxed in
numerous states (including Michigan).• Net effect General sales taxes apply to
40 to 60% of personal consumption in aggregate.
13
Origin and Destination Principles
• Origin – Tax based on location of sale.
• Destination – Tax based on location of consumption or consumer.
• State sales taxes are INTENDED to be destination taxes … but what about Internet purchases?
• There are lots of holes in the collection of these taxes.
14
Selected Sales Taxes
• Items such as cigarettes or gasoline,
• Cigarette taxes vary from $0.17 per pack in Missouri to $4.35 per pack in New York.
• Gasoline taxes vary from $0.113 per gallon in Alaska (no surprise) to $0.505 per gallon in Pennsylvania. Michigan’s tax = $0.303.
15
16
Optimal Sales Tax Analysis
• Suppose we have goods A and B and we need to collect revenue R from taxes tA and tB. Should the taxes be equal?
Good A
$
Good B
Price B
1 1
DA
DB
17
Optimal Sales Tax Analysis
• If they are equal we get indicated revenues.• We get reduced quantity demanded for each.• We also get indicated DW losses.
Good A
$
Good B
Price B
1 1
DA
DB
RA RB DWB
1+t 1+tDWA DWB
18
Optimal Sales Tax Analysis• We could be more efficient if we could raise same revenue with
less DW loss.• How can we do that?• Raise tax on A so price ↑ by 1%. This leads revenue to ↑ by a
lot, and quantity to decrease by a little so DW ↑ by a little. • Reduce tax on B (about 1%) to make revenue constant and it
decreases DWB by more than DWA increased.
Good A
$
Good B
Price B
1 1
DA
DB
RA RB DWB
CS loss ↑
CS loss ↓
Rb’
1+t + tA
1+t - tB
19
Optimal Sales Tax Analysis• Idea, here, is that you tax most heavily those things that have
the least elastic demand, because it changes quantity the least.• Called the Ramsey Rule. Taxes should be inversely
proportional to their price elasticities of demand.
Good A
$
Good B
Price B
1 1
DA
DB
RA RB DWBRb’
CS loss ↑
CS loss ↓1+t
SeeSlides27-29
20
Should we tax this way?
• There are some ethical and distributional issues here.
• If demand for insulin is very inelastic, do we slap a big sales tax on insulin.
• May hit the poor.
• On the other hand, it provides a rationale for taxing addictive substances.
21
Border Effects
• We talked about this a little bit before.
• What happens if Michigan taxes cigarettes a lot, and Ohio a little?
• What happens if Michigan taxes items a lot and the Internet doesn’t collect any taxes at all?
22
Taxes
Complicating our earlier analysis• Let’s look at cigarettes.
• You may have somewhat inelastic LR supplies. Why?
$ $
Q q
MI OH
P0 P0
Q1Q2
DODM
PM+ t
q1
SM
S'M
P1 +PS-CS
D'O – Michigan buyers
DW
23
Taxes
Complicating our earlier analysis• You have a DW loss in MI.• You have an efficiency gain in OH, which does not offset
the loss in MI.• Also, additional costs and inconvenience to Ohio
buyers.$ $
Q q
MI OH
P0 P0
Q1Q2
DODM
PM+ t
q1
SM
S’M
P1-CS
D’O
DW +PS
24
Pechman’s Analysis – Table 15.5
Effective SalesTax Burden as % of Family Income
0%
5%
10%
15%
20%
0-5
5-10
10-1
5
15-2
0
20-2
5
25-3
0
30-5
0
50-1
00
100-
500
500-
1000
1000
+
Income Category
Eff
ecti
ve T
ax B
urd
en
Eff.Rate
25
Effective SalesTax Burden as % of Family Income
0%1%2%3%4%5%6%7%8%9%
1 2 3 4 5 6 7 8 9 10
Income Decile (Low to High)
Per
cen
tag
e
Eff.Rate
Pechman’s Analysis – Table 15.5
26
Simple Ramsey Proof – 1
Two goods
Q1 = a1 – b1P1
Q2 = a2 – b2P2
Normalize prices P1, P2 at 1
Institute tax rates t1 and t2 per unit.
Revenue = R1 = [a1 – b1 (1+t1)] t1
Revenue = R2 = [a2 – b2 (1+t2)] t2
Deadweight Loss = D1 = ½ * Q P = ½ * b1t1 * t1 = b1t12/2
Deadweight Loss = D2 = b2t22/2
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Minimize sum of DW subject to constant tax revenue.
Min L = ½ b1t12
+ ½ b2t22 + λ { - [a1 – b1 (1+t1)] t1 -[a2 – b2 (1+t2)] t2}
Simple Ramsey Proof – 2
R
1 1 1 1 1 11
2 2 2 2 2 22
- [( - ) - 2 ] 0
- [( - ) - 2 ] 0
Lb t a b b t
t
Lb t a b b t
t
Simplifying,
1 2 2
2 1 1
bQ t
b Q tFurther simplifying,
1 1 1 1 1
2 2 2 2 2
2
2
b t Q b t
b t Q b t
You can ALWAYS
minimize DW loss if …
28
Simple Ramsey Proof – 3 Because i
ii
Qb
P
12
1 2 1 2
22 1 11
2
bQ P tQb Q tQP
Multiplying by1 1
2 2
( / )
( / )
P P
P P
1 11
1 1 2
12 22
2 2
/
/
Q PP
P Q t
tQ PP
P Q
And finally … 2 1 2
1 2 1
P t
P t
If P1 = P2 = 1, then 1 2
2 1
t
t
If demand elasticity of G1 > G2, we have a higher taxon G2 than on G1.