THE RETAIL SALES TAX IN A NEW ECONOMY

1 THE RETAIL SALES TAX IN A NEW ECONOMY Municipal Finance Conference July 16-17, 2018 John L. Mikesell* Indiana University [email protected] Sharon N. Kioko University of Washington [email protected] Abstract For the second half of the 20 th century, the retail sales tax was the largest single source of tax revenue to state government and the second largest source for local governments. Born out desperation during the Great Depression, the retail sales tax became the single largest source of tax revenue for the states by 1947. While consumption is an indispensable measure of household ability to pay, the U.S. retail sales tax fails to fully capture that measure in its taxable base. As a result, the tax is not economically neutral, horizontally equitable, robustly revenue-productive, or simple to collect. Since its adoption, political, social, and economic forces have created a tax that is both “too broad” or “too narrow”. We explore patterns of change and their impact on the retail sales tax. Specifically, we explore how changes in consumption, policy, and technology, particularly the internet, have made the retail sales tax less neutral, equitable, administrable, and productive. We also examine which policy options have been successful and what policy changes should be encouraged. * Corresponding author. Please do not reference without permission of the author. Comments and suggestions welcomed.

THE RETAIL SALES TAX IN A NEW ECONOMY

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