The One Tax to Rule Them All

Michael Tomlin over at Idaho Business Review ponders the idea of using one tax for everything, he writes:

“The real problem with taxation is that we have no idea what or how to tax. We tax property, which has no real value – it only has assessed or market value which can sway in the wind. We tax income, which makes some sense except the more we make the higher level we are taxed. That is backwards. And we tax sales, which actually makes some sense. …

“Even if (sales taxes) totaled 25 to 50 percent of every purchase we could pay it because we would have no property tax and no income taxes. All underground income would ultimately be taxed through purchases made, no hidden drug or sweatshop economies avoiding the tax. We could easily exempt food and medicine, and then purchases become mostly choice – cheap or expensive, buy it or not. Now there is some sanity, and some change I could believe in.”

The one general problem with Tomlin’s idea is that you cannot tax for state, local, and federal governments with the same tax unless through centralization all three have become one which is not a good thing. However, Tomlin is right that a Sales Tax probably makes more sense at each level.

I’m a fan nationally of the Fair Tax which would replace a slew of Federal Taxes including Income, Corporate Income, Capital Gains, and Payroll Taxes with a simple Flat Sales tax of 23% (Tax Inclusive) or 30% (Tax Exclusive.)

The question that occurs to me and where I’ll limit my thought is could Idaho get rid of the State Income Tax and the Corporate Income Tax and replace the taxes with a Sales Tax.

This is a little easier to do than you would think. Here’s the dirty little secret about Idaho’s Sales Tax exemptions, we have more examptions than we do items we tax. This was studied by the legislator in 2003-04 and what they found at the time is that the state’s tax revenue was $865.6 million. Exemptions? $1,264.4 Billion. Huge. Now certainly, there are some worthy exemptions in their like medical care, production costs for businesses. But then there are some things in there that you could tax.

Now, if you were to do this in Fair Tax fashion what you would do is you would tax medicine, prescriptions, and food, and give people a prebate for the poverty level spending up to their income level, while also taxing rents, new real estate, and other areas. Since, I can’t find figures that would give me an idea on how much new home sales would bring in and my preliminary calculations with a prebate tell me that a Sales Tax that excluded Food, Medicine, and Medical Care with no prebate mechanism would be cheaper in Idaho anyway.

So, I found about $700.8 million in additional sales tax revenue based on FY2004 numbers without taxing health care, medicine, or medical care, or contributions to charity or charitable expenses and sales. Add that to what was $886.08 million in Sales Tax Revenue in FY 2004 and you have a total of $1.586.88 billion, in our current tax year, we would have $1.914 billion assuming that the additional sales tax receipts grew at the same rate as the areas we’re already taxing. If you did not want to tax food,  a 2007 Senate bill pegged the cost at eliminating the tax on food at $180 billion, we’ll assume that 2 years later the cost would be $200 million.  that would take the total down to $1.714 billion. To cover the current costs of income, sales, and corporate income tax for Fiscal Year 2009 we’d $2.493 billion.  If you $1.714 billion at 6%, at 8.5%, you’d have $2.428 billion assuming that a higher sales tax didn’t result in a drop in spending. For the purpose of this excercise as I’m just approximating, we’ll call it good enough.

So you could take 8.5% sales tax excluding food and medicine but taxing many of things we currently exempt, and get rid of the State’s Corporate and Personal Income Tax.  What this would do is it would increase outside investment in the state, reduce complexity in the tax code and cut compliance costs. The lack of Corporate or Personal Taxes would give businesses the necessary incentives to locate to Idaho or for people to open their own small business.

Also, I think it could be argued that the Sales Tax would provide us with more stable revenue. According to the Governor’s estimates, Personal and Corporate Tax collections declined 17.6% and 11.3% from FY 2008 compared to the Sales Tax Revenue which only dropped 6.4%.  If we only had a sales tax we would not be worrying about the federal government messing around with the income tax and how that would affect Idaho’s Revenue.