OPINION: The Facts

LePage’s sales tax veto sheds light on issue of exemptions

By Gordon L. Weil, Contributing Writer, ©Maine Center for Public Interest Reporting | Jan 27, 2012

The sales tax is one of the touchiest political issues. Unlike income or property tax, just about everybody pays it: rich and poor, resident and visitor — even the teenager who eats at McDonald’s.

Almost every time a change to it is proposed, it sets off controversy.

Recently, Gov. Paul LePage vetoed a bill to exempt nonprofit performing arts organizations from paying a sales tax on goods and services, similar to the exemption for some other nonprofit groups. LePage said: “Exemptions from the sales tax should be saved for the necessities of life – food, shelter, medicine….”

He also would exempt the sale of items that promote economic growth and increase tax revenues.

Maine is a national leader in exempting goods and services from its sales tax.  In a 2008 survey, the Federation of Tax Administrators identified 168 items that are subject to the sales tax. Maine taxed only 25 of them. In sharp contrast, Connecticut taxed 79, and Hawaii taxed 160. Even New Hampshire, which is thought to have no sales tax, actually taxed 11 items.

And Maine’s 5 percent sales tax rate is one of the lowest in the country, placing the state in 43rd place, according to a study by the Tax Foundation. Maine bans local sales taxes, but many other states don’t, a factor that pushes up the average rate in those states. For example, to New York’s state rate of 4 percent was added an even greater amount in local sales taxes, making that state rank eighth in the country.

Adding together the relatively few items taxed and the relatively low tax rate makes Maine’s sales tax one of the lightest in the United States. Tacking on more exemptions, such as the one LePage vetoed, would reduce it even further.

Sometimes people mistakenly believe that the vendor responsible for collecting the sales tax actually pays it. The customer pays the tax, which the vendor tacks onto the price, then collects the tax and passes the funds on to the state.

Rich people pay more sales tax than poor people, simply because they buy more. To ease the burden on lower income people, essentials like food are often exempted.

One of the major arguments against the sales tax is that it raises the price of whatever is being sold. The vendor usually claims that when the price goes up, he or she sells less, thus harming the business and reducing the profits on which taxes are paid. This claim is widely accepted, often without any study of the effect of a price increase from the amount of the sales tax.

The effect of price increases on sales is what economists call “the price elasticity of demand,” and it can be studied to see the effects of changes in price on demand for an item. Such studies have been done for products and services ranging from eggs to air fares. For different products, the results vary. Adding a cent to a 20-cent item can have a different effect from adding $5 to a $100 item, though the rate increase is the same. When the price of gasoline went from, say, $2 a gallon to $2.40, there was little sign that drivers used less. When it hit $4, consumption declined.

Most important is whether the customer can choose a cheaper alternative.

Let’s take the hotel room tax. In Maine, the rate is 7 percent, while in neighboring New Hampshire, it is 9 percent. In Florida, the rate can be as high as 11 percent.  The traveler’s alternative is to visit another state or not go at all. But few people seem to be deterred from visiting the Sunshine State simply because they might have to pay a high lodging tax. They seem to pay little or no attention to the tax rate when deciding to travel or choosing among hotels. In short, the room tax probably does not lead people to consider alternatives.

Seen in the light of the effect of the tax on customers and state revenues, Gov. LePage’s veto may be considered good economic sense, especially in the absence of any study on how many more theater tickets would have been sold if there were no sales tax.

This issue is more than a question of whether a given service or product should be taxed or exempt. It’s a question of total government revenues that pay for services that people need or want.  If one source of state revenue, such as the income tax, goes down, then increasing the sales tax, either by raising the rate or having fewer exemptions will likely be on the table.

Gordon L. Weil is a contributing writer at the Maine Center for Public Interest Reporting: pinetreewatchdog.org. He is an author and publisher and served as a Maine state agency head. Weil was also a correspondent for the Washington Post and a columnist for the Financial Times. He is a former Harpswell selectman. He may be contacted at weil.gordon@gmail.com.

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