Income Tax Reductions Affect Sales Tax Rates and Rules

Recent data suggests that state policy makers are making a shift to taxing consumption rather than income and capital. There are several reasons for this:

1. In economic downturns, sales tax collections tend to fall faster but recover sooner relative to income and property tax revenues. (This means that the “fall and recovery” curve is more V-shaped for sales tax, and more U-shaped for income and property taxes).
2. From an administrative perspective, sales taxes are collected and remitted monthly and “at the source of the sale.” This helps make the cash flow a genuine (and timely) benefit to state and local governments.
3. Sales tax compliance also tends to be high among sellers because the penalties for non-collection and remittance are onerous. As a result, tax jurisdictions typically can count on collecting a higher portion of sales taxes compared to other types of taxes (e.g., property taxes) with higher non-compliance rates.

Source: vertexinc.com

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