Sunday, January 03, 2010

Why are there so many exceptions???

Part 1

Every once in a while, I see an article in a local newspaper complaining about all of these "loopholes" that exist in the sales tax laws. Often it's a newspaper editorial, sometimes it's a politician. In both cases, the writers are, to put it gently, ill-informed.

Here's the thing. If sales taxes and use taxes didn't have the loopholes, I wouldn't have a job. And that's kind of important. But other than paying my mortgage, loopholes are necessary, regardless of what some misguided journalist or politician says.

1. SUT is a regressive tax. That means that the tax that the richer folks pay is a smaller percentage of their income than what the poorer folks have to deal with. In other words, the tax hurts the poor more than it hurts the wealthy. That's why income taxes are progressive. The income tax rate increases as one's income goes up. It's an attempt to "equalize the pain" by making the rich pay a bigger percentage of their income in taxes. Such income taxes are progressive taxes. The reverse, sales taxes, are regressive taxes.

In order to make the sales and use tax less regressive, lawmakers put those darned "loopholes" into the laws to eliminate the tax on the kinds of things that everyone buys and that make up a larger percentage of what poorer folks spend their money on. That's why there are exemptions for prescription drugs, food, residential utilities, newspapers and, in some states, clothing. There's even one state that exempts the repair of motor vehicles, because everyone has to get their car fixed, particularly if they're poor and driving an old beater. [OK, it took me a while, but I finally tied the picture at the top into the post.]

2. Another reason for the "loopholes" is competition. A good example of this is the manufacturing exemption. In many states, equipment used directly in production is exempt from tax. This is not simply a giveaway to the "moneyed interests" in the state. It's done because if the exemption wasn't there, the manufacturers wouldn't be either. If, say for example, Illinois eliminated the manufacturing exemption, businesses would leave in droves for states like Indiana, Michigan, Missouri and Wisconsin, where there are very nice manufacturing exemptions.

And most manufacturers won't even open up plants in states unless there is an exemption available to them. Why would they if they can get a better deal in Wisconsin? So states must give those exemptions in order to get high-paying, skilled manufacturing jobs in the state. Every state, at least when it comes to sales and use taxes, is in competition with other states.

There are other "competitive" exemptions. They include movie production, research and development, and high-tech industries. Not every state has them, but the reason they do is to suck businesses into their states.

These exemptions are critical to states for attracting and keeping jobs. They're also the most commonly whined about by the editors and politicians.

Part 2 tomorrow.

The Sales Tax Guy

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