Lower Sales Tax Rates and Raise More Money
April 2, 2003
Nobody likes the idea of raising tax rates. Higher rates place a greater burden on those who pay those taxes.
Well, how about actually lowering a tax rate and collecting more money as the result? That’s what a number of states are already doing and it’s a good idea.
I’m suggesting that the State of Nevada lower its “Sales and Use” tax rate and at the same time broaden the tax base to include services as well as goods.
The state of Washington is currently investigating a “sales and use” tax based upon both goods and services. Washington state estimated the possibility of collecting an additional $2 billion annually if their sales tax is extended to include all services. Although the economy of Washington is several times larger than Nevada’s, both states rely on sales tax revenue for more than half their entire budget. Therefore, Washington might make an interesting comparison for us.
Nebraska is another state that has a “sales and use” tax on services. The Nebraska tax applies only to a limited base of services that includes just seven general categories. Regardless of its smaller scope, a recent study reported that the effect of its limited sales tax on services was potentially less regressive than normal sales taxes were on retail goods. Regressive taxes place a disproportionate burden on taxpayers that have smaller incomes. Retail sales taxes on goods are notoriously regressive and they inequitably burden lower-income families. Nebraska’s experience demonstrates that a sales tax can become more equitable, more fair, as its tax base expands to include services.
The question that everybody wants answered is “how much additional revenue can a sales tax on services bring into the state of Nevada’s budget?” South Dakota may be able to provide some guidance. South Dakota’s current “sales and use” tax has been in existence for several years. It is applied to virtually all goods and services at a rate of 4 percent, which is substantially lower than Nevada’s sales tax rate. Since 1996, South Dakota’s sales tax rate of 4 percent has consistently collected an annual sales tax revenue amount which is slightly less than 3 percent of the value of its Gross State Product (GSP = gross value of all goods and services produced in the state in any year).
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Now let’s speculate and apply the South Dakota experience to Nevada. Nevada’s estimated gross state product for 2002 is approximately $85 billion. If Nevada had a 4 percent “sales and use” tax rate applied to all goods and services, then it could possibly have collected $2.5 billion in sales tax revenues (3 percent of $85 billion). That would have been $200 million greater than the almost $2.3 billion that Nevada actually did collect in 2002 from its higher sales tax rate, which is applied only to goods. I admit that this is a very crude mathematical analysis, but at least it provides a starting point.
It makes good sense to investigate expanding the Nevada “sales and use” tax base to include services. A sales tax on both goods and services has these advantages: 1) the broader tax base provides a more stable and reliable revenue source, 2) the sales tax rate can actually be reduced and yet provide more revenue at the same time, 3) the broader sales tax base is less regressive, which results in a more equitable burden for everyone.
Dave Cook, a professor of business and economics at Western Nevada Community College, is a past member Nevada State Board of Education and Carson City School Board.