History and Economic Impact William F. Fox Professor of Economics University of Tennessee March 13, 2002 This chapter focuses on two basic issues, the history and the economic impact of sales taxes. The chapter is divided into five sections. The first is a brief review of sales taxes and their implementation throughout history. The second discusses the general sales tax’s role in current U.S. state government finance. The third is an examination of the sales tax as a consumption tax, and the other means of taxing consumption. The next section addresses trends in the sales tax base and the factors that have been altering the base. The final section is a discussion of the likely direction of sales taxes in the future. 1. Sales Tax History The imposition of transactions taxes can be found through much of modern civilization (see Buehler, 1940). Tomb paintings depict tax collectors in Egypt at least as early as 2000 BC, and sales taxes on individual commodities, such as cooking oil, can be traced to that time. Egypt, Athens, and Rome were all known to have general sales taxes. Indeed, the Romans were responsible for taking sales taxes to the rest of Europe, including to both Spain and France. Later, Spain had a national sales tax in place from 1342 until the 18th century, with rates that ultimately reached 10 to 15 percent. Specific commodity taxes were so broadly imposed during the U.S. civil war, that when combined, they nearly formed a general sales tax.1 The use of sales taxes by U.S. states dates back at least to the Pennsylvania mercantile license tax that was initially introduced in 1821, though this and other early taxes were not broad-based. Buehler attributes development of modern state sales taxes to the depression era. He credits Kentucky with the first tax levied exclusively on retailers. The initial tax, passed in 1930, was progressive, but was replaced in 1934 with a 3 percent flat rate tax and then was eliminated in 1936. The current Kentucky sales tax was adopted in 1960. Commerce ClearingHouse credits Mississippi with the first sales tax, in 1930. Forty-five states and the District of Columbia currently impose sales taxes (see Table 1). Twenty-four of the states first levied the tax during the 1930s, six in the 1940s, five in the 1950s, and eleven in the 1960s. In 1969, Vermont was the last state to impose a sales tax. Alaska, Delaware, New Hampshire, Montana and Oregon do not levy general sales taxes.
Two characteristics normally distinguish general sales taxes from selective sales taxes. First, general sales taxes have a broad base, including a wide variety of goods and potentially of services. Second, general sales taxes are imposed at ad valorem rates and selective sales taxes are often, though not always, levied at specific rates. Cigarettes, alcohol, and gasoline are examples of goods normally taxed at specific rates but cigars and other tobacco products are often taxed at ad valorem rates.
Table 1. Date of Adoption of General Sales Tax Year State State Alabama Arizona Arkansas California Colorado Connecticut District of Columbia Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi 1 1
1934 1967 1955 1966 1933 1965 1933 1935 1934 1933 1953 1947 1951 1933 1947 1961 1933 1969 1966 1933 1933 1961 1935
1936 1933 1935 1933 1935 1947 1949 1949 1951 1935 1965 1933 1933 1933 1937 1960 1938 1951 1947 1966 1933 1967 1930
Missouri Nebraska Nevada New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming
Gross income tax. In 1963, Indiana enacted a 2% retail sales and use tax. Source: U.S. Advisory Commission on Intergovernmental Relations, Significant Features of Fiscal Federalism, Volume 1. Budget Processes and Tax Systems, February 1993.