There’s momentum in the US Congress to give residents of Washington and other states that have sales taxes but no (state) income taxes a deduction on their federal income tax, as the Seattle Post Intelligencerreports.
From the perspective of tax fairness, this change is a good idea. It corrects one of the flaws of the sales tax. Residents of no-state-income-tax states currently pay more federal income tax than their counterparts in states that have income taxes of their own, because state income taxes—but not sales taxes—are (federally) deductible.
But it barely begins to correct many other, larger flaws. As Yoram Bauman and I argued in the 1998 book Tax Shift, Washington’s sales tax is hard on working families. In fact, thanks to its heavy reliance on sales taxes, Washington has the most regressive tax system in the nation.
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It’s not a tax on all consumption, but disproportionately a tax on consumption by ordinary people. Sales taxes exclude things that richer people buy disproportionately, such as private education, travel, second homes, land, and better medical care. The poorest fifth of households in Idaho and Washington pay three times as much of their income in sales taxes as do the richest fifth.
Sales taxes are also-despite occasional arguments to the contrary by some environmentalists-no friend to nature. They do fall on consumption of goods, but not in a way that sends any clear signal to conserve important resources. In fact, sales taxes almost always exempt the most environmentally important goods. In the Northwest, for example, sales taxes currently exempt electricity, heating fuel, gasoline, minerals, natural gas, pesticides, timber, water, and fertilizers.
Over time, Washington—and other Cascadian jurisdictions—can help their economies, environments, and their working families by fixing these flaws in the sales tax. Or by replacing sales taxes with direct imposts on pollution, congestion, sprawl, and resource depletion.