A national sales tax would be simple and efficient — but the current plan won’t work

One of the best things about living in Texas is that we have a somewhat larger-than-average state sales tax but no state income tax. If the recently proposed legislation to replace the federal income tax with a national sales tax would work, I’d be a big supporter. But it won’t.

There’s a lot to recommend Texas’s state sales tax system. It’s transparent, simple, efficient and private. Texans know what they’re paying, and they pay it only when buying something. So, the state isn’t snooping into its citizens’ financial lives. No filings, no fuss.

In addition, by excluding many essential consumer needs such as most food items, prescription drugs and medical care and legal fees, the state’s sales tax largely avoids regressivity problems (i.e., when the poor are hit harder by a tax than the rich).

So, if a national sales tax could replace the federal income tax with the same transparency, simplicity, efficiency and privacy, it might be worth a try. But the leading national sales tax proposal, known as the Fair Tax, doesn’t do that.

Recently, Rep. Buddy Carter (R-Ga.), along with some 30 other Republicans, introduced the Fair Tax Act. The Act would introduce a 30 percent sales tax (i.e. a 23 percent tax-inclusive rate) on virtually all purchases of goods and services. In exchange, it would eliminate the federal income tax, the corporate income tax, payroll taxes (i.e., Social Security and Medicare) and estate taxes. And the bill seeks to end the Internal Revenue Service (IRS).

Millions of Americans would shout a hearty amen to most of the Fair Tax’s goals. But the problems are big and concerning.

First is the amount of the sales tax: 30 percent. State and local sales taxes would be added to that amount. There are several states whose combined state and local sales taxes are nearly 10 percent. So, the Fair Tax combined with some states’ sales taxes would be close to 40 percent. Ouch!

Would a shopper buying $200 worth of food and other items at the grocery store be up for paying an extra $60 for the national sales tax? People are already searching for alternatives to their favorite grocery store purchases because of Biden-flation.

How about a new vehicle? The average cost of a new vehicle in 2022, according to Cox Automotive, was $48,000. A 30 percent sales tax would bump that price up by $14,400, to $62,400, and that’s before any applicable state sales tax. Would that increase discourage people from buying new cars and trucks? Dealers apparently think so. The Wall Street Journal just published this story with the headline: “Dealers and buyers are both worried cars are too expensive.”

Or how about a house. The average price of a new home is about $428,000. With the 30 percent sales tax of $128,400, that would make the actual average price $556,400. Would that increase keep millions of Americans out of a home when housing prices are already unaffordable for so many people?

And what about a 30 percent tax on a prescription drug that costs $5,000 a month? Would health insurance cover the cost of the tax? Almost surely not.

Fair Tax proponents say not to worry. Since there won’t be any federal income tax withholding or FICA taxes, people will be bringing home more money. The Hoover Institution’s John H. Cochrane, a Fair Tax supporter, agrees. “But taxes overall must finance what the government spends. Collecting it in one tax rather than lots of smaller taxes doesn’t change the overall rate,” he writes.

My guess is that most people will see a nice, but relatively small, increase in their take-home pay as far short of what they would need to cover the Fair Taxed price of expensive items.

And then there’s the fact that the bottom half of income earners pay only 2.3 percent of the federal income tax. The top 50 percent of earners pay 97.7 percent. In other words, the bottom 50 percent won’t have much higher income because they don’t pay much federal income tax.

Again, don’t worry, say the supporters. The Fair Tax envisions sending every American a “prebate” check every month to offset the regressivity of imposing such a high tax on every purchase.

Sending everyone in the country a monthly check? Progressives have wanted to put every American on the government dole forever. Now some Republicans would like to make that possible.

The monthly check would quickly be perceived as a federal entitlement program (or a guaranteed universal income) with all the usual public demands from recipients and progressives to increase the monthly handout.

The only way a national sales tax could actually work is if that percentage could be significantly lower. But doing that would require Congress to vastly reduce federal spending. Not much chance of that, especially with Democrats in control.

Another option: Remove the Social Security and Medicare payroll taxes from the plan. Those two programs accounted for about $2 trillion of the federal government’s $4.8 trillion in outlays in 2022. Separating those two programs from the proposal would still keep the national sales tax high, but a lot less than 30 percent.

Finally, the plan could exempt food, legal and medical expenses, as most state sales taxes do. That could eliminate the need for handing everyone a government check, which might allow for a lower tax rate.

Given that proponents of the Fair Tax are dead set against these changes, it’s extremely unlikely we will ever get a national sales tax. Which means a flat income tax (or close to it) is likely our best tax reform option.

Merrill Matthews is a resident scholar with the Institute for Policy Innovation in Dallas, Texas. Follow him on Twitter @MerrillMatthews.