1939: Sales Tax

Although the state legislatures, during 1939, enacted almost 200 new laws relating to general and selective sales taxes, no very significant changes in tax policy were made with reference to the exchange of goods and services. The flood of new retail and general sales taxes in evidence over the last several years seems to have subsided. On the other hand, few states which turned to these measures as temporary devices for emergency revenues have abandoned them. In at least ten states, taxes on sales and the use of commodities are top revenue producers. Selective sales taxes, notably on gasoline, bring in large revenues in a majority of the states. Because of their stability of yield and their elasticity in providing larger receipts when rates are increased, these taxes, in spite of admitted defects, are abandoned with great reluctance. Such excises, the burden of which is often borne unwittingly by the majority of taxpayers, have become increasingly popular with politicians, due to the ease with which they are collected.

Within limits, some of the special imposts which are added to commodity prices can be justified on the grounds of benefits which are received by particular groups. Gasoline tax revenues, the greater part of which are used for the construction and maintenance of highways, are of this description. Some of these taxes are frequently defended as restrictive in purpose; for example, it is argued that excises on liquor and playing cards may help to discourage the use of these products. However, the danger of relying more and more upon indirect levies, which in most cases result in higher prices to the final consumer, is that the tax burdens tend to be distributed inequitably. General sales taxes, in particular, bear most heavily upon the poor, for among the lower-income groups the bulk of the income is spent for taxable commodities.

Turnover taxes frequently result in pyramiding, so that the burden of the tax shifted to the consumer is greater than the amount which the government collects. Moreover, widespread consumption levies are likely to reduce purchasing power among the great masses of people to an extent sufficient to become injurious to business. The assumption on the part of most legislators in enacting various types of excises is that the burdens will be shifted forward to the final consumer. Where, as a matter of fact, this shifting does not occur, the tax becomes severely discriminatory with respect to the firms that are forced to assume the burdens themselves.

General sales tax legislation during 1939 consisted mainly in the extension of laws due to expire, or in the modification of the rate structures. Four states: New Mexico, North Carolina, North Dakota and South Dakota enacted use taxes. The City of Philadelphia allowed its 2 per cent city sales tax to expire. More activity was seen in the introduction of selective taxes or excises on individual commodities. Five states raised their alcoholic beverages taxes, while five others provided for changes in the taxation of liquor through the introduction of transactions taxes, and taxes on manufacturers, wholesalers, and retailers of liquors, beer and wine. Florida and North Dakota added an additional tax of 1 cent per gallon on gasoline and motor fuels. Massachusetts, New Hampshire, New York and Rhode Island, and the City of St. Louis enacted cigarette and tobacco taxes. Two other states increased their taxes on cigarettes. Several legislatures provided for additional gross receipts taxes on public utilities and places of amusement, and for miscellaneous excises. No important changes were made in chain store taxes but in two states, Pennsylvania and Kentucky, the taxes on chain stores were declared unconstitutional. Federal excises which were about to expire were extended at their prevailing rates.

A word should be added with reference to certain bills which, had they been enacted into law, would have made 1939 one of the most important years in the annals of sales and consumer taxation. The Federal 'general welfare' bills H.R. 2 and 11 introduced in the 76th Congress provided for old-age pensions to American citizens above 60, to be financed respectively, by means of an excise tax of 2 per cent of the gross dollar value of each transaction, transfer of money, or property; or by a 2 per cent gross income tax, i.e., a sales tax, upon receipts of every kind in wholesale and retail business. The California ($30 Every Thursday) Plan for old-age pensions called for a 3 per cent gross income or transactions tax to supplement the already existing 3 per cent sales and 3 per cent use taxes in that state. These proposals were all defeated. The Patman Chain Store Tax bill (H.R. 1) provided for a graduated tax on chain stores up to $1,000 per store with the further feature that this base be multiplied by the number of states in which the chain operates. This bill was laid over for early consideration at the 1940 session of Congress. See also TAXATION.