1942: Sales Tax

Source of Revenue and Deflationary Measure.

The rapidly mounting costs of the war magnified the need for new revenues. At the same time, the growing gap between increased purchasing power and diminished stocks of civilian supplies raised the threat of inflation. As a solution to both problems, proposals for a federal sales tax were vigorously supported by certain groups and several attempts were made during 1942 to secure the passage of such a law. The Chamber of Commerce of New York State recommended to Congress early in the year a 5 per cent nation-wide retail sales tax estimated to yield approximately $4,000,000,000. This was followed by a plan, endorsed by the National Association of Manufacturers for a 4 per cent manufacturers' sales tax imposed at the point of final sale, and a 4 per cent tax on general consumption. As an alternative, the latter organization suggested a flat 8 per cent war consumption tax. These proposals were expected to yield $4,400,000,000 and $4,800,000,000 respectively. Various other business groups and associations recommended general sales tax and manufacturers' sales tax measures.

General Sales or Turnover Tax.

The general sales or turnover tax is a tax upon the transfers of all commodities and services at all levels of trading. Levied on every transaction, the general sales tax may therefore be paid once, or several times on a given commodity, depending upon the number of layers of exchange between original sources of raw materials and the final stage of sale to the consumer. A manufacturers' tax, on the other hand, is imposed only on one sale of a product, usually at the point of origin, or at the first stage of wholesale distribution. Retail sales taxes are collected only once at the time of the sale to the final user who does not intend to resell the article.

Sales taxes are large revenue producers, especially during periods of rising prices and increased volume of trading. They have the further advantage of elasticity (i.e., of being easily adjusted as to rates to produce higher yields), and of stability, in providing revenues which are unaffected by wide fluctuations in income or property values. In addition, as soon as they go into effect, sales taxes begin to draw purchasing power from the pockets of buyers. They may thus serve as a useful means of curbing inflation. Moreover, there are few serious problems in administration of the sales tax. For these reasons, sales taxes are particularly attractive as wartime emergency measures.

Opponents of sales taxation point out, however, that the sales tax is not levied directly on the taxpayer and therefore no allowances are made for differences in economic status. The burden of taxation falls more heavily on those of the lower income groups who spend the greater part of their earnings on the necessities of life. They also show that a general sales tax, in particular, is inequitable because of the fact that, being superimposed on each sale, the pyramiding of the tax in the course of successive sales is unavoidable. This results in multiple burdens and discriminates in favor of vertical business combinations. Finally, while they do not altogether deny that the sales tax may succeed in producing some deflationary results, they argue that this end may be achieved by other and more equitable methods. They emphasize the point that as an instrument of inflation control, the sales tax is too crude, taxing all classes of goods at the same rate, whether plentiful or scarce, cheap or costly, necessity or luxury. It raises the cost of living, stimulates the demands for higher wages, and makes price control more difficult.

Spendings Tax.

Despite some of its shortcomings, especially its regressivity, a fair amount of sentiment has nevertheless developed in favor of the sales tax as an emergency measure for the duration of the war. The Administration has, however, steadfastly opposed the measure. As a substitute proposal, the Treasury endorses the 'spendings tax.' Such a tax, designed as an inflation control device, exempts a minimum standard of living, imposes progressive rates on aggregate spendings, and provides strong financial inducements to save.

Adaptation of Sales Taxes.

Sales taxes of various types have been a part of the tax systems of European nations for a generation or longer. In Canada, they have been successfully employed for two decades, and have become an important element of national taxation in the countries of South America. Although no Federal tax of this form has been adopted in the United States since the Civil War period, sales taxation came into use on a rather wide scale among the states during the last decade. In the search for emergency sources of revenue during the depression years, one state after another adopted sales taxes until twenty-eight states had passed various types of sales tax legislation. In 1942 twenty-two states were collecting sales tax revenues in excess of a half billion dollars. Tax rates ranged from ½ per cent to 3 per cent. Louisiana joined these states in 1942 by enacting a new sales and use tax of 1 per cent. In addition, New York City imposes a retail sales tax of 1 per cent.

1941: Sales Tax

Turnover Tax.

Interest in the pros and cons of sales taxation was suddenly revived in the closing days of 1941 as the Federal Government began casting about for new and important sources of revenue. Among the many proposals submitted for consideration by the House Ways and Means Committee for the raising of an additional $5,000,000,000-$6,000,000,000 in Federal revenues, few have the fiscal and administrative virtues of adequacy of yield, elasticity of revenue production, and simplicity of operation possessed by a general sales or turnover tax. The form of tax that has received the greatest attention as a possibility in a revamped emergency Federal tax structure is a turnover tax on all gross sales or leases of goods, wares, commodities and properties. In addition, such a levy would include a tax on services such as transportation, utilities, and professional and business services; on rents and royalties collected for the use of properties and patents, and on interest, fees, commissions and charges collected by bankers, brokers, agencies and commission merchants. In short, a tax of this kind would be payable on virtually every exchange transaction throughout the nation. Because of the huge volume of transactions (gross receipts of corporations, alone, are conservatively estimated at $200,000,000,000), a tax as low as 1 or 2 per cent on each turnover would yield tremendous revenue. Moreover, such a tax would rise directly in proportion to price increases, and because of its limiting influence on purchasing power would help to check inflationary tendencies. Furthermore, it is argued that taxes that tend to be shifted upon the buyer in the form of higher prices appear less burdensome to the average taxpayer, and hence prove to be more popular.

In spite of these advantages, general sales taxation has the obvious defect of causing an inequitable distribution of tax burdens. Since the rates are proportional all buyers, rich and poor, are treated alike. This results in regressivity relative to income levels for among the lower-income groups the bulk of the income is spent for taxable goods and services, while in the upper brackets of income there is more opportunity for avoidance through savings and investment policies. A larger percentage of the lower incomes than of the higher incomes thus goes for sales taxes. In addition, turnover taxes generally result in pyramiding, so that the final consumer bears a cumulative burden in an amount greater than the sum which the Government collects. This is caused by the familiar trade practice of computing mark-up on the basis of cost. As costs are swelled by the accumulated amount of turnover taxes, the figure which serves as the basis for calculation of mark-up is correspondingly increased — resulting in the quotation of still higher prices to the consumer. Furthermore, where conditions in a given trade make forward shifting relatively more difficult if not impossible, the tax becomes severely discriminatory with respect to those firms that are forced to assume the burdens themselves.

New Sales Taxes.

Existing levels of general sales taxation continued to prevail among the states almost without alteration. No new sales taxes were adopted in 1941 with the exception of the 2 per cent retail sales and use tax in the city of New Orleans which replaced the former 1 per cent tax that had been abandoned in 1940. A number of states: Colorado, North Dakota and Oklahoma, extended the life of sales or use taxes, and New York City was granted permission by the New York legislature to do likewise. Minor changes were made in sales tax rates in several other states.

Changes in the Selective Commodity Tax.

More significant changes occurred in the selective commodity tax structure. Sweeping revisions were made in the Federal excise taxes in the Revenue Act of 1941. The long list of defense tax rates on cigarettes, liquors, firearms, oil and gasoline, securities transfers, passage tickets and box seats, which were to have been reduced by 1945 were declared permanent. Sizeable increases were made in the rates on playing cards, wines, distilled spirits, tires and tubes, automobiles, refrigerators and radios, and on admissions, club dues, and telephone and telegraph messages. New manufacturer's excises of 10 per cent were imposed on business and store machines, commercial washing machines, electric gas and oil appliances, optical equipment and sporting goods. Retailer's excises of 10 per cent were placed on furs, jewelry and toilet preparations.

The state legislatures also boosted selective commodity tax burdens. Seven states increased the tax on wines and liquors; four states imposed higher rates on gasoline; two states enacted new taxes on tobacco products, and two states provided for additional taxes on gross receipts of utilities. In a few instances, reductions were made in state excise rates. Two states passed new chain store taxes of a restrictive or punitive character.

With these additions to the selective commodity tax lists, it should be recognized that substantial increases occurred in the total indirect tax burdens of the nation. Although direct taxes — chiefly in the form of payroll and income taxes — will in all probability increase during 1942-1943 there is some likelihood that the pressure for additional revenue may result in further indirect taxation. A national general sales or turnover tax is a distinct possibility in the near future.

1940: Sales Tax

The general taxation of sales of tangible personal property at retail, wholesale or manufacturing outlets, (as well as sales of professional and other services, in some instances) is of comparatively recent origin in the fiscal history of the United States. Scarcely a decade has passed since a few of the American states turned to the sales tax as a significant revenue producer. When first adopted, these measures were of an emergency character, arising out of the problems of state finance created by the depression. Today they have become so firmly entrenched in the revenue systems of certain states that their temporary status has been almost entirely forgotten. There are now 22 states that have some form of general sales tax and in 16 of them the receipts from this source constitute one-fifth or more of total state revenues. In West Virginia, the general sales tax provides the state with more than 40 per cent of its revenues, and Illinois, California, and Michigan rely on this source for 30 per cent or more of their taxes. In only one city, namely, New York, is the sales tax of considerable importance as a local revenue measure. Since 1934 it has served there as a special measure to provide funds for local relief work, and has yielded approximately $40,000,000 per year.

Sales taxes take several forms. In their narrowest application they are retail taxes — referring only to sales of commodities not intended for resale. This type is found in the majority of the states, and in New York City. A somewhat broader version of the tax includes in the taxable base all transactions in wholesale and retail channels. Taxes of this type are found in Pennsylvania and North Carolina. The tax becomes still broader in scope when it is imposed upon gross receipts or gross income derived from the sale of goods and services, as is the case in Arizona, Indiana, and New Mexico. In one or two states such as West Virginia, there may be a combination of sales taxes — one law relating to the value of sales at retail and one pertaining to gross income or gross proceeds of all business enterprises. In general, the rates are proportional and range from 1 to 3 per cent with the majority at 2 per cent. In a few instances, specifically indicated enterprises are taxed at higher or lower rates. In some states certain commodities are exempt from the tax — notably food, drugs, and other itemized necessities.

In addition to the general sales tax there is the broad area of sales taxation known as the selective commodity taxes. These are much older and more firmly established, and are among the largest producers of federal and state revenues. They include the bulk of the federal 'miscellaneous internal revenue taxes' as well as the many classes of state excises. Chief among these are the taxes on liquor, tobacco, gasoline, oil, cosmetics, soft drinks, admissions, automobiles and parts, etc.

Taxes imposed on oleomargarine, or on chain stores, represent another form of taxation for which the base is the selling price of merchandise sold. However, in these cases, the rates are relatively high since such taxation is punitive or prohibitory in intent and hence is of little importance from a revenue standpoint. At present, 19 states have special taxes on chain stores — the rates of which are usually graduated with reference to the number of stores.

Closely related to sales taxation and of growing importance in the United States are the so-called 'use taxes.' Designed to serve as checks against sales tax avoidance, they are levied on the storage, use, or consumption of tangible personal property upon which no sales tax has been paid. The rate is usually the same as the sales tax rate. Use taxes are now in effect in 17 states. Some states have also imposed use taxes on certain commodities such as gasoline, tobacco, liquors, cosmetics, and soft drinks. Use taxes do not yield much revenue, nor is that their purpose. Their chief importance lies in the extent to which they may prevent evasion or avoidance of general or selective sales taxes.

No very significant changes were made in the status of general sales taxation during 1940, with the important exception that in Louisiana the general sales tax and the use tax were repealed. In California, the sales of livestock, poultry, newspapers and publications were added to the list of items exempt from the sales and use taxes. In New York City the sales tax was extended to June 30, 1941. Use taxes were enacted in New York City and in Kansas City, Missouri — the latter to function as a complement to the state sales tax. Alabama, Louisiana, South Carolina, and Virginia extended the gasoline tax to the sales of Diesel motor fuels. The cities of Denver, Colorado, and Kansas City, Missouri, enacted municipal cigarette taxes of 1 and 2 cents respectively. The cigarette tax in New York City was permitted to expire. Several states raised the rates on miscellaneous selective commodity taxes. Mississippi and Kentucky adopted chain store taxes with graduated rates determined by the total number of stores, wherever located, in the chain. The Patman national chain store tax measure failed to pass in Congress. See also TAXATION.

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.

1938: Sales Tax

Varieties.

The term 'sales tax' denotes a compulsory levy upon the value or volume of goods or services exchanged. Several important varieties may be distinguished: (1) retail sales taxes, imposed upon the sales of tangible personal property which is purchased for direct use or consumption and not for resale. They may apply also to certain services rendered to consumers; (2) general sales taxes, applying to a broader group of transactions, including the sales of tangible personal property both at retail and for resale, and extending to the business of extractive industries, manufacturers, and wholesalers, and to the sales of realty and receipts from various service enterprises; (3) gross receipts taxes, including all the preceding types of levies and, in addition, taxes upon the sales of intangibles and upon receipts from personal or professional services; (4) gross income taxes, applying to all receipts, including payments such as wages, rent, and interest. A further distinction is to be made between sales taxation, which is broad in its application, and certain so-called 'selective' sales taxes such as the Federal and state excises upon cigarettes, liquor, playing cards, gasoline, and other specific commodities. Other taxes, which are based upon volume or value of gross sales, but which are restricted in application to certain specified groups, include manufacturers' sales taxes, wholesalers' sales taxes, and taxes upon chain stores.

Usage and Prevalence.

Sales taxation as a method of raising public revenue is not new. The practice of taxing the sales of commodities or services, either on a general or a selective basis, is traceable to the civilizations of antiquity. It is only since the World War, however, that sales taxation has become significant in the fiscal systems of leading nations. General sales taxes are now an important element in the national taxation of most European and South American countries, as well as in Australia and Canada. In the United States, except for selective excises, sales taxation has not been introduced as a Federal levy. In state and local finance, it has made fundamental changes in the revenue systems since it was introduced on a widespread scale following the year 1930.

At the close of 1937, sales taxes were in effect in 27 states and the District of Columbia. In more than half of these jurisdictions, the tax was a retail sales levy with rates ranging from 1 per cent to 3 per cent. A number of municipalities also entered the field. New York and New Orleans had 2 per cent taxes on retail sales. About half a dozen other cities levied smaller taxes of less fiscal importance.

Extensions and Revisions of 1938.

During 1938, Philadelphia joined the list of municipalities imposing a retail sales tax. A 2 per cent sales-and-use tax became effective March 1, 1938, with an expiration date set for Dec. 31, 1938. It applied to tangible personal property, gas, electricity, refrigeration, steam, telephone and telegraph, and receipts of restaurants and cafés. Food, drugs, newspapers and periodicals were exempt. In Louisiana, the state 2 per cent 'luxury tax' enacted in 1936 was replaced in 1938 by a 1 per cent sales tax applied to the sale or use of tangible property with exemptions on the sale of livestock and other farm products sold directly by producers from farms. Sales of natural gas, steam, water, electricity, newspapers, and fertilizers also were exempt. The tax in New Orleans was similarly revised. Rate changes on certain commodities and the exemption of several goods from sales taxes were effected in 1938 in Mississippi, South Carolina, Kansas, Ohio, and New York City. No other important alterations in sales tax legislation were made during the year.

Trend toward Permanency.

The rapid development of sales taxation in the United States since 1930 was due partly to the shrinkage in revenue from other tax sources, and partly to the need for additional funds caused by demands for public relief to those who suffered from the prolonged business depression. The emergency character of these levies when originally passed is indicated by the fact that most statutes contained expiration clauses providing for the automatic termination of the levy. However, as these laws were renewed, many of them omitted these clauses, so that recent legislation appears to be of a more permanent character. Moreover, although the sales taxes were at first collected mainly for temporary welfare and relief programs, they have gradually been applied as a source of revenue for education, social security, or general fund purposes to relieve property tax burdens.

Support and Opposition.

Support of sales-tax measures has usually come from real estate interests, highway interests, state employees, political leaders, and other groups which would stand to benefit either from uses of the revenues raised, or because of a shift in emphasis upon other tax sources. Opposition has been found principally among such groups as retailers, labor unions, and consumer associations.

In defense of sales taxes adopted by American states, it is said that from the fiscal and administrative standpoint they yield high, relatively stable revenues that are simply and economically collected. It is further argued that, because minute amounts are collected at the time of each purchase, the tax is almost burdenless or painless, and at the same time has the virtue of making everyone responsible for some contribution to government. Moreover, despite certain defects, in may be the only practicable way of raising needed revenue.

On the other hand, critics of sales taxation argue that it is a dangerous hidden levy which causes taxpayers to bear a burden which is frequently greater than they realize. The effect is regressive with respect to ability to pay, resulting in highest percentage burdens upon those with lowest incomes. To the extent that food, drugs, or other necessities are exempt, the tax, from this point of view, becomes more defensible. (See also TAXATION.)