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How
will the FairTax affect state taxation?
One of the more common concerns about the FairTax relates to its impact
on state taxes. As with virtually every area of public policy that
will be impacted by the proposal, the effect will be very positive.
It should be understood first that the trend toward sales taxes
and away from income taxes is well established at the state level.
That trend has been going on for more than 10 years; currently there
are 9 states which do not have an income tax, with several other
states considering theirs. That trend has been going on irrespective
of the FairTax and can reasonably be expected to continue. The states
which have depended on sales tax revenues for some time seem to
be as strong as, if not stronger, financially than their counterparts
who tax on incomes.
While the federal government does not now, nor would they under
the FairTax, have the authority to dictate to states how they will
collect their revenues, there are incentives built into the FairTax
plan which can logically be expected to accelerate the previously
discussed trend toward sales taxes at the state level. States which
contract with the federal government to collect the FairTax on behalf
of the federal government will be allowed to retain a fraction of
a percent for providing that service. Any state which wishes to
do so must "harmonize" its tax system with the FairTax.
The two most significant changes of harmonization are likely to
be 1) elimination of its income tax, and 2) applying its sales tax
to services. Services account for approximately 50% of our economy.
Therefore, the expansion of the sales tax base to include services
will roughly double the tax revenue for those states which levy
a sales tax on goods only at the present time. Expanding the base
on this order of magnitude will exert downward pressure on rates
and/or enable states to address other problematic tax issues, such
as property taxes.
We believe, then, that most states will voluntarily harmonize their
tax systems with the FairTax and that they will enjoy greater fiscal
strength and stability as a result. We also believe that most Americans
will be able to enjoy receiving a paycheck that has no involuntary
deductions.
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