I once heard a radio interview with a woman who said, “Sales tax is fair because everybody pays it. If they don’t want to pay sales tax, don’t buy things.” The woman on the radio was right: sales tax is fair, according to the definition of the word — “impartial, not marked by favoritism.” Everybody is treated exactly the same.
But sales tax is also regressive; it takes proportionally more from those with lower incomes. As an example, let’s compare two families. One family makes South Dakota’s average salary: $42,525. Another makes significantly more: $350,000. If the average family purchases $500 of goods each week, at Rapid City’s 6.5 percent sales tax rate, that family pays $1,690 in sales tax per year — nearly 4 percent of its annual income. For the same purchases at the same tax rate, the family making $350,000 pays less than half of 1 percent of its income. Does that seem fair?
The woman on the radio said that people could choose not to pay sales tax by not purchasing things. Really? People must purchase food. Although most states understand that taxing food hits lower income families harder and choose not to tax it, South Dakota still does. If that $500 is spent on groceries each week, our average family spends more than three weeks’ worth of groceries each year in sales tax. Consider a family that makes significantly less than the average salary. Sales tax eats up an even larger percentage of its income. Is that fair?
And here’s another problem with sales tax: it’s voluntary. If you’re a small businessperson, you are required to obtain a sales tax license and pay tax on the goods or services you sell. Does everyone do that? A friend of mine has referred to sales tax as “a cheater’s tax.” The Journal recently published an article about a “taxpayer” who owed the state of South Dakota $60,000 in sales tax. Does the person who cleans your house pay sales tax? Does the pet sitter who walks your dog? Ask next time.
Finally, sales taxes provide a significant source of funding for small towns. Although many small-town residents go to larger cities for big ticket items like cars, most people buy their groceries locally. The grocery store is, in many cases, the biggest source of sales tax in town. The state takes 4.5 percent of the 6.5 percent total sales tax, and leaves the remainder, usually 2 percent, to the city or town. That revenue pays many of the town’s bills. If South Dakota chose to remove the sales tax from food, many of those towns would find themselves in trouble. For example, Ipswich, S.D., population 926, receives nearly 43 percent of its total revenues from sales tax, and much of that is on food.
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Suggestions have been made that South Dakota could move the sales tax off food and increase the sales tax on other consumables to offset the loss. That, however, won’t help the small towns much, since those consumables are frequently purchased in bigger cities. How would small towns replace that revenue?
Good question. If the state continued to collect sales tax and redistributed it by population instead of by location where the tax was paid, the bigger cities would suffer. Many nonresidents shop in their stores and, in the process, use their streets, parks, venues and more. The additional sales tax revenue from those purchases helps to support maintenance of that infrastructure.
So, while removing the sales tax from food would be the fair thing to do, it would cause problems for many communities.
We clearly need another revenue solution.