Conservative Economic Guru Finds Sales Tax Fairness Would Spur Economic Growth

In the report “Pro-Growth Tax Reform and E-Fairness,” released late last week, Dr. Arthur Laffer, a leading proponent of conservative economics, and co-author Donna Arduin, a former budget director at varying times for California, Florida, New York, and Michigan, argue that implementing sales tax fairness is necessary to address a fundamental inequity in the free market and that it would spur economic growth. Laffer and Arduin also predicted that by 2022 additional revenues resulting from equitable sales tax collection could lead to 1.5 million new jobs.

“The 45 states with sales taxes could use the additional revenues from the collection of taxes on remote sales already in the sales tax base to lower other tax rates and reduce far more burdensome taxes,” the authors wrote. “This more efficient system and lower taxes would, in turn: increase state prosperity and employment.”

“This important study by Dr. Laffer bears out that sales tax fairness really is a bipartisan issue,” said ABA CEO Oren Teicher. “Supporters of e-fairness come from across the political spectrum, and they agree that the time has come to level the playing field. Sales tax fairness would take the government’s thumb off the scale and allow independent booksellers and other Main Street retailers to operate in a free market.”

The principles in favor of “addressing the online tax loophole and enacting policies that will jumpstart economic growth are straight forward,” Laffer and Arduin noted. “While online and other remote sales are subject to state and local sales and use taxes, they are often inaccurately perceived as ‘tax-free’ because the taxes legally owed on these purchases go largely uncollected by remote sellers…. Sales taxes and other broad-based tax regimes with fewer loopholes and lower rates are the least damaging taxes to state economies and state employment.”

The authors stressed that “reinvigorating” the economy should be the top priority for state and federal leaders. They noted that a decreasing sales tax base “has led to several inefficiencies that, on balance, diminish potential job growth and growth in gross state product.” The current sales tax inequity encourages consumers to buy from out-of-state retailers and it spurs them to use Main Street retailers as a showroom. “It’s a lose/lose situation for in-state retailers,” Laffer and Arduin said.

Any “pro-growth tax reform,” they wrote, should treat “out-of-state retailers on the same level playing field as in-state retailers, and the marginal tax rate should be reduced such that the total static revenues for the government are held constant or reduced. If done properly, expanding the state sales tax base by including Internet sales could reinvigorate economic growth.”

Importantly, Laffer and Arduin reported: “By allowing Internet-based sales taxes to be uncollected at the retail level, the states’ sales tax base is being inefficiently narrowed as residents make a greater amount of purchases from online retailers to avoid the tax than they optimally would without the existence of the tax distortion. Simply put, the current Internet tax advantage distorts the retail market against ‘brick and mortar’ retailers, and therefore creates additional economic costs. As long as closing the loopholes in the sales tax base is offset by lower rates, it’s a win-win for the economy.”