Conservative economist Dr. Arthur Laffer has co-written a study that identified a positive economic impact in efforts to require online retailers to collect sales taxes from customers on Internet purchases.
The study was released by the Alliance for Main Street Fairness, a group that has been pressing for passage of the Marketplace Fairness Act, which was passed by the Senate in May, but has not yet been voted on in the House (see Senate Passes Internet Sales Tax Bill). Laffer’s research contended that the sales tax has the least harmful impact on the economy. He is a former member of President Reagan’s Economic Policy Advisory Board and is credited with popularizing the supply side economics concept of the Laffer Curve. He conducted the study with Donna Arduin, a former state budget director under Republican governors in Michigan, New York, Florida and California, and currently president of Arduin, Laffer, & Moore Econometrics.
Their study argues that enacting policies to collect online sales taxes would jumpstart economic growth across the country. The study projects potential increases in gross state product and state employment over the next decade based upon Internet sales tax revenues being used to reduce the burden of other taxes in each state, leading to increases in state prosperity.
“There are two types of incentives that exist in this world in economics,” Laffer said in a conference call with reporters Thursday. “There are positive incentives and there are negative incentives. By way of illustration, if you beat a dog, you know where the dog won’t be. It won’t be where you gave it the beating, but you have no idea where the dog will be. That’s a negative incentive. If on the other hand, you feed a dog, it’s a positive incentive and you know where the dog will be.
“If you look at taxes, taxes are a negative incentive,” he added. “They tell people what not to do: do not report taxable income, whether you go out of business, move to another location, evasion, avoidance, underground economy, whatever. So the taxes are a negative incentive and when you look at this, what you want to do in your state or in your country is you want to have a low-rate flat tax and broadly based flat tax. The low rate being that you provide people with the least incentive to evade, avoid or otherwise not report taxable income, and a broad-based tax to give them the least places to which they can escape. When you look at state and local governments combined, there is one tax that I think fits this bill very, very well. It’s a low-rate flat tax, and the ideal with the lowest possible base is the sales tax. The sales tax in states—especially when they have the least number of deductions, exemptions and exclusions—fits the bill in my view for the optimal tax for states. All taxes are bad. Some are a lot worse than others, but governments need to collect the requisite revenues to carry out their functions in state and local areas as well.”
In the study and in his book “Eureka,” Laffer said he looked at the total tax burden among the nine states with the lowest tax burden and the nine states with the highest tax burden, as defined by the Tax Foundation. He found that the nine states with the lowest tax burden (with an average state and local tax burden of about 7.8 percent) far outperformed the nine states with the highest tax burdens (with an average tax burden of 11.3 percent). The states with the lowest tax burden averaged 66.1 percent growth in gross state product from 2000 to 2010, while those with the highest tax burdens grew 40.7 percent over the course of the decade.
“The most neutral tax of all is the sales tax,” said Laffer. “My paper assumes that any increase in the use of the sales tax is used to offset far more damaging taxes. I’ve taken each and every state and I’ve looked at their sales taxes and then I’ve included the Internet sales on the sales tax base, and remote sales on the sales tax base as well, and I’ve assumed that each and every state has properly used the increased sales tax revenues to reduce other tax burdens to get a far more proper growth in the state.”
Laffer acknowledged that many states such as Massachusetts and California would probably not use their sales tax revenues “correctly,” but he assumed that if they did, they could improve their growth rates dramatically.
Laffer argued that avoiding taxes on Internet sales would not reduce state and local taxes. “If you look at the past 11 years, even with Internet sales not being taxable and remote sales not being taxable, we’ve had total state and local tax increases in 10 of those 11 years,” he pointed out. “That has not put a lid on state and local taxes. Even if you look at sales taxes, while retail sales as a share of state GDP have been declining dramatically, this has not stopped states from raising their sales taxes as well. Having been a longtime California resident, I can assure you that Proposition 13’s limit on property taxes did not stop California from raising taxes.”
He argued that if states use the funds correctly, they would add to national growth dramatically. “If they use these funds correctly to reduce more damaging taxes, GDP in 2022 in real terms could be $563 billion higher than it would have been if had we still excluded Internet sales and remote sales from any type of sales taxation. The employment effect, by 2022, if these proceeds are used correctly, my estimates come up that we would have 1.5 million additional jobs above what they otherwise would have been, if we allowed Internet sales and remote sales to be taxed and used those proceeds to reduce more damaging taxes. I go through all this by state, and I’ve looked at them all with a lot of different assumptions, but that’s the bottom line. Anytime you preclude the states from using a less damaging tax to replace a more damaging tax, you’re going to hurt economic growth in that state and in the nation as a whole.”
Arduin cited her experience in working with governors at the state level. “Especially during those times when the federal government’s fiscal policies are dampening the economy, to put it mildly, states really need to have the freedom to enact fiscal policies that can help them move forward even during times when the nation is not enacting good fiscal policies,” she said. “The last thing the federal government should be doing is to tell them they shouldn’t be doing those things if that’s what they want to do.”