NJ Fiscal Folly

Wednesday, June 21, 2006

NJ Sales Tax Reform

New Jersey Policy Perspective, the liberal policy group, has just issued another interesting paper, "Making The State Sales Tax Pull Its Weight".

The paper provides a broad overview and comparisons of various states' sales taxes. After briefly summarizing NJ's sales tax history, the report then analyzes NJ sales tax features and shortcomings.

The paper basically concludes with a single recommendation: NJ should retain the current 6% sales tax rate, but should try to eliminate most of the sales tax exemptions that currently exist, particularly the many categories of services that are now untaxed. The paper points out that services now account for 58% of Americans' consumer spending.

As you may recall, Gov Corzine's budget proposal currently includes a similar expansion of taxable activities, which is projected to yield $330 million in additional yearly revenues.

The NJPP report claims that elimination of all exemptions could produce $5.6 billion per year in additional sales tax revenues. However, this figure includes the following categories and estimated sales taxes:

(1) Gasoline and other motor fuels ($928 million)

(2) Food products ($922 million)

(3) Clothing ($680 million)

(4) Consulting and lobbying services ($462 million)

(5) Legal services ($449 million)

(6) Computer systems design ($381 million)

(7) Architectural, engineering and related services ($379 million)

(8) Accounting, tax preparation, etc ($297 million)

The paper includes a table in the appendix which shows how many states currently tax various categories of services. For the most part, taxation of services is fairly widespread, except for professional services, which are rarely taxed.

If you can concede for a moment that spending cuts alone will not balance next year's budget, then NJPP's recommendation (and Corzine's budget proposal) makes sense. Sales tax reform would also help reduce NJ's dependence on income taxes and property taxes. The paper is probably too optimistic about the potential expansion of taxable goods and services, but the general idea seems correct. It's also nice to see that NJPP's proposal falls outside the usual liberal "tax the rich" rhetoric.

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