Broadening the sales tax base to include all end-user goods and services and lowering the sales tax rate is consistent with sound tax reform, according to the report.
“As policymakers consider these and other tax reform proposals, they would do well to keep in mind the impact that certain taxes have on revenue stability and economic distortions,” said Tax Foundation tax counsel and director of state projects Joseph Henchman, who authored the report. “Corporate income taxes are the most volatile of the major tax revenue sources and are the most harmful tax for economic growth.”
The report examines year-to-year changes in state tax revenue among property, general sales, excise, individual income and corporate income taxes and found that the annual percentage changes varied the most among corporate income taxes. The standard deviation, a volatility measure analyzing whether the year-to-year percentage changes are about the same or whether there’s considerable variability, for corporate income taxes is 15.43 — nearly twice the amount for individual income taxes (8.10) and almost five times the amount for general sales taxes (3.16).
The standard deviation is 6.17 for property taxes, 2.81 for excise taxes and 5.02 for all taxes.
Another reform being considered is a gross receipts tax, which is imposed on all transactions and results in what economists call “tax pyramiding” as products move through the production process. Gross receipts taxes interfere with business investment decisions, leading to lower economic and job growth, according to the report.
The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.