By Susan Redden
sredden@joplinglobe.com
Imagine taking home all your pay, save that held out for elected health insurance or other benefits. No federal income tax is withheld. No state income tax, either. No Social Security or Medicare deductions.
That’s the idea of the proposed “fair tax,” with government revenues generated by a broad-based sales tax on products and services instead of a tax on income.
Now imagine paying that sales tax on all purchases, including prescriptions, which are now exempt. And not just on goods, either, but on services such as a haircut or a visit by the plumber. And you’d pay that sales tax even on a newly-built home.
The pros and cons — or more accurately the plusses and minuses — of each tax leave a lot of room for debate, but what proponents label a “fair tax” is gaining ground. A rally for supporters of a nationwide sales tax to replace the current income taxes drew thousands of residents to Columbia last weekend. A similar plan at the state level attracted enough support that a resolution calling for a statewide vote was approved by the Missouri House of Representatives in the last session. It died in the Missouri Senate for lack of a vote at the end of the session.
‘Real stimulus’
Greg Wilks, of Carl Junction, is convinced that a nationwide sales tax would meet the nation’s financial needs, address the looming insolvency of the Social Security and Medicare programs, and turn around the nation’s trade deficit.
“You’d get rid of all the payroll taxes, corporate taxes and capital gains taxes, and replace it with a 23 percent consumption tax you’d pay on any new goods, or services like a doctor’s visit, haircut, whatever,” said the retired school teacher.
He said the shift would produce additional revenues for Social Security and Medicare because those taxes are only assessed on payrolls.
“Now, only 160 million are paying into that system, but with a consumption tax, everyone pays, including those not involved in making an income, visitors and aliens who are in our country illegally,” he said.
Payroll and other tax costs that are now “hidden,” or built into the price of U.S. goods, would disappear and make exports more competitive, Wilks said. And the elimination of other taxes would prompt the return of money sheltered in other countries.
“It would also bring back companies from overseas who would build factories and employ American workers who would make and spend money,” he said. “That would be a real stimulus check.”
Wilks also said another advantage is that the fair tax would be more transparent, while the current tax code “is filled with thousands of provisions that benefit just a few people.”
He said he calculated his costs under the “fair tax” plan compared to tax returns filed each April, on the $79,000 in income he and his wife earned as retired teachers, plus a part-time job that she holds.
“There would have been $13,000 more in my pocket,” he said.
State plan
State Rep. Ed Emery, R-Lamar, sponsored two measures on behalf of a Missouri version of the “fair tax” including one calling for the change to be put before voters. He also was a speaker at the Columbia rally, along with U.S. Rep. John Linder, R.-Ga., sponsor of national “fair tax” legislation, and radio commentator Neal Boortz, who, with Linder, helped author the plan. It calls for all income, employment, estate and gift taxes to be repealed, with revenues to be replaced by a 23 percent consumption or sales tax on all new goods and services.
The Missouri plan proposes eliminating all state income and withholding taxes on individuals and businesses, and replacing those revenues with money generated by a 5.11 percent consumption tax on all goods and services. The statewide income tax is 6 percent.
Both the state and national plans call for “prebates” — monthly payments to low-income families to offset the tax paid on basic necessities — which proponents say would address concerns that more of the tax burden would be borne by poor families who spend most of their income on food, rent and utilities.
If the Missouri fair tax plan was implemented along with the national model, the state’s tax rate would drop to 4.8 percent, Emery said.
“The national tax would make our state tax more effective, but it needs to be done nationally, because all the states would benefit. If we pass it, neighboring states will have to, because they won’t be able to compete with us in attracting industry, new jobs and people who want to retire here.”
John Putnam, of Carthage, and co-director of Fair Tax for Missouri, said the plan’s passage in the House of Representatives has put Missouri in the lead among groups wanting their state to be first in adopting the tax plan on a state level.
Putnam said nearly 20,000 Missouri residents have signed petitions in support of the national tax proposal. Interest in the plan is growing, he said, noting that 50 spoke in favor at a hearing in the Missouri Senate and that the measure attracted 31 co-sponsors in the House. That list included state Reps. Marilyn Ruestman, Joplin; Bryan Stevenson, Webb City; and Tom Flanigan, Carthage. All are Republicans.
Stevenson said he signed on as a co-sponsor “to help get discussion going because we need to broaden the tax base and lower the tax rate.
“It would tax consumption, rather than accumulation, and encourage savings,” he said. “At the same time, I have real concerns because so much of the state’s population lives close to the state line, that a lot of people would just cross the line and shop in other states.”
Emery said he believes lower prices would offset the higher consumption taxes. Since the consumption tax would only apply to individuals, businesses would not pay taxes on materials they use in manufacturing, or on profits.
“If voters approved, the tax would take effect in 2012,” he said. “That would give states around us time to catch up and I think they would, because the overall impact on the state’s economy would be so positive.”
Proponents also noted that nine states don’t assess income taxes.
“They all perform at the top of the list when it comes to economic development,” Putnam said.
Opposition ‘ramps’ up
“They don’t have income taxes, but Nevada and Florida tax tourism and gamblers. Wyoming, Alaska and Texas get a lot of revenue from coal and oil, and South Dakota, Tennessee and Washington assess fairly high sales taxes,” said Tom Kruckemeyer, a leading critic of the state tax alternative.
“Missouri can’t replicate those states and there’s no systematic evidence that states without income tax are more economically viable.”
The proposals are unworkable, unrealistic and far from “fair,” he said.
“If that’s a fair tax, I need a new dictionary,” said Kruckemeyer, who is chief economist with the Missouri Budget Project, a non-profit group that works to advance public policies that improve economic opportunities for all Missourians, particularly low and middle income families. He also was chief economist for the Missouri state budget office for 26 years. “There would be a nice tax cut for those with higher incomes, but the majority would actually pay higher taxes.”
In addition to the Missouri Budget Tax, questions on the tax have been raised by representatives of the National Institute on Taxation and Economic Policy and the American Association of Retired Persons, which joined together for a press conference prior to the rally last weekend in Columbia.
“The fact it passed the (Missouri) House shows it’s being seen as a serious proposal. That’s why we decided to ramp up our work and get the word out that it sounds too good to be true,” Kruckemeyer said.
He said the state plan would have to impose a higher rate than the 5.11 percent suggested to meet the revenue target.
“Missouri gets 73 percent of its revenues from the taxes they propose to eliminate. This isn’t tweaking, it’s a pretty seismic reworking,” he said.
The consumption tax also would have to generate $5.8 billion to replace the tax revenues lost, plus money to cover the costs of “prebates” for low-income families.
“Now, the state sales tax generates less than 25 percent of state revenues and collections declined 6.5 percent this year,” he said. “We think the rate would have to be closer to 9 percent.”
He said he doubts there is a broad-based understanding of the tax, including the fact that it would include products and services such as nursing home fees, medical and legal services, rent, health insurance and college tuition.
“There will be a lot of lawyers packing up and moving across the state line,” he said.
Concept and intent
Rep. Marilyn Ruestman said she “favors the concept and intent” of the plan but has grown concerned because she has heard proposals to include exemptions from the tax.
“It needs to be all-inclusive. If we start exempting some things and not others, we’re back where we started,” she said.
House Speaker Ron Richard, R-Joplin, said he voted for the tax proposal, “though I’ve never been clear how you would make the transition from one system to another.”
“We need discussion on taxes and tax policy,” he said. “The House particularly is mindful of tax and tax reduction, and if this fits into that dialogue, we’re happy to proceed.”
Richard said he expects the measure will be introduced and approved in the House again next session.
“There’s going to be a couple of other tax proposals, one to reduce income taxes, and I’m trying to get through some property tax relief,” he said.
State Sen. Gary Nodler, R-Joplin, said he likes the idea of “doing away with filing a state tax return, and a tax that would address the underground economy.
“My sense is the idea has broad-based public support,” he said. “It’s legislation I’d probably support, but I’d have to see how the bill is written.”
Emery said a companion bill to House legislation on the tax “will be introduced early on in the Senate next year, so we can answer questions and resolve issues early in the session.”
