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1 Nicole Kaeding, Sales Tax Base Broadening: Right-Sizing a State Sales Tax 1 (2017)

handle is hein.taxfoundation/stxbroad0001 and id is 1 raw text is: FISCAL FACT No. 563 Oct. 2017 The Tax Foundation is the nation's leading independent tax policy research organization. Since 1937, our research, analysis, and experts have informed smarter tax policy at the federal, state, and local levels. We are a 501(c)(3) non profit organization. ©2017 Tax Foundation Distributed under Creative Commons CC BY NC 4.0 Editor, Rachel Shuster Designer, Dan Carvajal Tax Foundation 1325 G Street, NW, Suite 950 Washington, DC 20005 202.464.6200 taxfoundation.org Sales Tax Base Broadening: Right-Sizing a State Sales Tax Nicole Kaeding' Economist Key Findings Most state sales tax bases are smaller than ideal. The median state sales tax base only includes 23 percent of personal consumption. Sales taxes should tax all final personal consumption. States frequently exempt consumer goods, such as clothing and groceries, but these blanket exemptions are ineffective ways to lessen the regressive nature of sales taxes. Due to historical accident, most states do not tax services in a notable way. States should expand their state sales taxes to include consumer purchases of both goods and services. However, states should exempt business-to- business transactions. Expanding sales tax bases improves neutrality. Newly generated revenues can then be used to finance general fund programs or other tax reforms, including paying down reductions in the sales tax rate. If states are still concerned about the somewhat regressive nature of sales taxes, several policy options are more effective tools than blanket exemptions. Grocery tax credits, expanded Earned Income Tax Credits, or an increased standard deduction in an income tax would provide assistance without introducing the same degree of economic distortions. 1 The author thanks Isai Chavez for his research assistance and analysis.