What Should be Included in a State’s Sales Tax Base?

March 6, 2019

Project Summary

As in many states, Utah is currently in a discussion about modifying its tax system to minimize its economic costs while still raising a roughly equal amount of tax revenue – a so-called revenue-neutral policy change. One way of accomplishing that goal is by expanding the sales tax base and using the additional revenue to reduce the sales tax rate (or lower other tax rates or eliminate harmful taxes).

But what is the right sales tax base? Economists have studied the issue closely and agree on several basic principles. Above all, economists argue that a sales tax should cover all final consumption, including both goods and services, unless good reasons exist to exempt individual goods or services. Common motivations for exemptions that we discuss include the potential for consumption taxes to fall most heavily on low-income people (called a regressive tax), when goods are business inputs, and Utah’s near total exemption of services from taxation.

Tax policy researchers across the political spectrum agree that narrow, targeted policies (such as tax credits) are usually a better way to address the regressive nature of the tax than blanket exemptions. Current policies exempting services and partially exempting groceries are unlikely to effectively minimize the tax burden on Utah’s consumers. More targeted policies combined with a broad tax base and low tax rates may achieve the same levels of public revenue at a much lower fiscal and economic cost.

Project Authors