Even though a value-added tax is being debated in Washington, D.C., many analysts and observers believe the idea just won’t go anywhere. Even so, a federal value-added tax could have some major implications for states should it ever pass, experts say.
A value-added tax is a tax on goods and services as they move through the chain of production—at every stage—or when value is added. That tax is paid by businesses at every stage but is ultimately passed through to the end consumer. So in the end, the consumer pays the full tax at retail.
“I don’t think it’s going to happen,” said Bob McIntyre, director of the Washington, D.C.-based nonprofit advocacy group Citizens for Tax Justice, “because there are so many voters who wouldn’t like it.”
In May, word spread of discussions at the national level of a value-added tax. Some experts said a value-added tax could help pay for national health care or ease the nation’s growing debt.
“There is a growing awareness of the need for fundamental tax reform,” U.S. Sen. Kent Conrad from North Dakota said in an interview with The Washington Post. “I think a VAT and a high-end income tax have got to be on the table.”
There’s a value-added tax in more than 130 countries, according to The Washington Post. Value-added taxes range from 5 percent in Japan to 25 percent in Hungary, the newspaper reports.
Currently, the value-added tax on the national level is only being discussed as an additional tax—not as a replacement to the federal income tax, according to McIntyre. That’s another reason the proposal isn’t likely to go anywhere, he said.
Under a value-added tax that’s simply added on—not replacing any other taxes—consumers would pay the tax in addition to a federal income tax and state sales tax.
“If you put it together with state sales tax, the tax will be enormous,” McIntyre said.
But what if a national value-added tax proposal was passed?
McIntyre believes if an add-on value-added tax were to pass, it would definitely affect consumer spending. People would just buy less, he said. That’s simply because goods and services would cost more with the additional tax, he said. State revenues might take a hit as well, he said, if consumer spending declines.
Arizona Rep. Russ Jones also doesn’t think the idea of a national value-added tax will amount to much. Jones thinks the proposal for a national value-added tax would have ripple effects for consumer spending that would not only affect state tax revenues, but also tax revenues for cities.
“If (the value-added tax) is an add-on for federal, the reduction in sales will certainly impact the cities,” he said. Consumers are going to buy less and “when people buy less, that also means the cities that collect part of the sales tax will get less also.”
With what would amount to basically a federal sales tax, a national value-added tax combined with state sales tax would be “really complicated” when there are two separate systems, McIntyre said.
For now, his organization believes the issue is moot and isn’t taking any action on the issue. “I won’t treat it as a serious proposal at this point,” he said.
Jones, however, is toying with the idea of a value-added tax on a state level. Just as huge revenues from a national value-added tax may tempt the federal government, he said Arizona could benefit from a state-level value-added tax and the additional revenue it could bring for the state.
“It doesn’t take a lot of a value-added tax to generate significant amounts of revenue,” Jones said.
There’s nothing formal in the works when it comes to a state-level value-added tax proposal, Jones said, but “it’s one of the ideas under the umbrella discussion of revenue reform.”
If Arizona seriously explores that idea, he said, the state might be able to reduce or eliminate corporate income tax and even the state’s sales tax.
And with stimulus dollars running out in 2010 and beyond, Jones said states need to start rethinking where their revenues will come from to run state government.
“Unless we’re prepared to substantially curtail government, we’re going to need additional revenue to replace what we’re going to lose in order to maintain the status quo,” Jones said. “The discussion is there—Arizona needs to have this discussion—we need to step back and look outside the box from our traditional revenue streams.”