Consumers’ Share and Producers’ Share of the General ?· Consumers’ Share and Producers’ Share…

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<ul><li><p>Consumers Share and Producers Share</p><p>79</p><p>Abstract - We estimate, for each state with a general sales tax, thepercentage of that tax that is levied directly on final consumptionspending of the states residents. State by state, the consumers shareranges from 28 to 89 percent. For all states together, it is 59 percent,findings that generally agree with expectations and with otherestimates for single states. Most of the remaining sales tax is onproducer inputs. Between 1979 and 1989, the consumers share in-creased for 28 states, fell for 17 states, and was unchanged in 1state.</p><p>INTRODUCTION</p><p>While the state general sales tax is a tax on final consumption, its base also includes substantial sales to busi-nesses, raising the specter of tax pyramiding/cascading. Sup-pose, for example, that a state taxes electricity used in pro-duction. Depending on market conditions, a manufacturersproduction costs, and ultimately its selling price, might in-clude tax already paid. Taxing the output at retail imposes atax more than once on the same piece of value added(Graeser and Maury, 1992).</p><p>Besides current production costs, state and local sales taxesextend to the acquisition of capital assets. They are far fromuniform across investments (Joulfaian and Mackie, 1992).Joulfaian and Mackie found that national average effectivesales tax rates for different types of business equipment andstructures varied from 5.9 percent to zero. State-to-statedifferences in tax rates and in taxation or exemption of capi-tal purchases add further distortions, especially in locationdecisions. These and other examples (such as tax incidenceand tax exporting) illustrate the importance of recognizingthat sales taxes affect business purchases, as well as con-sumption, and of knowing the amount of sales tax on eachpart.</p><p>This paper reports estimates, for each state with a generalsales tax, of how much of that tax was levied on personalconsumption spending of in-state residents in 1989. (Hereand henceforth, reference to states with a general sales taxincludes the District of Columbia.) These update my earlierestimates for 1979 (Ring, 1989), incorporating several im-</p><p>Consumers Share and Producers Shareof the General Sales Tax</p><p>Raymond J. Ring, Jr.School of Business,University of SouthDakota, Vermillion, SD57069</p></li><li><p>NATIONAL TAX JOURNAL</p><p>80</p><p>provements in data and methodology. Thenext section briefly explains the improve-ments and shortcomings. The section af-ter that contains the estimates and ananalysis of them. The paper concludeswith a summary and conclusions.</p><p>METHODOLOGY</p><p>The consumers share of the generalsales tax (SHARE) is given by</p><p>[1] SHARE = CP/(CP + BP)</p><p>where CP represents sales tax on pur-chases by resident consumers and BP rep-resents other sales tax revenue. BP in-cludes primarily business purchases, butalso any other items a state taxes, such aspurchases by governments and nonprofitorganizations. For a thorough discussionof SHARE and the factors that affect it,please see Ring (1989).</p><p>To estimate each states SHARE in 1989,we used 1990 U.S. Census data on thenumber of each states households in 1989income classes (U.S. Department of Com-merce, 1993), Consumer Expenditure Sur-vey (CES) tabulations of average 1989spending by consumer units in eight in-come classes (U.S. Department of Labor,1991, Table 1), and information on howeach state defines its tax base. (AppendixB lists sources of state-specific informa-tion.) See Ring (1989) for a detailed expla-nation of the methodology and elabora-tion of its advantages and shortcomings.The major advantage is the ability to ac-count for state-to-state differences, provid-ing consistent estimates of SHARE for allstates.</p><p>Improvements</p><p>This study incorporates several im-provements over my earlier work. Theearlier study used 19723 CES dataupdated to 1979 (Ring, 1989); the esti-mates presented here incorporate actual</p><p>1989 CES data. This is unlikely to greatlyaffect the results, but does increase confi-dence in the estimates.</p><p>This update also includes several refine-ments in how each state defines its salestax base. Ring (1989) fit all states into gen-eral tax base categories according towhether they taxed or exempted food athome, clothing, utilities, and gasoline.This update retains those general catego-ries, but distinguishes state-by-state treat-ment of four utilities (electric; natural gas,fuel oil, etc.; water and sewer; and tele-phone), instead of treating each state astaxing or exempting all utilities. Ring as-sumed that all states taxed the sameconsumer services: a few services taxedby nearly all states in 1979. Greater detailin the 1989 CES (70 spending categoriescompared to 41 in the 19723 CES) allowsus to account for each states treatment ofnine categories of consumer services. Wealso now include more precise treatmentof alcohol, tobacco, prescription drugs,and nonprescription drugs. Table 1 indi-cates the broad categories into which eachstate falls; the finer distinctions used forutilities, services, alcohol, etc. are availableupon request.</p><p>We also treated unrelated individualsdifferently for this study than for the ear-lier one. Earlier, we used the number ofunrelated individuals (from the Census)directly, treating each as a consumerunit as defined in the CES. For this study,we distinguish financially independentconsumer units from those that pool theirincome. Appendix A explains this adjust-ment. Without it, the number of consumerunits (and thus estimated consumerspending) would be understated.</p><p>The CES spending figures include salesand excise taxes; without adjustment, ourmethodology would overestimate theconsumers part of the sales tax base. Ad-justing Joulfaian and Mackies 1987 esti-mates (1992), we find the weighted aver-age state and local rate (weighted by grossstate product (GSP)) for states with a gen-</p></li><li><p>Consumers Share and Producers Share</p><p>81</p><p>EDHCBABBJGECFDEBHBBAFAEEDBAHCHBBEAAEHEBEBEBEBH</p><p>TABLE 1CONSUMERS SHARE CALCULATIONS FOR 1989</p><p>AlabamaArizonaArkansasCaliforniaColoradoConnecticutWashington, D.C.FloridaGeorgiaHawaiiIdahoIllinoisIndianaIowaKansasKentuckyLouisianaMaineMarylandMassachusettsMichiganMinnesotaMississippiMissouriNebraskaNevadaNew JerseyNew MexicoNew YorkNorth CarolinaNorth DakotaOhioOklahomaPennsylvaniaRhode IslandSouth CarolinaSouth DakotaTennesseeTexasUtahVermontVirginiaWashingtonWest VirginiaWisconsinWyoming</p><p>TotalaTax base key:</p><p>A: exempt food, clothing, utilities, gasolineB: exempt food, utilities, gasolineC: exempt food, utilitiesD: exempt food, gasolineE: exempt utilities, gasolineF: exempt foodG: exempt utilitiesH: exempt gasolineJ: exempt none</p><p>TaxBasea</p><p>73506053605844506428626854596754515760625856666460446250666260666664596161635363567049896254</p><p>59</p><p>ConsumersShare</p><p>(Percent)</p><p>970.81,794.8</p><p>756.212,681.4</p><p>733.32,066.6</p><p>434.06,930.12,264.71,006.2</p><p>351.83,765.72,475.1</p><p>883.2799.4</p><p>1,230.51,443.4</p><p>461.51,836.21,902.53,137.01,974.41,022.91,743.9</p><p>470.3666.7</p><p>3,016.9848.1</p><p>5,793.91,672.7</p><p>234.33,401.8</p><p>936.73,947.2</p><p>377.21,315.4</p><p>247.22,194.08,055.9</p><p>667.0152.7</p><p>1,585.53,088.4</p><p>554.71,833.4</p><p>142.6</p><p>95,888.0</p><p>TotalSales Tax</p><p>($m)</p><p>709.5893.4454.0</p><p>6,679.5441.2</p><p>1,205.8191.8</p><p>3,448.51,438.7</p><p>280.6218.9</p><p>2,574.41,348.3</p><p>519.5535.1666.8737.0264.8</p><p>1,104.71,176.31,833.51,112.9</p><p>672.91,119.5</p><p>283.2294.2</p><p>1,857.2428.1</p><p>3,818.71,036.5</p><p>141.52,258.1</p><p>616.42,533.0</p><p>222.7801.4149.6</p><p>1,391.24,296.1</p><p>421.185.7</p><p>1,115.61,505.4</p><p>4961,136.9</p><p>76.6</p><p>56,560.5</p><p>ConsumersSales Tax</p><p>($m)</p><p></p><p>TaxRates</p><p>(Percent)</p></li><li><p>NATIONAL TAX JOURNAL</p><p>82</p><p>eral sales tax to be 6.06 percent in 1989.1</p><p>To account for the over-estimate, we di-vided each states estimated consumersales tax base by 1.0606.</p><p>The CES figures also include travelspending, so our CP estimates (as describedso far) include what each states residentsspent out of state. State sales tax revenuesinclude taxes paid by nonresidents, whichare thus included in BP. To adjust for bothof these, we used Mutti and Morgans(1983) estimates of General Sales TaxesPaid by Residents Traveling Out-of-Stateand General Sales Taxes Paid by Out-of-State Travelers, adjusting them to accountfor state taxes only and for growth between1980 and 1989. This adjustment removesone of the sources of uncertainty in howclosely BP approximates business pur-chases, leaving government and nonprofitpurchases as the only potentially signifi-cant elements besides business purchases.</p><p>Limitations</p><p>This study suffers from several limita-tions. Due to the absence of state-specificCES data, we must attribute nationalspending patterns to each state. For morediscussion of this problem, please see Ring(1989).2 The CES under-reports consumerspending, which in itself might be ex-pected to result in underestimates ofSHARE. However, both the Census andthe CES suffer from under-reporting ofincome. Absent any good way to adjustfor these problems, we must hope thatthey are roughly offsetting.</p><p>The adjustment to reconcile Censushouseholds and CES consumer units(Appendix A) should provide better esti-</p><p>mates (than were in Ring (1989)) of thenumber of consumer units in each incomeclass. Unfortunately, there is no clear wayto adjust for the fact that CES consumerunits will have lower incomes (and thusspend less) than will Census nonfamilyhouseholds. Consequently, this methodstill somewhat overstates spending. Themagnitude of this overstatement shouldbe relatively small.3</p><p>FINDINGS</p><p>We turn now to the findings, how theycompare to independent estimates andhow SHARE changed between 1979 and1989. As Table 1 shows, in 1989, SHAREranged from a low of 28 percent in Hawaiito a high of 89 percent in West Virginia,and averaged 59 percent for all states. (Fig-ure 1 illustrates regional variations in thevalues of SHARE.) All estimates meet thesimplebut criticala priori conditionthat they be less than 100 percent.</p><p>Comparison to 0ther Estimates</p><p>Given the uncertainties discussedabove, it is important to test our method-ology by comparing these estimates toindependently produced ones for singlestates. Santi (1994), using a method muchlike ours, but more aggregated data, esti-mated the 1989 consumers share to be61.7 percent for Arkansas, close to our 60percent. The Minnesota Department ofRevenue (1993), using a somewhat differ-ent technique, found a 1990 consumersshare of 54 percent for sales tax and mo-tor vehicle excise tax together (which isconsistent with the method used here);</p><p>1 Joulfaian and Mackie (1992) estimated 1987 local general sales tax rates for each state and added statutorystate rates. We used state rates and kept Joulfaian and Mackies local estimates, to estimate effective state andlocal rates for states with a general sales tax. (Effective local rates probably also increased slightly between1987 and 1989.) Our estimate of 6.06 percent in 1989 for states with a general sales tax compares to theirfinding of 5.89 percent for all states in 1987.</p><p>2 Another possible approach would be to use regional CES spending data. However, each of the four regionsreported in the CES includes widely different states, and it is not clear that regional averages approximateindividual states spending any better than do national averages.</p><p>3 Nationally, nonfamily households account for about 40 percent of total households.</p></li><li><p>Consum</p><p>ers Share and P</p><p>roducers Share</p><p>83</p></li><li><p>NATIONAL TAX JOURNAL</p><p>84</p><p>this is also close to our 56 percent estimatefor Minnesota. Derrick and Scott (1989),using a technique comparable to thatused in Ring (1989), found a 44 percentconsumers share for Maryland in 19867, substantially different from our 60 per-cent. Derrick and Scott did not includevehicle purchases in their estimates; wedid include vehicle purchases, but thisdifference is unlikely to account for thediscrepancy. It appears from their descrip-tion that they used more aggregated data.It is not clear whether they used 19867household distribution figures or unad-justed Census figures for 1979. If the lat-ter data were used, that could explain theirlower estimate.</p><p>In the only other application to all statesof a methodology roughly similar to thatused here, Uhimchuk estimated percentof Sales Tax Falling on Consumer Pur-chases in 1982 (1986). Uhimchuks val-ues range from 33.80 percent (Wyoming)to 85.89 percent (West Virginia), with a na-tional average of 61.57 percent.4</p><p>Several authors have directly estimatedthe producers share.5 In making compar-isons, it is important to keep in mind thatthe implied producers share generatedhere (1.0 SHARE) includes sales to gov-ernmental and nonprofit entities (for thosestates that tax them). A Texas study foundabout 46 percent producers share for</p><p>that state in 1987. (Texas Business Taxes,1988). Using a Dynamic AnalysisModel, Clayton-Matthews (1993) esti-mates that Massachusetts businessespay roughly 22% of total sales and excisetax revenues. A study of Iowa found aproducers share of 39 percent (Due andMikesell (1994), citing a study by KPMGPeat Marwick). It is not clear whetherthese estimates include sales to nonbusi-ness entities; except for Massachusetts,they probably do not include sales to non-resident consumers.6 For Texas and Iowa,the sums of SHARE and these indepen-dently developed estimates of producersshare are close to 100surprisinglyconsistent, given the widely varyingmethodologies. The Massachusetts esti-mate is less consistent.</p><p>Producer Exemptions</p><p>Everything else equal, states with moreconsumer exemptions have lower valuesof SHARE. However, Table 2, with statesarranged by consumer tax base categories,reveals no such relationship. The Exemp-tions columns show why: states thatexempt more consumer purchases alsotend to exempt more business purchases.7</p><p>Table 2 also shows that, within consumerexemption categories (i.e., holding con-stant those legal provisions that affect CP),</p><p>4 Uhimchuk (1986) used less detailed and more aggregated data (e.g., average income for each state, while weused eight income classes). Uhimchuks data sources were less closely related to what was being measured.</p><p>5 For earlier estimates not discussed here, see Ring (1989).6 Mutti and Morgan (1983), using travel data, broken down by the place of a trips origin estimate General</p><p>Sales Taxes Paid by Out-of-State Travelers at 3.9 percent of total general state and local sales taxes in 1980, forall states together. For individual states, the proportion ranges up to about 11 percent for Hawaii, Nevada,and Washington, D.C. (calculated from their Tables 1 and 2).</p><p>7 In the Exemptions columns of Table 2, states indicated by X define the sales tax base more narrowly; thatis, they define the exemption more broadly, as follows.</p><p>DU (direct use/ingredient test): States with X allow exemptions for business inputs directly used in pro-duction of items that will then be subject to the sales tax. Other states exempt only items that become aphysical ingredient of the final product. All states exempt purchases for resale (Fisher, 1996). See also Dueand...</p></li></ul>


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