Sales Tax Slice: What are the Implications of Introducing a National Sales Tax?



Amid speculation over what tax reform will look like under President-elect Trump, Sen. Benjamin L. Cardin (D-Md.) has re-introduced his proposal for a federal consumption tax. Cardin’s bill (S. 3529) would dramatically alter the current structure of federal taxation not only by adding a value-added tax (VAT), but also by revising federal corporate and individual income taxes. Cardin contends that these changes would ease the burdens of administering and complying with federal income taxes for many Americans; however, the difficulties many states have faced in collecting sales tax revenues indicate that moving towards a consumption-based, rather than an income-based, tax system would create a new set of administrative problems.

Cardin’s bill, dubbed “The Progressive Consumption Tax Act” would enact a VAT at a rate of 10 percent on almost all purchases of goods and services in the U.S. This would be accompanied by a reduction in the corporate income tax rate to 17 percent, as well as a massive decrease in the number of Americans liable for individual income tax. 

Cardin refers to his iteration of a VAT as a “progressive consumption tax” because rebates from the consumption tax would be offered to low- and moderate-income filers. The proposed rebates are based on income and the number of children claimed as dependents. Although the majority of households would be exempt from income tax under this plan, taxpayers would still be required to file an annual return to verify eligibility for the income tax exemption and consumption tax rebates.

Cardin has argued that enacting his version of a consumption tax would reduce the costs of tax compliance and administration. Even if this is true, few states would agree that consumption-based taxes are easier or less costly to administer than individual income taxes. States have historically struggled to collect revenue on items purchased out-of-state or over the internet from out-of-state retailers. The states collectively lose an estimated “$23 billion every year in uncollected sales tax from web and catalog purchases” alone. This obviously would be less of an issue for the federal government, but Americans purchase items while traveling internationally, often to save money compared to the U.S. prices on similar items. A federal consumption tax could further incentivize such purchases, leading to lost revenue for not only the federal government, but for the states as well.

The Senate is not expected to take action on the bill before the end of the lame-duck session. Cardin is currently soliciting feedback as part of his plans to re-introduce “The Progressive Consumption Tax Act” in the 115th Congress.

Though contemporary congressional treatment of similar proposals suggests the bill’s passage is unlikely, it does raise interesting questions about what types of reform would appeal to both Democrats and Republicans on the Hill and gain support from the Trump administration.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think a consumption-based tax is likely to gain any traction in the upcoming congressional session?

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