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General Government Divisloa

B-236843

March 21. 1990

The Honorable Dan RostenkowslkChairman, Joint Committee on Taxation

The Honorable Lloyd BentsenVice Chairman, Joint Committee on TaxationCongress of the United States

This report provides an overview of state tax officials' concerns related to the enactment ofa broad-based federal consumption tax, as determined by a survey of state tax policymakersand administrators. The report was prepared, not at your request, but pursuant to GAO'S

basic statutory authority. We undertook the effort to assist Congress in its consideration ofoptions for reducing the federal budget deficit.

We are sending copies of this report to the Secretary of the Treasury and the Director of theOffice of Management and Budget as well as to appropriate congressional committees andmembers of Congress.

If you have any questions, please call me on 275-6407. Major contributors to this report arelisted in appendix VI.

Jennie S. StathisDirector, Tax Policy and

Administration Issues

pJDTIC' ELECTE f1JUN 2 8 0%95B4 B 2d

Sre'2 TYY

aE~cutive Summary.

The objective of this report is to provide Congress with an overview ofPurpose state tax officials' concerns related to the enactment of a broad-based

federal consumption tax-in the form of a federal retail sales tax or avalue-added tax. It presents the responses of state tax policymakers-Governors and their staff and chairs and staff of major tax policy com-mittees of state legislatures-to a GAO questionnaire on their preferredrevenue options for dealing with the deficit and their concerns regardinga broad-based federal consumption tax. In addition, it discusses taxdesign alternatives that may address these concerns. It also presents theresponses of state tax adminitrator to a separate GAO questionnaire onthe effects of a federal consumption tax on state tax programadministration.

GAO has previously issued several reports discussing consumption taxes.

Background These reports discussed the various types of consumption taxes. the

principal methods for calculating a value-added tax, and key tax policyissues U.S. tax policymakers would face if they consider a value-addedtax based on insights from the international experience.

A value-added tax is a consumption tax collected on the differencebetween a business' purchases and its sales, otherwise known as thebusiness' "value added." For example, if a business buys S150 worth ofmaterials and equipment and produces a product that sells for $200. itsvalue added is $50. A 5-percent tax on the value added to this productwould yield $2.50 in tax revenue. The United States has very limitedexperience with value-added taxes, but they are widely used in othercountries.

A retail sales tax is collected on the total price of a good or service at theLo0S?8 T time it is sold to the final consumer. Forty-five states have a retail sales

I tax, and in 1987 state revenue from general sales and gross receipts

X ý XAB 1ced C3 taxes amounted to 32 percent of overall state tax revenue.•nnom~ced

1.a Retail sales taxes and value-added taxes are collected at different stages

of the production and distribution process. A retail sales tax is collectedYB IRVonly once, when a good or service is sold to a consumer. A value-added

tax is collected at various stages of production and distribution. BothS...... taxes could raise about the same amount of revenue given the same tax

all W rate and tax base.

Ie oi Visp' moPa"O 2 GAOIGGDO0MJ Statw Orqd&W' Comsuxodpt Tax Concern

Results in Brief When asked what potential revenue sources the federal governmentshould use to reduce the deficit. .54 percent of the policymakers selectedexisting federal taxes exclusively; 8 percent selected a broad-based fed-eral consumption tax exclusively; and 18 percent selected both existingtaxes and a new consumption tax. Only 20 percent did not select a reve-nue option, indicating the federal government should not raise taxes toreduce the deficit.

A broad-based federal consumption tax was opposed by over two-thirdsof all state tax policymakers responding. Both a federal retail sales taxand a value-added tax were viewed as an intrusion into state tax pro-grams. Policymakers were especially concerned about the impact of abroad-based consumption tax on their ability to increase the future rev-enue generated by their own state retail sales taxes. Other concernsincluded the possibility of increased federal spending and inflation, andthe impact of a broad-based consumption tax on the poor. i.e.,regressivity.

Desigiting a consumption tax to address state tax officials' concernswould involve trade-offs. For example, design features incorporated toreduce state regressivity concerns, such as exemptions or multiple rates.would add to administrative complexity and limit revenue. According toresponding tax administrators from states with retail sales taxes, theimpact of a federal consumption tax on the administration of their statetax programs would depend on the type of tax and its visibility to thefinal consumer.

GAO's Analysis Forty-five percent of the policymakers indicated that additional revenuefor deficit reduction should come from corporate income taxes. Thirty-

seven percent would use individual income taxes. (More than one sourcecould be selected by respondents.) Policymakers supported raising taxrates and broadening the base of both corporate and individual incometaxes. (See pp. 14-16.)

Intrusion on State Revenue Intrusion into a major state revenue source was cited as a concern by 80Source percent of the policymakers opposed to a federal sales tax and 70 per-

cent of the policymakers opposed to a federal value-added tax. This con-cern stems from the states' dependence on consumption taxes as well asthe desire to maintain the independence of their state tax systems. (Seepp. 16-18.)

Page 3 GAO/GGDSO. State Officals' Commimptlon Tax toncenns

Policymakers are concerned that a federal consumption tax could (I)limit the states' ability to raise additional revenue from statesalestaxes, (2) presure the states to alter their tax bases to conform with thefederal tax base, and (3) confuse taxpayers about the distinctionbetween state and federal consumption taxes. Offering to share federalconsumption tax revenue with the states received little support. Lessthan a fifth of the respondents indicated they would reduce their oppo-sition to a federal tax if states received a share of revenue. (See pp. 16-23.)

Effect on the Poor Over half of the state tax policymakers responding were concernedabout the regressivity of a federal consumption tax. A tax is regressiveif low-income families pay a larger proportion of their income in taxesthan high-income families. Several alternatives can be used for reducingthe regressivity of a consumption tax, including (1) exempting basicnecessities from the tax base or adopting multiple rates which would taxnecessities at a lower rate than other goods, (2) providing a tax creditfor low income taxpayers on their income tax return, or (3) raising enti-tlement payments and ceilings to compensate for the increased cost ofthe consumption tax. (See pp. 24-26.)

These alternatives have potential drawbacks, including increasedadministrative costs and reduced federal revenue for reducing or elimi-nating the deficit (See pp. 27-29.)

State Tax Program Tax administrators from states with retail sales taxes varied in their

Administration opinions on how much a federal consumption tax would complicate the•administration of their state sales tax programs. A federal sales tax wasexpected to have more impact than a value-added tax, and a visible taxmore than an invisible tax. For a federal sales tax, 31 percent of theadministrators expected the impact to be great, 26 percent placed it inthe moderate category, and 43 percent predicted some to no impact. Fora federal value-added tax, 59 percent expected no impact. (See p. 33.)

PaIF 4 GAO/GGD*040 State OffldaW Commpdion Tax Concerns

Recommendations iAo s not malig any recommendations.

Comments Survey results were discussed with officials from the Advisory Commis-sion on Intergovernmental Relations, the National Governors' Associa-tion. the National Conference of State Legislators, the NationalAssociation of State Budget Officers, and the Federation of Tax Admin-istrators. The results generally confirmed what they perceived to be theconcerns of their constituents.

Pap 5 GAO/GGD.*OM Stsie Ofmcia' Comumptlen Tax Concerns

Contents

Executive Summary

Chapter 1 10Introduction Explanation of Consumption Taxes 11)

Objective, Scope, and Methodology 12

Chapter 2 14State Tax Existing Federal Taxes Preferred Over Other Revenue 14Policymakers' Views Options

Concerns Focus on Potential State Tax Program Impacts 16on a Broad-Based Other Frequently Cited Concerns of Policymakers 23Federal Consumption Conclusion 31

Tax

Chapter 3 :33Tax Administrators' Impact on State Tax Administration 33

Views on a Broad- Conclusion 37

Based FederalConsumption Tax

Appendixes Appendix I: Operational Differences Between a Federal 38Retail Sales Tax and a Value-Added Tax

Appendix II: Methodology for GAO Consumption Tax 41Questionnaire

Appendix III: Level of Concern by Respondent 47Characteristics

Appendix IV: Questionnaire and Responses From State 52Tax Policymakers

Appendix V: Questionnaire and Responses From State 64Tax Administrators

Appendix VI: Major Contributors to This Report 70

Bibliography 71

Tables Table 1.1: Selected Federal Revenue Options for 1992 11Table 2.1: State Officials' Interest in Piggybacking 22

Page6 GAO/GGID404 State Ofndias' Commaption Tax Concenis

Table II. 1: Summary of Questionnaire Respondents by 42Type of Official

Table 11.2: Level of Questionnaire Respondents by State 43Table 11.3: State Characteristics 4.5Table 111. : Percentage of Responding Executives and 49

Legislators Who Were Greatly or Very GreatlyConcerned With Federal Consumption Tax Issues

Table 111.2: Percentage of Responding Policymakers Who .50Were Opposed or Not Opposed to Raising Taxes andWho Were Greatly or Very Greatly Concerned WithFederal Consumption Tax Issues

Table 111.3: Percentage of Responding Policymakers From .51States With a Level of Retail Sales Tax DependenceBelow and Above the Average Who Were Greatly orVery Greatly Concerned With Federal ConsumptionTax Issues

FigUres Figure 2.1: Policymakers" Preferences for Federal 15Government Deficit Reduction

Figure 2.2: Policymakers' Preferences for Changing 16Corporate and Individual Income Taxes Expressed byThose Policymakers Favoring the Use of Those Taxesfor Federal Deficit Reduction

Figure 2.3: Policymakers' Most Frequently Cited 17Concerns, Very Great or Great, About the Impact of aFederal Consumption Tax on State Tax Programs

Figure 2.4: Degree of Concern About Potential Confusion 20Between State and Federal Taxes If a FederalConsumption Tax Is Enacted

Figure 2.5: Policymakers' Other Frequently Cited 24Concerns, Very Great or Great, About the Impact of aFederal Consumption Tax

Figure 2.6: Degree of Concern About a Federal 28Consumption Tax Financing Additional FederalSpending Rather Than Deficit Reduction

Figure 2.7: Degree of Concern About the Impact of a 30Federal Consumption Tax on Inflation

Figure 3.1: State Tax Administrators' Concerns About the 34Impact of a Federal Consumption Tax on State SalesTax Revenue

Page 7 GAO/GGD4O. Stat d• ' CommPidon Tax Concerns

C.-7

Figure 3.2: State Tax Administrators' Concerns About the 35Impact of a Federal Consumption Tax on State TaxEvasion

Figure 3.3: State Tax Administrators' Concerns About the :361Impact of a Federal Consumption Tax on States*Costs to Administer State Sales Taxes

Abbrevatimos

A Advisory Commission on Intergovernmental Relationscm Congressional Budget OfficeIRS Internal Revenue Service

PapS GAO/GGDOM0. SMte Ofrodalo' CoNmupeion Tax Conecr"s

I nI I n, ~ lI~ll~lI~~lLl

paso 9 GAO/GGD4O6 State Offidalo Commuiption Tax Concerns

fitroduction

Income taxes are the present principal source of federal revenue. Con-gress responded to concerns about the perceived unfairness of theincome tax system by enacting the Tax Reform Act of 1986. The Actwas designed to be revenue neutral. i.e.. it provided no additional reve-nue to reduce the budget deficit or national debt. Because many mem-bers of Congress believe they made a tacit agreement with taxpayers tolower income tax rates in return for broadening the base, it may be diffi-cult to reach congressional consensus on efforts to raise revenue byincreasing income tax rates.

EXp t If changes to the income tax system are ruled out, a broad-based con-5.- 1anation of sumption tax represents one of the few single revenue alternatives for

Consumption Taxes raising large amounts of revenue. A consumption tax is levied on tax-payers' expenditures for goods and services rather than on their totalincome. The part of the taxpayer's income that is saved is not subject tocurrent taxation from a consumption tax. Some economists believe thatthis would induce people to save more and consume less. However, theevidence on the strength of this belief is inconclusive. Consumptiontaxes also differ from income taxes in respect to who is responsible forcollecting and remitting tax payments-businesses rather then house-holds. Another basic difference is that a consumption tax is levied onindividual transactions without regard for the taxpayers' personal cir-cumstances, and income taxes generally attempt to take these circum-stances into account.

The two most commonly used broad-based consumption taxes are theretail sales tax and the value-added tax. A retail sales tax is imposed atthe point of final sale and is generally collected by the retailer directlyfrom the consumer. Currently, 45 states have retail sales taxes. In addi-tion, many states' sales taxes are combined with local sales taxes, suchas counties, cities, special districts, and transit authorities. For example,California has a 6 percent statewide sales tax rate. Of the 6 percent,4.75 goes to the state, and the remaining 1.25 percent goes to the coun-ties and cities. However, in several California counties the rate is 6.5 or7 percent; the additional .5 to 1 percent is used to finance local transpor-tation and other local government services.

A value-added tax is a multistage tax on goods and services. In princi-ple, it is equivalent to a retail sales tax on goods sold to consumers, butit is calculated differently and collected at each stage of the production

Page 10 GAO/GGD300 Stat O9caWs Cosaaiuzpon Tax Concerns

and distribution process. For each stage the tax is calculated as a pro-portion of the difference between the value of goods and servikvs pur-chased and the value of goods and services sold. In effect. thisdifference is the measure of the value firms add to the goodLs and ser-vices they buy from suppliers. While the United States has very limitedexperience with value-added taxes, they are widely used in other coun-tries. A comparison of some of the operational differences between afederal value-added and a federal retail sales tax is in appendix i.

A federal consumption tax could raise large amounts of revenue. TheCongressional Budget Office (cno) estimates that a comprehensivevalue-added tax imposed at a rate of 5 pecent could raise $125 billionin 1992. Even if food, housing, and medical care were exempt. the taxcould still yield $72 billion annually. A retail sales tax with the same taxbase and rate could raise similar amounts. Table 1.1 compares selectedfederal revenue sources.

Table 1.1: Selected Federal RevenueOptiOl for 1992 Dollars in billions

Estimatedadded 1992

revenue fromeach option

Individual income taxesRaise marginal tax to 16 and 30 percent 5357

Add a 5 percent surtax 260

Eliminate deductibility of state and local income and property taxes 296

Consumption taxesImpose a 5 percent value-added of federal retail sales tax with

comprehensive base 1254

- with exemptions for food, housing, and medical care 72 0- with low-income relief by increasing funds for social programs" 103 5

atncludes increased outlays for Food Stamps. Supplemental Security Income. and Aid to ýamiies dithDependent ChildrenSource: Revenue estimates from "Reducing the Deficit. Spending and Revenue Options -Part i Corgressional Budget Office, Feu•ury 1989

Page 11 GAO/GGD90-50 State Officia' Consumption Tax Cincer'%

IIs la I

Objective, Scope, and We have previously issued reports discussing consumption taxtl,. ."hreports focused on the various types of consumption taxes. t he principaIl

Methodology methods for calculating a value-added tax, and key valite-added tiax luol-icy issues based on international experience.

Unlike the United States, most countries that have a national v'.n,,ump-tion tax do not have independent federal-state tax systems. Thircfore.their tax systems do not have the complexities of overlapping govern-ments. If the federal government were to adopt a broad-based c.ins.•urp-tion tax, the federal tax and a state retail sales tax would be in force in45 states. In 1987, general sales taxes provided 32 percent of twtal statetax revenue. It is unclear what impact a federal consumption tax wotildhave on state retail sales tax systems, but many people. including statepolicymakers, believe the states would resist a federal consumption taxbecause of its perceived potential impact on state tax systems and statetax prerogatives.

The objective of this report is to provide Congress with an overview (ofstate officials' concerns related to the enactment of a broad-based fed-eral consumption tax and of possible ways to mitigate these concerns.To address these issues this report

* identifies state tax policymakers' views about how to reduce the deficit.including their preferred revenue options;

* identifies the nature and extent of state tax policymakers' concernsrelated to a broad-based federal sales tax or value-added tax:

a discusses how to address policymakers' concerns through the design ofthe tax or other methods; and

* identifies state tax administrators' opinions on the effects of a federalconsumption tax on state administration, revenue, and tax evasion.

To obtain state officials' views of a federal consumption tax and itspotential impact, we sent 261 questionnaires to state policymakers tgov-ernors, state budget officers, state fiscal officers, and chairs of state leg-islatures' major tax policy committees) in all 50 states. We received 15:3responses; 42 declined to answer; and 66 did not respond. We received atleast one response from tax policymakers in 49 states. We also surveyedthe 50 state tax administrators (using a different questionnaire) toassess their concerns about the impact of a value-added tax on state tax

hA mT Au-. 20. 1966). Tax Polic': Tix-( r',,ki ,iadsace 1 i oAOdde Tax (GAO/GGDa4'7. uonsum1p. 14io T.,% 'Ar-

iyVaue-Ade Tax lmFor U. S. Tax PRs (GAO/GGD-W I 25BR.Sept. 1 .. 1 is',!'

Page 12 GAO/GGDM450 State Officiais Consumption Tax Cionveryt

S

administration. We received 44 responses and 3 declinations. Threeadministrators die )t respond. We entered the answers into a cormput-erized database a.. analyzed them. Responses fromn policymakers arediscussed in chapter 2, and responses fret C au, ainistrators are dis-cussed in chapter 3. (See app. II for a detL ,i explanation of the qut.s-tionnaire methodology.)

Part of our questionnaire analysis included, where appropriate, compar-ison of responses based on specific respondent characteristics. Theseincluded the following:

* the type of respondent-legislators (state senators, state representa-tives, state fiscal officers) versus executives (governors and statebudget officers);

• the degree to which a state is dependent on individual income taxes forrevenue;

• the degree to which a state is dependent on retail sales taxes forrevenue.

The results are discussed in appendix IHI.

To identify ways of addressing policymakers' concerns, we reviewedpublished sources, including economic textbooks, government reports.professional journals, and accounting firm and trade association publi-cations (see bibliography). To get a wide range of opinions on consump-tion tax issues, we met with academic experts and knowledgeableofficials of several states.

Our work was done between January 1988 and August 1989 and inaccordance with generally accepted government auditing standards.

Survey results were discussed with officials from the Advisory Commis-sion on Intergovernmental Relations, the National Governors' Associa-tion, the National Conference of State Legislators, the NationalAssociation of State Budget Officers, and the Federation of Tax Admin-istrators. The results generally confirmed what they perceived to be theconcerns of their constituents.

Page 13 GAO/GGDW6O0 Stat. Offldalo Coamumption Tax Concenms

Chapeer,2

State Tax Policymakers' Views on aBroad-Based Federal Consumption Tax

The majority of state tax policymakers responding to our questionnairebelieved the federal government should use existing federal revenuesources to reduce the deficit.' Increasing existing income and excisetaxes was preferred over a new broad-based consumption tax. Somepolicymakers also suggested such revenue sources as increasing userfees, having a national lottery, or charging the National Atlantic TreatyOrganization for troops stationed in Europe. Only 20 percent selected norevenue option, indicating the federal government should not raise taxesfor deficit reduction.: Several of these policymakers indicated thatspending should be cut instead.

Both a federal retail sales tax and a value-added tax were perceived asintrusions into state tax programs. Policymakers were especially con-cerned about the impact of a broad-based consumption tax on their abil-ity to increase revenue generated by their own state retail sales taxes.Other concerns included the possibility of increased federal spendingand inflation, and the impact of a broad-based consumption tax on thepoor.

A federal consumption tax could be designed to mitigate some state taxpolicymaker concerns. However, some mitigating features may produceother undesirable effects, such as increased administration costs andreduced revenue for federal deficit reduction.

When asked which potential sources of additional federal revenue they

Existing Federal Taxes preferred to be used to reduce the deficit, 72 percent of state tax policy-

Preferred Over Other makers responding selected existing federal taxes. Fifty-four percent

Revenue Options selected existing taxes exclusively; 18 percent selected existing taxesand a broad-based federal consumption tax; and 8 percent selected onlya consumption tax.

As illustrated in figure 2.1, corporate and individual income taxes werethe revenue options chosen most frequently by state policymakers toraise revenue, followed by federal excise taxes and broad-based federalconsumption taxes. Of the policymakers who chose a federal consump-tion tax, two out of three preferred a value-added tax over a federalretail sales tax.

SIncludes governors. state budget officers, chairs of state legislatures* major tax policy conumttees.and state fiscal officers.

'An additional 10 percent of respondents indicated federal taxes should not be raised but alsoselected one or more revenue options for reducing the deficit.

Page 14 GAO/GGD-0O State Offldals' Coommptlo Tax Concerns

smTxVNqumhnbm* Vies an,10"We ValrM WAMme To. .. 4bTai Fe "a evmnpds Te

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40

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Notei More then one re'enue source could be selected by respondents.

Forty-five percent of the policymakers indicated that additional revenuefor deficit reduction should come from corporate income taxes. Thirty-seven percent would use individual income taxes. As shown in figure2.2, these policymakers supported raising tax rates and broadening thebase of both corporate and individual income taxes.

Page 15 GAO/GGDO40 S&a&t OndeleW POMIpUom Tax Concerns

stow Thau fsevusbu' VW s M absndDmsed F edwmACMUMm Tax

Figur 2.2: Polsymakers' Pilerenosfor Changig Corporale anod knd0vi1-s 75 f mW ssp8Md~Inoame Taxes Expressd by Those TPolsymask Favorng te Use o ThoeThaxs for PFedora 0e~ Redudlion

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Concers Focus on Overall, state policymakers responding opposed a broad-based federalconsumption tax. Eighty-one percent of the policyalkers were opposed

Potential State Tax to a federal sales tax, and 68 percent were opposed to a federal value-Program Impacts added tax. Policymakers' most frequently cited concerns (as shown in

figure 2.3) focused on the impact of a federal consumption tax on statetax programs. Specifically, 80 percent of the policymakers opposed to afederal sales tax and 71 percent of the policymakers opposed to a fed-eral value-added tax cited intrusion into their traditional source ofrevenue.

Page 10 GAO/GGD*S0 State OffdaW' Comumpton Tax Concerns

• ' "C, gu, 2SIowm TaroacynshoW S" Views = aSeamos Feoderml COMsMO Tax

Plgw L& Polsymabokr' MostPFrqualdy Cited Concems, VWY rGrt orG..t, About t•e Impact of m Feod*lMCommmtoptOn Tax on Ste Tax Programs

130

A ,.

State tax policymakers are very concerned about the federal govern-ment's budget policies that lead to higher national debt and annual defi-cits and their impact on state finances. Over the last few years, as thenational debt increased, state and local governments have lost federalrevenue sharing and have seen reductions in federal grant funds. Inaddition, the Tax Reform Act of 1986 reduced federal tax rates andbroadened the tax base, in part by repealing a provision that allowedindividual deduction of state sales taxes, thus creating the potential ofincreased resistance to state and local sales taxes. Finally, growing pub-lic opposition to increases in property taxes has left the state officialsfeeling they have few. if any, ways to increase revenue.

Therefore. the prospect of a federal consumption tax intruding intostate revenue sources concerned state officials. A majority of therespondents were greatly concerned that a federal consumption tax

Page 17 GAO/GGD410State OfficiaW Coummption Tax Concerns

9tie T= f US- ' Vkgusm abt•64tmi NiI~tCeienpm Th

could affect their ability to increase state retail sales taxes. Specifically.80 percent of the policymakers from states with a retail sales tax indi-cated that a federal consumption tax could discourage their state fromincreasing their sales tax rate. Sixty-four percent of these policymakersindicated that a federal consumption tax could discourage their statefrom broadening their tax base. However, five out of nine policyntakersresponding from states with no retail sales tax indicated that a federalconsumption tax would have little, if any, effect on their decision toadopt a state retail sales or value-added tax.

States' concern about federal intrusion is understandable given theirreliance on retail sales taxes for revenue. States have used the consump-tion tax base extensively as a major source of state general revenue. Instates with a retail sales tax, sales tax revenue represents approxi-mately 31 percent of the total state tax revenue collected for fiscal 1987.This percentage has remained relatively stable around 30 percent since1970. As shown below, 31 of the 45 retail sales tax states generated 30percent or more of their tax revenue from retail sales taxes.

"* Four states obtained over 50 percent of state tax revenue from stateretail sales tax.

"• Ten states obtained between 40 and 50 percent of state tax revenuefrom state retail sales tax.

"• Seventeen states obtained between 30 and 40 percent of state tax reve-nue from state retail sales tax.

States May Be Pressured to Policymakers felt the federal government would be encroaching upon

Match Federal Tax Base state taxing autonomy by enacting a federal consumption tax. Theywere concerned that a federal consumption tax would put pressure ontheir state to match their state tax base with the federal tax base. Onepolicymaker commented that a federal consumption tax would trespasson the states' tax base and would affect the states' independence andcontrol over their revenue source. Another believed the federal con-sumption tax may have an "evening" effect: over time the bases of thefederal and state retail sales taxes may move closer together-if thefederal tax were a federal retail sales tax.

Interviews with other state officials and our literature review suggestthat the tax base concern may also stem from some states' use of retailsales taxes to implement state social or economic policies or gain an eco-nomic advantage over other states competing for businesses to locate intheir state. For example, Virginia exempted basic research. fish farming.

Paoe 15 GAO/GGD)4-O kate OIdam' CoamwUOa Ta" Concers

Cb"" Iam" To& Pene .' Vkmsas a• , IO014h1sd Pedml CGUNNOM Tax

and computer software from state retail sales tax in order to encouragecertain industries to locate there. Nebraska exempted farm machineryfrom its sales tax base, so farm equipment dealers would not lose salesto a neighboring state that had exempted the same items.

Another viewpoint, expressed by AcIR.:' suggests that a federal consump-tion tax may not be competitive with the state retail sales tax. particu-larly if the tax is an invisible value-added tax not separately identifiedin the final price.

It can be argued that some states could realize revenue gains by replac-ing their current sales taxes with their own add-on to a federal con-sumption tax. States doing this could capitalize on the potentiallybroader base of the federal tax. If similar to federal consumption taxesin other countries, the federal consumption tax base would cover itemsnot presently included in most state retail sales tax bases, such as pro-fessional and personal services.

Taxpayers May Confuse Another issue was potential taxpayer confusion between state and fed-

State and Federal Taxes eral consumption taxes, especially for a federal retail sales tax. Thisconcern focuses on difficulties that retailers and consumers may havedistinguishing between the potentially different tax rates and tax bases.Figure 2.4 shows the degree of state policymakers' concern about tax-payer confusion of state and federal taxes.

:'3Mvisory Commissioon nter•oenrnta Rel•tios S-rghenr S the Federal Remenue .S-tern 1mplicatkOs for State and Local Taxing aWd oaowi" pp. 59-06. Washingtma. D.C.. ctober1964.

Page It GAO/GGD*4 Sats Officdis' CAomsmption Tax Concerns

Saw. Tax fteqmsho VIm on aImed.3md rodmid CommaU.. Tax

PFW. U. Degr" of Concen AbOutpotenma Conkmioug Between SOMt wnd Modordle 10 SomeFederal Toam It a Federa ConeumptdonTax to Emoted"

to Oak st0 Judge

Federal lhetail Sales Tax

Mjodurdetjo Som

No Basis to Judge

36JGre om 10Vey Grest

Federal Value-Added Tax

Pteg 20 GAO/GG060M Sut. Offidab C~smwti~oo Tax Concemi

tfm Tha ret"ginbu Vww = aONW hma VdamdiCOMWOa Tax

Concern about taxpayer confusion may be well-founded. Eighty percentof the tax administrators responding to our questionnaire indicated thatretailers are currently having some difficulty in determining whichitems are subject to the state retail sales tax. This is generally the resultof the exemption of certain items from state retail sales taxes, and thetaxation of similar products. This is discussed in more detail in theregressivity section of this chapter.

Interviews with some tax administrators indicated that, since stateretail tax bases differ among the states, a federal consumption tax witha different base could cause confusion among consumers and amongretailers collecting the tax. Confusion regarding which items are taxableunder which tax system coupled with potentially different reportingrequirements and the higher combined state-federal tax burden may cre-ate an opportunity for underreporting and tax evasion.

Mitigating Concerns Over Because states have used the consumption tax base extensively as aFederal Intrusion Could Be major source of general revenue, mitigating state policymakers" con-Difficult cerns about intrusion could be difficult. Some experts believe this con-

cern might be alleviated if any federal consumption tax proposal werecoupled with provisions attractive to state governments. Such provi-sions might include sharing consumption tax revenue directly with thestates, letting states piggyback onto the federal tax, or enacting legisla-tion that would require out-of-state vendors to collect and remit statetaxes on mail-order sales.

Sharing Consumption Tax Of the large majority of state tax policymakers who opposed a federalRevenue consumption tax for deficit reduction, very few would reduce their

opposition if offered an opportunity to share in the revenue generated.Less than 20 percent of the policymnakers indicated their oppositionwould be reduced if the consumption tax revenue were shared withoutconditions or if the federal government agreed to pay a larger share offederally mandated social programs.

Piggybacking Piggybacking was also rejected by most state officials. Piggybackingwould allow states to add on a percentage to the federal consumptiontax rate while the federal government administers and collects theentire tax and remits to the states their portion. Piggybacking wouldgive the states added revenue without decreasing the federal revenueavailable for deficit reduction. As shown in table 2.1, only about 20 per-cent of the state tax policymakers expressed interest in piggybacking oneither a federal sales or a value-added tax.

Page 21 GAO/GGD.U040 Start Officials Coamsmpton Tax (onctrns

" 'c~em. Ii$we Tax, ftficyh.3" Vi m sI1be68eN Fedrl CeMMINVA" Tax

TW L2.: Saft Official, tk~ InPlgyschM Figures in percent

Federal Federalretail OaN value-added

tax taxDefinitely or probably yes 190 -03Uncertain 248 245z

Definitely or probably no 458 4.31

No basis to Pudge 105 "1 1Total 100.1" 100.0

4TOti dOes not add to 100 percent due to rounding

Mail Order Sales While not directly tied to the passage of a federal consumption tax. oneoption for increasing state sales tax revenue would be to include in theconsumption tax legislation provisions which would allow states torequire out-of-state vendors to collect and remit state retail sales taxeson mail order sales. This would provide states with additional sales taxrevenue from their existing tax systems. States estimate that over S2billion of sales tax dollars are lost because sales tax is not collected onthese purchases. The state of Texas estimates that it loses about $ 1:34)million annually on mail-order sales and that local governments in Texaslose another $30 million.

State sales tax is a destination-based tax-it applies to imports (into thestate) but not to exports. Goods shipped to out-of-state purchasers arecommonly exempt from state sales taxes, and consumer purchases arecommonly subject to the tax of the state of residence of consumers. withone exception. In National Bellas Hess,, a case decided in 1967. theSupreme Court decided that mail-order houses cannot be required to col-lect and remit sales taxes to the state of residence of a customer unlessthey have a business presence in the state.

Since the Supreme Court decision, a variety of bills have been intro-duced in Congress to resolve this issue. For several reasons, including astrong mail-order industry and a lack of consensus on whether localsales taxes should be included, none have been enacted. However.within the past few years, 21 states have passed statutes to extend theirreach to out-of-state mail-order catalog firms. Further. 23 states haveentered into regional compacts to cooperate on sales tax compliance. Thepurpose of many of these efforts is to test various aspects of the original

'•xanoaud Ben. Hem. Inc. v. Deparnme of Revenue of the state of Illinis. -M1 U S. 7,53. 1:967

Page 22 GAO/GGD.40 State Offlias' Consumption Tax (',mcmrn'

Cbepater• , smo Tait PWlwmdwWs Vbm so aDmressee Febvmb VOO~te a~

Bellas Hess decision before the Supreme Court. To date this has nottaken place.

A federal consumption tax could be designed that would allow the statesto make out-of-state vendors responsible for collecting and remittingstate sales tax, whether or not the firm has a physical presence in astate. However, it is likely that these provisions would face the sameobstacles as past proposals.

State policymakers' concerns went beyond the direct impacts a federalOther Frequently consumption tax could have on state tax programs (see fig. 2.5). ManyCited Concerns of policymakers were concernedPolicymakers 0 about the potential economic impacts of a federal consumption tax on

low income taxpayers;"* about the federal government's use of the revenue from a federal con-

sumption tax for something other than to reduce the deficit;"• about the prospect of increased inflation; and"* about the cost of enforcing a new federal consumption tax. especially a

federal value-added tax.

Page 23 GAO/GGD4MOO State Official." Coumamption Tax Concemrns

* Cbampt2Staw Tax Meyabo' Viw.m m ameemd F44dwal Cm4-_enp Tax

F~gw Z.& Pofcpminkor' 011wFrequenUy Ched Conoers, Vbry Groat or

Gmmet, About Uw Impact of a Federal IConsumption vYax

7,

4.

U

10

0

Naim Vak*4eMdd Tm

Regressivity Almost 60 percent of policymakers indicated that they were greatly con-cerned about the regressivity of a federal consumption tax. A broad-based consumption tax on basic necessities would likely be regressivebecause lower income households spend a greater portion of theirincome on food, clothing, medical care, and shelter than higher-incomehouseholds. Therefore, a broad-based consumption tax would fall mostheavily on those taxpayers who are least able to afford it.

While there is little doubt that a single-rate, broad-based consumptiontax is regressive, the degree of regressivity can vary depending on thetime period over which the regressivity is measured. In general. the taxappears to be more regressive when taxes on annual consumption are

Page 24 GAO/GGD69M4 State Offid&is Ckmumption Tax Concerns

Chate 2State Tax lrbiema•W' Views, e aUed14Band hNemi CemmpiM lTax

compared with annual income. However, if taxes on lifetime consump-tion are compared with lifetime income, the degree of regressivity isgenerally reduced.

Mitigating Regressivity Concerns Several methods could be used to offset the regressivity of a consump-tion tax. These methods include taxing necessities at a lower rate (a mul-tiple-rate tax). refundable tax credits, and increased transfer payments.However, each method has drawbacks either in terms of reduced reve-nue generation, more complicated administration, or the degree to whichthey address the regressivity concerns. For example, compensating lowincome individuals would reduce consumption tax revenue and usingmultiple rates would complicate tax administration.

Tax Necessities at a Lower Rate. In most European Economic Commu-nity countries, the value-added tax is made less regressive through theuse of multiple rates which tax necessities at a lower or zero rate. Moststate tax policymakers favored exempting from the tax base such basicnecessities as prescription drugs, medical and dental services, food,household fuels, and housing.

cso estimates that a broad-based federal consumption tax imposed at arate of 5 percent could raise $125 billion in 1992. However, if food,housing, and medical care were removed from the tax base, it wouldyield $72 billion annually. Thus, if the government needs to raise S 125billion annually the tax rate would have to be almost doubled in order toraise the same amount of revenue. Also, because high income house-holds spend a significant portion of their budgets on the low tax rategoods, one of the drawbacks of using multiple rates is that the offset toregressivity is not well targeted to low income households. The taxbreak is provided to anyone, regardless of income level, who consumes agood taxed at a low rate.

Multiple rates can also interfere with the neutrality of a broad-basedconsumption tax system. Goods with tax rates below the standard canbecome more attractive to consumers, and goods with above-standardrates can become less attractive. For example, a medicated shampoothat is considered a non-taxable medicine may be less expensive andhave competitive advantage over a non-medicated shampoo that istaxable.

Lssues concerning and methods for mitigating the repemsivity of the tax are discussed in more detaulin our rmpofrts tided Tax Policy: Tax Credit and Subtraction Methods of Caklulatig a Value-AddedTax. (GAO/GGD-89-87, June 20. 1969) and Tax Policy: Value-Add Tax Issues for U.S. Tax Voli&"-Rers (GAOiGGD-89-125BR. Sept. 15. 19W),1

Page 25 GAO/GGDOM State Officials' Consumption Tax Concerns

State Tax fPMqmahs' Views e a8906410"d Federal COMOindmpdi Tax

Another drawback of multiple rates is the effort and costs of adminis-tration associated with this type of system. The federal agency adminis-tering the tax would be faced with the same administration problemsfacing the 28 states that exempt some foods from their retail sales taxbases. For example, New York does not tax food and medicine. As aresult

"* small marshmallows are not taxable because they are considered cook-ing ingredients (food), but large marshmallows are considered candyand taxed;

"* a wafer covered with chocolate is taxable when put on the store shelveswith candy, but it is considered a cookie and not taxable when shelvedwith cookies: and

"* some items, such as soft drinks and plant seeds, are not taxable if pur-chased with food stamps, but they are taxable otherwise.

Increase Social Transfer Payments. Increasing transfer payments to lowincome individuals could also provide relief from the regressivity of thetax. Programs such as Aid to Families with Dependent Children andother social welfare transfer payments could be increased to compensatefor the tax. Which programs are indexed would affect how well targetedto the poor this approach would be and the amount of additional reve-nue that would be needed to finance these programs. If limited to needs-tested programs, this method would better target the poor than ifextended to all social transfer payments. This is because some pay-ments, for example social security, go to eligible recipients. regardless ofeconomic status.

Establish Refundable Income Tax Credits. A third alternative to reduceregressivity would be to establish a refundable income tax credit forconsumption taxes paid. Taxpayers could use this credit to offset theirincome tax liability. Those who pay less income tax than the amount ofthe credit would receive a refund from the government. To reduce theamount of revenue lost, the credit could decline as income increases anddisappear at a designated level of taxable income. A disadvantage ofthis alternative would be the increased number of taxpayers who wouldhave to file returns, many of whom are not currently required to do so.Currently, eight states use some form of tax credit to offset the regres-sivity of their state sales tax.

Page 26 GAO/GGD*400 State Offiials' Commption Tax Concerns

Stae Te ftqmbusw Vhws mefteggd Veduel CeugmPd~e Ta

Revenue Might Not Be As shown in figure 2.6, state policymakers were greatly concerned thatUsed to Reduce the Deficit revenue from a federal retail sales tax or a value-added tax might beused to finance additional federal spending, rather than to reduce thedeficit. Most noticeably. a higher proportion of those opposed to raisingfederal taxes was greatly concerned that federal retail sales tax orvalue-added tax revenue might not be used to reduce the deficit. Severalpolicymakers indicated that they did not "trust" Congress to earmarknew funds for deficit reduction and that a federal consumption taxwould only provide Congress with a new source of revenue for spending.Figure 2.6 illustrates that this perception of unchecked governmentspending seems to be more closely associated with a federal value-addedtax than a federal retail sales tax. This viewpoint may stem partiallyfrom the influence of consumption tax opponents who oppose a federalvalue-added tax as a money machine that will fuel more spending ratherthan help to reduce the deficit, according to an interest grouprepresentative.

Page 27 GAO/GGDOM0 State OfIdek' Comnuaptlon Tax Concerns

S S

S T Pgqo'mbW Vkisnm m aIm, a&1sd fadm h Comema Tas

pigw 3.26 Deqre of Concern About aFederae Constuption Tax Fnancng

,Fd endn Ra- Modermle to SomeThan Osfiel Reduction

29.5% 21ALkdeto None

4.8%No Basi to Judge

44.4%Great 10 very Great

Federal Retail Sales Tax

eioderale to Siane

19% &2%No Sbai to Judge

68.- Gread 1o very Great

Federal Value-Added Tax

Fag. U GAO/GGDO6O Staft Offda Ckwmm~ionp Tax Concerns

N Tax Pebi Vim 40 aft -Ams- Frqdu Cau•d"!mrm T

Mitgating Concerns That Several solutions may address the concern that a federal consumptionRevenue Mght Not Be Used to tax might be used to finance additional federal spending rather thanReduce the Deficit federal budget deficit reduction. These include (1) requiring the Gramm-

Rudman-Hollings deficit reduction target of zero in 1993 to remain ineffect with no changes; (2) reducing the debt ceiling each year by all orpart of the revenue generated by the tax; and (3) making changes to therate or base of the tax allowable only by a two-thirds vote of bothhouses of Congress. For example, in 1989 legislation was introduced toenact a value-added tax for deficit reduction. That legislation containedprovisions requiring that revenue derived from the imposition of thevalue-added tax be deposited in a deficit and debt reduction trust fund.Money from this trust fund would be available only for payments on theprincipal and interest of the federal debt.

Adding these or other provisions to consumption tax legislation wouldprovide some immediate assurance that the funds, for the most part.would be used to reduce the deficit. However, future Congresses couldchoose to change any such provisions. For example, the 99th Congressenacted legislation requiring the elimination of the deficit by fiscal year1991. The 100th Congress extended the deadline for the elimination ofthe deficit to 1993.

Possible Inflationary As shown in figure 2.7, inflationary impact was also an issue with state

Impact policymakers. As a consumption tax can be passed forward to consum-ers in the form of higher prices, the introduction of a broad-based con-sumption tax would probably cause a one-time increase in prices by theamount of the tax. This is not the same as an increase in the ongoingrate of inflation. This will increase the rate of inflation for about oneyear, but the rate of inflation should not be any higher in subsequentyears than in the absence of a consumption tax.

Papg 29 GAO/GGD4.0O Staw OffllaIW CommPti Tax Concerns

ft" TMu Itswmmhei Vbsa m a

fitsue L.7: Degre of ConeWei About goIvmpac GI a Fedura CnusmsPtifts Tax anfIft"O OmO

4.6%No 6"Io Aep

17% Groat ID very Great

Federal Retail Sales Tax

Moderate to So"

No Beubsto Judge

Federal Value-Added tax

pape so GAO/GGD14*0 State Offidala Commaaipdomi Tax Concerns

Ste Tax Pdkyqmbim' Viesinm a1111601410 Mudwh c.iNOP" Tax

Administration Costs Many policymakers were concerned about the administration costs ofenforcing a federal consumption tax. particularly with a federal value-added tax. In 1984, the Internal Revenue Service (nis) estimated that afederal value-added tax would require 20,000 additional in employees.would cost about $700 million per year to administer, and would takeabout 18 months to implement. However, these estimates were madeover 5 years ago, and according to ws, assumptions about economic con-ditions and other variables are subject to change. In addition, CustomsService costs to administer border-tax adjusmentv with a value-addedtax would also have to be considered.

While there is no available estimate of the administration costs of a fed-eral retail sales tax, some current literature suggests that a federalvalue-added tax would be slightly more expensive to administer than afederal retail sales tax. A federal value-added tax would require moreinformation to be reported and processed than a federal retail sales tax.In addition to differences in staffing and equipment, cost differenceswould also depend on factors such as filing requirements.

Mitigating Concerns About Administration costs would vary depending on the tax unposed, theAdministration Costs breadth of the tax base, and methods that could be included to offset

regressivity. International experience shows that the simpler the tax theeasier and less costly to administer. This is consistent with the responsesto our questionnaire. Almost all of the state tax policymakers andadministrators agreed that a single-rate federal consumption tax withfew or no exemptions would be easier to administer.

Conclusion Most state policymakers responding to our questionnaire favored using

additional revenue from existing federal tax sources to reduce the fed-

eral budget deficit. Eighty-one percent of them were opposed to a fed-eral retail sales tax, and 68 percent were opposed to a value-added tax.Their major concern about a broad-based federal consumption tax istheir perception that it would intrude on state tax systems and limittheir ability to raise additional revenue from state retail sales taxes.

The effect of a federal consumption tax on state revenue is somewhatspeculative and may ultimately depend on the type and design of thetax adopted. For instance, a relatively low rate, invisible value-addedtax may not affect state sales tax revenue. Also, states could be given

"IBorder tax adgutment are attempts by countries usuq a canaumption based value-added tax toremove the tax from goods that ae exported and apply it to goods that are moted.

Page 31 GAO/GGD4O60 state OMfcal' Coumptmo Tax Concerns

* ~CbgWW2lSt Tax Pffiqru' VWske abme~bgsi Feiwa CinMMdga Tax

opportunities to realize added revenue by adding on to a federal tax. butthe independence of their own tax systems could be reduced-a concernthat could be difficult to mitigate.

State officials also were troubled by the potential regressivity. thepotential impact on inflation and increased federal spending, and theadministration costs of a broad-based consumption tax. These concernscould be addressed but would involve trade-offs between competing con-cerns in the design of the tax.

rawp $2 GAO/GGODOM Stat* O0ei" Cm=wsdm Tax Cow•rn

*Tax Ad nnistrators' Views on a Broad-Based"Federal Consumption Tax

According to responding state tax administrators from states with retailsales taxes. the impact of a federal consumption tax on the administra-tion of their state tax programs would depend on the type of tax and itsvisibility to the final consumer.' An invisible tax was expected to haveless impact than a visible tax, while a federal retail sales tax wasexpected to have more impact than a value-added tax.

While there was no clear consensus on whether a federal consumptiontax would complicate state tax administration, in general tax adminis-trators indicated that a federal consumption tax would have someimpact on their state's existing tax program's revenue, evasion rate, andadministration costs. The tax administrators overwhelmingly respondedthat each level of government should collect its own tax.

Impact on State Tax Tax administrators from retail sales tax states varied in their opinionsabout how much a federal consumption tax would complicate the

Administration administration of their sales tax programs. A federal sales tax wasexpected to have more impact than a value-added tax. For a federalsales tax, 31 percent of the administrators who had a basis to judgeexpected the impact to be great; 26 percent placed it in the moderatecategory; while 43 percent predicted some to no impact. For a federalvalue-added tax, 59 percent expected no impact and 22 and 19 percentexpected moderate or great impact, respectively."

Impact on State Tax State tax administrators believe that the visibility of the federal con-Revenue sumption tax will determine whether state sales tax revenue will be

affected. As shown in figure 3. 1, when asked what impact a federal con-sumption tax would have on state retail sales tax revenue, almost halfof the tax administrators indicated that a visible retail sales tax'I wouldprobably decrease state revenue, and 13 percent believed revenue wouldincrease. If the retail sales tax were invisible to the fiMal consumer.25 percent thought revenue would decrease, but 28 percent believed

I Resposes from tax admbintrators in the five states wfthout a sales tax were from such a smaipopulation and so dixe that they could not be effectively aralyzed.

1Percentaes do not include repondents who indicated they had no bais to judge how much a fed-eral comuwuptin tax would compacate the admlmttration of their state sales tax.

'Au "mvibWe" tax would be irciuded in the price of oods and services before the sale an wouldtherefore be Jes notiscle to a casumme than a "v1sble" tax which would be added to the price ofgoods and srvices duri the le. For discussimo of vs•idt and value-added taxe see TaxPoTax-Credit a subtraction Methods of Calculatint a Value-Added Tax (GAO/GGD-89-87iiiei1989).

Page 83 GAO/GGD4O0 State Official' COMIuMptIo. Tax Concerns

1T. *dsmlle' Vlo.m a kbmb.4b

revenue would increase. Eighteen percent indicated that they believedan invisible value-added tax would decrease state sales tax revenue, and31 percent thought they would increase.

Figm 3~1: Semi Thu Axmlsrmm'Co moa Abei Ow hoamp of a PindwaCosumpm- TUR N m Smem SAm. lTax •

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U

State tax revenue may be expected to decrease with a visible taxbecause the higher combined federal-state tax rate would make tax eva-sion more financially attractive, according to our discussions with somestate tax administrators and officials. Other tax administrators mayhave thought that revenue would increase because of the federal auditpresence in the consumption tax area, and for an invisible tax, becausethe federal tax may be included in the state tax base, according to aninterest group representative.

Pap GAO/GGiM*O SUawe OffldaW Conmmpdo Tax Conenm

Impact on Sales Tax There was also no clear consensus among the ste tax adminsratorsEvasion about the impact of a federal consumption tax on state sales tax evasion

rates. About 40 percent of the tax a from retail sales tax

states indicated that a federal retail sales tax would decrease or notaffect their state retail sales tax evasion rate. An equal number believedthat tax evasion would increase. With a value-added tax, 51 percent ofthe administrators thought state sales tax evasion rates would eitherdecrease or not be affected, and 28 percent believed evasion wouldincrease (see fig. 3.2).

Comes.. Abedts wl Imp a I ofI FedaCmAIumpbm Th ontt m SW Th Evadma lCWWO U•x ODOM*• Timx evmmowndm

n

IS

WN

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10

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mm

Pa. 85J GAO/GGDO0 SUNs Ofýfieal' Commptiom Tax Conmerns

• 'TM A~gdsmm W~N Vm a I*&ik•ftolumlommlVmsTU

Concerns About Although no tax administrators thought administration costs wouldAdministration Costs decrease, about 60 percent of them believed that administration costs of

the state retail sales tax would stay about the same with an invisiblefederal consumption tax. For a visible federal consumption tax, therespondents were nearly split between the opinions that state adminis-tration costs would increase or remain the same (see fig. 3.3).

Rpm S&3 Smof Tax AdmMIN Wa'Cso-owmso ,a, lISs.lI s 70 Federal e RCnaumpummq Thu am Sumt' Case e " s

AdmnliMw h•ui Salen Tauxs

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31

11.

m l• ul

Joint Collection Not According to most tax administrators, the most efficient manner of col-Recom endedlecting consumption taxes is for the states to collect state taxes and theRecmmededfederal government to collect federal taxes. For a federal sales tax, 6

A96

percent of them said the federal and state governments should each col-

lect their own tax; for a value-added tax the percentage increased to 90percent.

Psa3 N GAO/GGD4140 Ste sumai' CmaiMMO Tax CoWe"ra=

Ten administrators indicated that it would be most efficient for theirstate to collect both state and federal sales taxes. Only two administra-tors indicated that the federal government should collect both the stateand federal taxes if a federal value-added tax were enacted. Lack ofinterest in federal collection of state taxes is not surprising, since noneof the states have applied for federal collection of state individualincome taxes, an option provided in section 6361(a) of the federal taxcode as of October 1972.

Conclusion to responding tax udinistrators from sates with retail salestaxes, the impact of a federal consumption tax would depend on

whether the tax was visible or invisible and whether it was a sales taxor a value-added tax. An invisible value-added tax was expected to haveless negative impact on state tax programs, and a visible retail sales taxwas expected to have greater negative impact on state tax programs.

In general, tax administrator indicated that a federal consumption taxwould have some impact on their state's existing tax revenue, evasionrate, and administration costs. The tax administrators responded thateach level of government should collect its own tax.

Pape S GAO/GGDU40 Stae Ofidak' CMuMpdm Ta Cuacem

Operational Differenc Between a FederalRetail Sales Tax and a Value-Added Tax

The federal retail sales tax and the value-added tax are taxes on theconsumption of goods and services and have similarities and differ-ences. Both could raise about the same amount of revenue, assuming thesame tax rate and the same tax base. The operating assumption ofpolicymakers and economists is that either tax would be fully shiftedforward onto the consumer in some form or another. The final after-taxprice of the product to the consumer may be the same for both taxes.but the operating procedures of the two taxes differ.

These operating differences may have important policy implications andinclude such factors as administration costs, tax collection, enforcement,broadness of tax base, implementation time, evasion, and flexibility. Inaddition, as the total taxes (federal, state, local) on consumptionincrease (whether value-added tax or federal retail sales tax), the moreattractive tax evasion becomes. This may result in lower voluntary com-pliance and higher administration costs.

Following is our discussion about how each type of federal consumptiontax (retail sales or value-added) may have some comparative advantageover the other, given the following assumptions: (1) the federal con-sumption tax will be a tax in addition to existing federal taxes and willnot replace any current taxes; (2) compliance cost is defined as the costincurred by businesses to comply with the new tax; and (3) the tax baseis broad and includes all goods and services, except those related tofinancial institutions, education, religion, and housing rentals.

Administration Costs A federal sales tax is assumed to be less costly to the business commu-nity as a whole because only those businesses selling at retail wouldhave to collect the tax. Under a value-added tax almost all businesseswould have to collect. Administration costs are also believed to be lowerfor a sales tax, primarily because fewer businesses would be collectingthe tax.

Compliance o s For the business community as a whole, a value-added tax would proba-bly have higher compliance costs than a federal retail sales tax becausealmost all businesses, not just retail businesses, would collect taxes. If a

Popr 38 GAO/GG"0.30 Stae Offica'. Coaumption Tax Concern

operahmw Direffeam Dtea a Fairnism 1ain Tax an a ValueM Tax

credit value-added tax is implemented. most businesses would have t(keep invoices for all sales to and all purchases from other firms. Thestinvoices would be subject to audit by tax authorities. The subtractionmethod value-added tax would require less documentation. If certainitems (such as food, clothing, and shelter) were taxed at a lower rate cnot at all, compliance would be more complex, and costs would poten-tially increase for businesses that sold both taxable and non-taxableitems. If multiple rates were used to offset regressiveness, complexitywould again increase and affect compliance costs.

Ease of Collection The federal retail sales tax might have an advantage over the value-added tax if federal and state sales taxes could be collected jointly-either by the state or the federal government. Realistically, however,states impose sales taxes on different items (some tax almost all goodeand services; others tax only certain items) and at different rates (3 tc7.5 percent). To have an efficient collection process, all 45 states withretail sales tax would have to conform their sales tax bases to the fed-eral government's base.

Start-Up Time The biggest advantage a federal retail sales tax may have is the esti-mated time it would take to implement it. A sales tax should not havelong implementation period because it would fall mainly on retail outifin 45 states that currently charge state and local sales taxes. States anretail businesses are familiar with the sales tax concept. Value-addedtax is a new concept to the United States, and many businesses are nolfamiliar with this form of taxation. The Isis estimates it could take 18months from time of enactment to implement a value-added tax.

Enforcement With a credit value-added tax, firms have a financial interest in ensur.ing that the amounts of value-added tax paid on purchases made in pr

ducing a good or service are accurately reported on their invoices, sin(they receive credit against their value-added tax liabilities for previ-ously paid value-added tax. This self-enforcing feature not only

'Credit and subraction am two ways of calculating a value-added ta. Under the subtraction metta firm calculates its value added by subtactnS its total purchases fr•n its total sales. Then it cakclares the tax liability by multiplying its value added by the tax rate. The credit method calculates ttax for each transaction. A firm's tax liability is determined by adding up the taxes paid on allpuremses and the taxes collected on all sales and astactin the total tax paid from the total taxcollected. For a more complete discussion of these methods of calculatin a value-added tax see TaPol!%: Tax-Credit and Subtraction Methods of Calculating a Value-Added Tax (GAO/GGD-89-7?June 21. leow).

Past 39 GAO/GGI4MI4 State Officia'- CoraumptionsTax Copee

Opdmd DiFORISM but a augMalbla %Wrn Tax aW a Valb.Adied Tax

enhances compliance but also provides tax authorities with documenta-tion for cross-checking the amount of value-added tax collected. A fed-eral retail sales tax and a subtraction mtrthod value-added tax both lackthis self-enforcing feature.

Size of Base Because of the better enforcement properties, it may be possible to levya federal value-added tax on more goods and services than a federalretail sales tax. In fact, European nations, on the average, levy value-added taxes on more goods and services than most state sales taxes inthe United States.

Exemptions From the Goods and services may be exempted from the tax base under either afederal retail sales tax or a value-added tax. Under a retail sales tax

Base exemption the entire tax is removed, but under a value-added taxexemption only the tax at the final point of distribution or production isremoved.

If the intention is to remove the tax completely under a value-added tax."zero-rating" can be used. A zero-rating under a value-added tax appliesa tax rate of zero on the sale of a good and allows a full deduction, orcredit, for any tax paid on items purchased to produce the good. Zero-rating differs from exemption because zero rating keeps the firms pro-ducing zero-rated goods "in the system," that is, they are registered withthe tax authority and must file a tax return.

Evasion Most taxpayers are reluctant to attempt to evade their tax obligations-until the tax rate becomes so high that the potential financial gain from

evasion exceeds the cost of the potential punishment if caught. A creditvalue-added tax with the self-enforcing feature increases the probabilityof exposing tax evaders. A federal retail sales tax has no such feature.Therefore, up to some given tax rate, a value-added tax would beexpected to have better voluntary compliance than a federal retail salestax. Thus, the federal value-added tax rate that would trigger signifi-cant levels of evasion would probably be higher than the federal retailsales tax rate th.- would trigger significant levels of evasion.

. Appendix II

Methodology for GAO ConsumptionTax Questionnai

These GAO questionnaires were developed on the basis of informationcollected from published sources, including economics and accountingtextbooks, government reports, professional journals, and accountingfirm and trade association publications. We spoke with academicexperts and with knowledgeable officials of the Canadian governmentand the states of Maryland, Michigan, Nebraska, New York. Oregon. Viginia, and Washington. We also spoke with representatives of severalbusiness associations, including the Michigan State Chamber of Com-merce and Tax Executives Institute.

Four separate questionnaires were developed to send to (1) policymak-ers in states with a retail sales tax, (2) policymakers in states without.retail sales tax, (3) tax administrators in states with a retail sales tax.and (4) tax administrators in states without a retail sales tax. Prelimi-nary drafts of the questionnaires were reviewed by officials of the Air

the National Governors' Association, the National Conference of StateLegislators, the National Association of State Budget Officers, and theFederation of Tax Administrators. Based on their suggestions, changeswere made where appropriate. These officials did not in any wayendorse or sponsor the questionnaires but did supply GAO with thenames and addresses of the appropriate state officials to receive ques-tionnaires. State senators and representatives who received the ques-tionnaires were chairpersons of the tax policy committees in theirrespective states.

A draft of the questionnaires was pretested with the appropriate stateofficials in New York, Oregon, and Washington. These states wereselected for the following reasons:

* New York because it has both a retail sales tax and a state income tax;* Oregon because it has an income tax but no retail sales tax; and* Washington because it has a state retail sales tax but no state income

tax.

The first mailing was done on August 17, 1988. Follow-up letters andquestionnaires were mailed on September 30 and November 17, 1988.Telephone follow-up was done in December 1988 and January 1989. Otanalysis includes all responses received by March 15, 1989. The answeireceived by respondent type are shown in table 11.1.

fag. 41 cGAo/GGoD 0 state osoidaen coasmýo Tax co.er

AP,.ft EMsnhdinh hrGAO CAiM=npd~mTeaQmm@@ um

Ta, ,.1: Sum.mry of Ousoe ame A RO@Pmd*at bY Of OfAl

Do~se to Anewered reponhP maker/AdminiatAmt Total mWed No respons aswer quesfte ramGovernors 50 18 7 25 5(Budget officers 50 13 6 31 WSenators 54 19 9 26 41Represeontatrv 49 10 6 33 6;

Fiscal offices 56 6 14 38 6(Tax administrators s 3 3 BE

Total 311 SI 45 197 W

We analyzed and quantified responses for all policymakers and adminis-trators in states with a sales tax. Responses from tax administrators inthe five states without a sales tax were such a small population and sodiverse that they could not be effectively analyzed. The level of respon-dents in each state is shown in table 11.2.

Two~~~A -L " fae"A* tWW ysf

Thbalee $*NA ----- effw adeinlr epnet ~S

Alabama N C N CCAlASka D D N.N C NAriZona C C C CCArkansas N C C C CCalfornia D 0 N.C 0 DColorado N C N C 0Connecticut N C 0 C 0Delaware C C N C 0Florid C C C.C 0 C.CGeorgia N C 0 C CHawai C C C C DW04h C C C C CIllinois N C C C CIndian C N C C CIowa N N C C0Kansas N 0 C N DKentucky C C N CNLou~isriaa N C C NNMaine C C N N CMarywan C C C N 0Mas1saChUSetts N N N.N N CMichign C C C C C,Cfinnesolta C C D C NMississippi N N C C CMissouri C C N N CMontane D N D D CNebraska C C C * CNevada 0 N N N CNew Hampshire C C D 0 DNew Jersey C C N D NNew Mexico C C C C CNew Yobrk N N C N C,NNorth Carolina C C C N CNorth Dakota D N C C COhio C C D C DOklahoma C N D D DOregon D D C C C cniu

194648GAO/GGDft0 *taft Offidms CA101UNPdo T=x C*cNm

Ms ge Piss o s.fim a m afm - •Pmennylvani N N N C C.C(RhdellandtW C C C C C.C (

South CWaro C C N C C (South Dehota N C C C CTennemss N C C C C (Teons N N D C DUtah N N C C CVrmont C N N C CVirgio 0 0 0 C C.DWahitgton C C N C C.C CWest Virginia N D N C CWisconsn C C D.N N,C DWyoming C C C C C.C

NOe: C.CoPleted Qusmonnire. DOe-ned to Rspwond, aM NfNo Rimesose. Two letters indcatetwo persins in i pa•-ymelung pstMn in at sate *wee ret qustieonrms.

Sales tax dependence was calculated with data from the Department ofCommerce report Government Finances in 1986-87 (Bureau of the Cen-sus, Series GF-87-6). High and low retail sales tax dependence wasdetermined by calculating the revenue from retail sales tax as a percentof general revenues for each state. If a state's percentage was above (orbelow) the national average of 24.578 percent, it was considered to havea high (or low) dependence on its state retail sales tax. States without asales tax were included in the low retail sales tax dependency group.State data is shown in table 11.3. Where there was a significant differ-ence in the answers given by these various groups, it was noted in ourreport.

NebhW ft GAO CAROuM1

Table R.3:13W SoftBau eI IDepsliees m•mon s

Mwe I NOls.. same1mimi soin ihodkbi Above soi

So" tax Wi0sme mn svwq aeOmAlabama X X

Anzona x x xArkansas X X XCalliftnia X X XColorado X XConnecticut X a xOelaware XFlorida X XGeorgia x X XHawaii X X XIdaho x x xOlinoles x X xIndiana X X XIowa X XKansas X X XKentucky X XLouisiana X XMarne X X XMaryland X XMassachusetts X XMichigan X XMinnesota X XMississippi X X XMissouri X X XMontana XNebraska X XNevada X XNew Hampshire b

New Jersey X XNew Mexico X X XNew York X XNorth Carolina X XNorth Dakota X XOhio X X XOklahoma X XOregon X

(continue

Page 45 GAO/GGD.4O Ses Offdela• s Cem.npdom Tax Coenfr

Miaaheawr GADO aMOMwdaiTax eomsliIIIIII1ul

goes. inwb a ~ sonh

softe tax ee..max aw1INg. avwaPennstvlania x x xRhiodelaWand x x __

South CaroIna x X xSouth Dakota x xTenneune x xTeXas X xUtah x X xVermont X KVirginia K Xfthengton K XWest Virgimi x K XWisconwi X XWyoming K

aConnecticut waes ory nterest. ON40ide ndsd CWapt gain and was counted as, a state n'ot ftaving arindivida income tax.

Ne w lsupahar and Tennessee tax only interest and dividends and-ower counted as states not havtman individual inxme tax.

Level of Concern by Respondent Characteristia

Our questionnaire analysis included, where appropriate, comparison oiresponses based on specific respondent characteristics. These includedanalyses based on

"* type of respondent-legislators (state senators, state representatives.state fiscal officers) versus executives (governors and state budgetofficers);

"* degree to which a state taxes personal income as determined by thedependence of that state on individual income taxes for revenue--40states with a broad-based individual income tax versus 10 states with.low or no individual income tax;

"* degree to which a state is dependent on a retail sales tax-states abovfthe national average were determined to have high dependency versusstates below the national average (low dependency)-25 states withabove average dependence versus 25 states below average.

Limited comparisons of policymakers' responses were made betweenstates with and without a retail sales tax because of the low level ofresponse from policymakers in states without a retail sales tax.

Policymakers indicated their level of concern regarding either a federavalue-added tax or a retail sales tax based on their preference for sometype of federal consumption tax. Those not favoring a federal retailsales tax indicated their concerns about a federal retail sales tax. Thomnot favoring a federal value-added tax indicated their concerns about evalue-added tax.

Questionnaire responses indicated that the level of concern for manyissues varied depending on whether the respondent was a legislative otexecutive branch policymaker and whether the policymaker opposedraising taxes. Concerns about issues also varied depending on the pro-portion of state revenue derived from retail sales tax in the respondentstate.

Executive branch policymakers were more concerned than legislativebranch policymakers about the regressivity of a consumption tax.Policymakers opposed to raising taxes were more concerned about theimpact of a consumption tax on inflation or that the tax might not beused to reduce the deficit. Policymakers from states with a relativelylower retail sales tax were more concerned about the regressivity of afederal consumption tax.

Pa& 47 GAO/GGD*05 Sta. OffR"al'. CamsemU Tax Comcer

A higher proportion of executive branch policymakers than legislativepoilcymakers indicated concern about the regressivity of a federal salesor value-added tax. These executive branch policymalers indicated"greater concern about the regressivity of both a federal sales and avalue-added tax. For a value-added tax, they were especially concernedabout the invisibility of the tax, its potential impact on inflation, and thadministrative costs associated with enforcing the new tax.

As shown in tables 91. 1, M.2, and U11.3, a higher proportion of thoseopposed to raising federal taxes indicated great concern about potentialdrawbacks of a consumption tax than those not opposed to raising fed-eral taxes. Most noticeably, a higher proportion of those opposed to ranting federal taxes was greatly concerned that

0 federal retail sales tax or value-added tax revenue might not be used toreduce the defclt;

* a federal retail sales tax or value-added tax would increase inflation;and

• a federal value-added tax would create pressure on the state to matchits tax base with the federal tax base.

A higher proportion of those who did not oppose raising federal taxeswas greatly concerned about the regressivity of a federal retail salestax.

Levels of concern also varied depending on whether the respondent'sstate's retail sales tax revenue as a percentage of total state revenuewas below or above the average level for all states. A larger proportionof policymalers responding from states below the average was greatlyconcerned about regressivity and inflation. A slightly higher proportionof policymakers from states with sales tax revenue exceeding the aver-age was greatly concerned about the impact of a federal consumptiontax on their state's ability to increase its sales tax.

TAWs ELI: Pa wmeup of A peedleUteudvs amd Leulelmghvs Who Whie balm raw son W- pte"Gnmy or Vwry theeMy Cemeemed Wa Ease LOW Exec LeIedeal uiNmp mn Tax t5We Revenue may not be used to

reduce th deficit 43% 45% 68%Regressive neture of the tax 71 53 72Impact of the tax on inflation 21 Is 66Adminostrative cost to enforcethe tax 14 20 52intrusion of the fedel"government into state revenuesource 82 78 64ImWact of the tax on state'sability to increase a stateconsumphon tax 71 72 64Confusion between state andfederal tax 54 50 36Confusion between state andfederal tax ban 54 53 32Pressure to match state taxban with fed"a tax ban 39 42 32Visibiity of the tax to theconsumer 21 18 16Invisibility of the tax to theconsumer 4 10 60

Pape 4 GAo/GGDmam state Offdar cmuiw a Tax Cnce"

9asel effCAOMsi by

TOWe .2 PUMbOene of ReopondingPeNtywmekers Who Whys Opposed wr Not Ped"r MWb uiu tax g Sh OOppoesedad i isngThmss&dWho QW-csed in Opp""s fieVwhr Or*@*y or Wry Greel Consumed ising Not risin

Wfth F~WW C~nUMMI~n 4K NOM Revenue may not be used tot1111111 OpsdOOSreduce the deficit 71% 38% 79% ERegress"enature of the tax 29 66 63impact offthtaxanminflation 29 14 67Administrative cost to enforcethe tax 29 16 soIntrusion of the federalgovernment into state revenuesource 82 79 75Impect of the tax on state'sability to increase a stateconsumption tax 65 73 75Confusion between state andfederatax 53 51 38 3Confusion between state andfederal taxbass 53 54 42 3Pressure to match state taxbase with federal tax base 41 41 46 2Visibility of the tax to theconsumer 12 21 17 1Invisibility of the tax to theconsumer 13 7 46 3

Ls'd dCAi

TOWl 11111A Pemenlng of RespondbingPolmeker Fom SteMs Wth a Level Podeu mine tSiv a dof ReMt Sales Tax Ospendauce Belwn 3.1w Above Wew Lbean Above the Averege Who Wea Rave" may riot be used toGreeor Vey GnmWy Cner-nd Wiu reduce the defict 42% 46% 72%Fedewal Conwsumptn Tax lasses Regressive nature of the tax 73 51 72

Impact of the tax on inflation 21 15 63Administrative cost to enforceme tax 24 15 41Intrusion of the federalgovernment into state revenuesource 79 80 66Impact of the tax on state'sabdity to increase a stateconsumption tax 67 75 59Confusion between state andfederal tax 55 49 31Confusion between state andfederal tax bese 49 56 38Pressure to match state taxbate with fderl" tax base 33 46 31Visibdity of the tax to theconsumer 21 18 25Invisibility of the tax to theconsumer 9 7 44

Pape 51 GAO/GGDU06 Sitme Offcieal's CmunOaiOn Tax Conce

AppnAdix IV

Questionnaire and Responses From StateTax Polieymakers

This appendix includes the questionnaire and responses of state taxpolicymakers. Responses to questions 3 through 9 and 11 through 18reflect the number of policymakers from states with and without a stateretail sales tax. Responses to questions 10. 19, and 20 could not be com-bined for policymakers in states with and without a sales tax becausethe questions are not identical. Responses from policymakers in stateswith a retail sales tax are shown in sequence. Responses from policy-makers in states without a sales tax are on the last page of thisappendix.

Appendx IV

Survey of State Tax PolicymnakersConcerning a Possible Federal Consumption Tax

IWU.& Omwd Awef OfcU. (GAM. as spiy of OMftCasm nqmftb Oar eemwhudq Jbad" pdwadt

peoe. Is aedof a M my of anm wpIlkmI I Vdn.di too (VATha A siliftV an m0~meamigesw. The -,s Oi Ykaw Ma -ws minu cdovleaedap me n w a

phsydMf ateard easee ipsmwes w ba saubwas -, Vab""I P daweI uesfmwavs ...S rnasimim . a akse is ieu w

31001 Wil 20 OtM A as do is mkmiudod ad

ad am. The puedcowa aboul be u..plss by be esaddeseso usawow heis delps.s. A Anis

iaah bgt mD s I -- Yaw COOKIW. Vs RAW1m win anm or m vn-add tax.pI~.a is whinay. Hamme. car mprni to d

coopast. Win be imOMMOa muim .bo yo -fgn.o We dk low A maid adms as or Sis- WoIu tax Eo aU6 GOS ' mply. ebd absd ind-i of gwht er se-wee odd w

hamm d of befta alahud ad added w SmThuis Wso 3 m ,.. wevey. Yinldiew vauposu bhabeas Piw at VIM ONf aid.IM be. - fibe ftCeemp. Afew usuimp Smriplim OAO wN ft uh a a membr of saw we bb Iaw A faced aidew wo value-added me to ishemo-up im Poss w cases -omi doomimic fI ~ M adiiii en aded 0nprim of pods ormli.do 9Smasewek uminm Thmubms. k is do Olda 40 mioaows humied df hasee WkWNabi S pnceonmod dw w.be of sa coww pence i awdam 1. believe d ises.

Its ~IdnI I abasdin 30 20.30 Miu w CMIMB. r4bI O A swmat M saft uxor eSlva-adui soxIdw of do qntmm s. han bieh mui -- 'by bambm *A b added vemtoa I I Il and sawm Uz at VIMe-aun Nlm inn be dopemaisims inb edo e Simiade me w dot ba qylisod mbsin -mu. as b1~,d " jI Iowdps wif It dep of 9i~ If m have Wordsax . AdvaesaS aand..ud of WOb umr

my qid.'. psemm cml). collw. Mr. Gme iAw em w etes b1 0,a abfiedw mpmcy. hi cb petiodicgy(415) S564300 or W Lyaft Will am MMW M27%650. in mine0do mu do Mason coeclieefo hei.

bumid~nm Iaw A maxh ba s~s do ustaw amlU.S. Ganod Mcosiom OM= gswe ad amic.- Radimi wouid iehafs wwag d elMr. OweP lia Of ~ mi -MUN ammSl hoeiq. mdm* cam.SM Fm. negised Ofiem huiinat end GOO edina. ubo. Si ewifm

1275 MS.i Sowim____________________Se Pim- c. CA 94103

Pago 53 GAO/GGDM60 State Offiaim~ Consau"mp Tax Com~e.

Appeadl IVquetIomainb amd -qpo Fvam UstsTAX POlCYMa~mtu

L BAcKoWAXMN*~~~f Fm .w* e.d gab I or I mqmapm wvia&

I - bm diomthe md kphmwm~ of ift m) Ia in aum 3. plai awn w qwsmam4.On pm v obdd cwm adow~lsfomm Itym dli mu chk I or 2i aqum 3. pums slapftq* abwym 0 qnmmm S.

MN.4. Pm orpai U aunvai warn. a yam vamITTL: ________________I______ dob *a bmx . u . dom au m ta wrn bo

(Cbud sm he. a d mw. rymu chw -*a1U.DHPt4E NUMUIR: Am=......... in oPi 3. A" WM fJr At @*or.)

2. Pe W" sh mas yrU a UK pdky~aaw? ar~ad J I

IL ~uPOMM SO.JM~ OF A4fleguWA (1) (2) (3 4

nma uv= . Cwm~mr

3. ymyaop... shAhk of *a bI~wiqmwg s it my, n194 4

~do "' he (O ihiwiuwI') wta 15 12 28

I .O0Cowpauuiaom ma. (69 )

2. O3laivud aaaemsmaa (57 ) Vymcao =mmm)aqi=3

3. ai baa~i csafiw.d wma M1ST or VAT) ( 41) 1 pb auw qnso S.

4. C Fabj udg m (jcogl -I so .(49 l "Myom hwea'. mm 1m vls.Lh.L M) ma. or both" Khoc am)

5-3dPm~t)(28) i1.ORwAdimjma (10)

____ ____ ____ ____ ___ 2. O3vabs-a*1wm (24)

________________10_ %aOed (4)

6. 0 iw h gamin. shw a rim OT mim 4.w 13 0d ohm voce Un) (2)

lnmudwU*fdLsh (46)

IIf Y=m sbackd ady 4.5S. or 6in qua.. 3.plai ahpW 6.I

AppguimIV

Taxrn Pkiuaku

W. grAT1 CONCU 43011 A UOAD SAND ==Da winibow TAX.

C. Wam yen 6t or p.. a k~bm@6m biudw msr~um in m burn.. do .3md MW.k Kho - bm m

I- PAW am an 6 12 51 73 3L vdm.dbim I" I 18i 17 46 56

V ud"&(qppm) or 5 (mnime* opu) ft efw uW Wo idnat ow b min6. mmomqmm 7-91. N i yo Ad. mAu umm. sbp qmpsm 10.

7. WoM m aop@Mmtoa b'i-bd hiod co~m us =~u Ww mwa win v dsd) be .mWim if d8ý WW, ... a dm b On u.ý 90bo oud Cmm arb umi)? (W am b m Ara.

D~* RAWbil Pi~i Dublul No bmW

I. aft Ulm i 1 23 7 40 + 51 II 2I Vd-iM~uzm 1 I1 6 1'3 40 2

S. Wodi yew opaldu. a a S~UI PI I-d bIm uI onpm a (ibu wi Mu. or vdm& be .~wif Viibiodw gussus aped 0 ply a bigi im of ym m's bftoyidpmi NW prop= $010? a~m - Ain 0"fw.)

Dsabihi PA*Iy RAb"l Noud bookyo m . asomi w s 0

_________ (1) (2) (3) (4) (5) j 6

1. RAMA OW a 3 17 17 39 4?

2. Vdso4iu %a1 13 116 136 37

p ae 1919~IV ~ERU.. ~ ~

- wtlTax ftqynamh

9. Wevi yew appoim w a kv@64@w Mmad -a mmp k mu inS bB nvs o w nw bntk oo do cmmmr

-W am -wi #An

Dadumly Pveb§hIy Pauimw Dafitl* N. bm

(1) (2) ()34) m) 0)

I.At II" 6 2 463 j 71 12. VdwM.Wix 0 0 1,134 61, 1

I&0I ym oqkm.. Now do Odom of a bnmduim hIud em~dm ma wmnq =0fw or ' yw ax"M ~a iqm Uj wx txrbd m w n f ax bum? Ic e aw &W In NSAmw.)

one* ow &a*y No umnM-8- Iiopmmmp Dwom V&= sm-, aim

(1) (2) (3) (4) (5) (6)

1. bcurwing oma1~0 1 20 59 56 7

2. smum mw ax_____ I__ I 1 11 27 58 34 12

11. A~mgo *we urn gpq w be a I I- bSwd em.~qda ux. waui pvf a fsminI amuoa.ma SmurM a MR win ax ora vagGdA~i I"? Khtd oar.)

1. 0 Pub, tad whin = 9 a. ound 1.#.) (53)

2. 0 Pseh wwaw soodwax w vuamn 12.) (78)

& 0 Dasar (ima wo*) VFl.. aw pj~mi 12 tad vj IS.) (10)

4. 0NHe bb toJWmdp wmp~udm 4.) (12)

AopWsm IVQeasdsminbs a"i ON"mF~

12. To * sno VNmy. do you bhiaw do bswa imsm mu *by Se hmud gwmmom u wmi ~mpm* a bme v~w WO aft wOuih sm be iau ernj

VO, LinkpU ums Moin sm w so e b"m

A. lb awuu mW beud a 3mn adilembdud waf uh am hr do"

btei ud dlam Im a my I q - om.. hm a W4mbo=MM w uma is 31 16 9 6 1

C. bmm a hdd mo Wo .us so bur mknow______________ 2 13 22 120 27 1.

D. Adoiove am fm ad"u a bwd .uaWN us8 16 14 40 2

L. Paded g, m bus .iom lm kubus obiIý amdft sW 46 24 6 5 7 0

P. hosab udud d Ius mly bm fMel Aft a' &mmo win I= 36 25 7 7 9 2

a. cooh.. buw. mmadi bd] mom dmk________m______ 19 26 15 S 221

H. Camum bm imm a aw sbu 20 27 10 13 17 1I. Pwina so mu - m bus wW hdmi

m w16 20 20 11 20 1

J. Vbbf ofa I umd Woax Isft

mm5 12 12 16 137 6

___________________ 2 5 11 17 42 9

Aw 0 qtIU31m1O34

Paoe 57 GAO/GGD.OG6O State Officlsi's ('oumuumtlon Tom Ca*nrom.

-pwbsI- ,' .i I am Reposs Po @1mTax ftIkqmmbm

13. To %to exaL y. do ys bmipsw do bIq unow on mmom wby dim 66 s'mems m eim owhsmmo

IVony Lms

(1) (2 (3) (4) 5 ()

A. Us nemomy be anda w n dhsqpeiq~~i&b24 19 7 5 2

Wird volls..ide us so" aiisu~smos"ma .Is u bommubw dm bou 21 15 9 9 6 3

C. lowm a hind vdin.eiWma Uy ow ws mbasin ____________ 12 18 6 6 15

D. Adm~msl unot a m a hind valehaddd a 14 12 10 9 12 6

3. Vmid pworomues jausie Ins win Inom modal d) a sm mo frms 30 15 5 4 9 0

F. hwo a d"i do woimhowe"am-$ obay 0 mumme smuwmopw

m.24 18 6 I 3 40. Cominis butwoo som ai bina

oomdm u. 10 13 13 11 12 4

H.Colmi bo sm dfoer n bw 14 11 12 9 13 4I. F om a soc smeat but wTA*n

man ue 13 a 1 1 10 19 2

1. V~blf of a1 Word Not ma e

-4 6 6 10l 33IL. hvl Iftofa b6"in dd i ndh ma as

__ __ _ __ _ __ _ __ _ __ _ 16 a 6 9 17 6

L Odw OlowVc*) (7)

AuPsMAIsV

IV. U or AI £ IZ AL COM5NAON TAX

14. k yew op~m. ~~ of dw bahsi bur. d my. ubml be OMW &Mr A huod~hind Iuu rmd ad. imMM1) or mamo w(VAT)? f~wk em bmp fw *xmd ow 6b.' 1Aw *trin ,." mev

LS? *an" Mew. VAT *sdi mmy.

me hum ....... No binITEso I 2) () (1) (2)

1. Fet somadwpo.tv 29 108 1s 36... IL.. 22

3. Few imyuq. 103 36 12 92 142 19

o. 13 11 21 14 Il 7S. U IhMmrMINN 25 105 22 31 91 300. mm uwb 15 115 22 13 11. 297.Uadmimmi 25 104 23 28 94 3

W~iaumm13 119 19 13 11 2

1INwamn91 42 19 69 56 22L thai 6m 93 36 21 75 46 I 29

13. biWifq inodi 43 91 is 34 92 2614. Pin~m 13 120 19 14 1

is. Piak odli

u--ukta 89 51[~ i 13i7 iZ4[i20b6 Uoinhy 85 55SJ 13 74 so 2.. r

17. Umhf p f ofWp" 64 162L26 37 a 3

QUMNON 14 CONWium CO TM MW PAGE

rap 5 GAO/GGD*6 Reate Officals CinuýWpoe Tax Concenm

diw an"wuui

at1 dow no VAT *.Amap

It______an _______________ 12 53 30 19

i.P * akm110 20 11 95 40 16b"

a. WsW ma Dmd 103 36 13 50 4 1 15 21b. GWpoftW" iuii. 45 64 23 39 80 33

c. Npok wrm 35 101 10 36 92 24

36 94 22 33 32 31

21. O*~ O q 4o

(10) 10

IS. To .~m amiL it my. wudi ye. bwn a opp a bv@64=i hdwd oa ~u or vdM wt do hwobd*a ý m? (Dv ~ bw i &a* m r.)

Smay b. so mbl No bubIy. ft~. "pm Osms "e~mm juip

________ () (2) (3 (4) (5) (0)

am an 6 15 37 183 6

2. 1~ mo 17 0- ,j 76 11

Ansaf IVQ , -I u opsw e u~m.

16. ToYie nowm itfmy. OWNM vam bor Oppim a kInemd *duod IuMW a" ar vd-d as do ad o eUmPO #w* Owl ub im au Few)

Fi avor qPoi OPmU al

__ __ __ 4 12 I 10 55 59

2. Vdmsoqbis 3..L. 17..2..... I 7 ... L. 9 IL.

V. 'fWIA1NOF A FEUNCAL TAX

17. how qse. .hoba *8 hembsom ho. it any. wev b11 m d md af fa W106410" h.dw

I DLO,,.. (61)

3. 0 N*wk to (10)

4. Dftwrusuampuem (111)

s.0bhMadwrmhlswld (31)

0. DVbbkademwmlbivd (40)

7.0 o bu.m= exemai ( 12)

vL SAMMN CWJWTIat4 TAX UKVEISU WIT STATES

I@. sqwf em w 9,S amimi nma Wed mai mu aft osr *A meui MR. Iaye apown. "Mdi yew =ajwkmwij ao Iwh Sopewin bl I w itd gil Mpuil) NO ý OR imA"ahl? flbft - bi a inc

o.dwb* PabaMy no" iemul No blobYU ya Womnb to )W

(1) (2) (3) (4) (5) (0)

1. &AM m a 4 25 38 38 32 16

2. vale~iiuian 5 20 391 2 4

rose. 61 GAO/G;GDI0M Sgat. Official Cssoquajpion Tax Cor~ene!

TAz ftff

a keim hdmd mW mW w itd o@mu mq*W yw mm " Ro a Fd Wad 21. Ph.. M dO *m bism 0 Pifvs& My siMm

au on"" of pwds.?w Kd sme.) pm my bmw sb Ob .IniS - bisu Modil

t-DdMihlmsy (12) -we if d ammmy.. ~ e

3. 0 mbft yam (20)

10O hUui.d (28)

4.0 dnu*blft (47)

5.0 owbh* so (25)

3. & ya opkmin WNW yewmu saf w is~a bm.hboW Muwd vaaidM m it do bidwVag uqmad ym rn mempod he m winadman ameiba of pUddm.? faw ow.)

I. QbnbMdyum (15S)

2.O0 now*u" (14)

3.O0Ummmam (26)

4.O0 Sbmbla* (44)

5.0OdlbM* w (28)

&D.siuiswyaw (17)

1~ye yet b*

Wb Impj qia. vi ua& it. o. sM do sm at a hdd emompo a mo ya wo - mam a

pw Ons Moo Su We or Me bon

suimo 2 1 0 1 5 0

39. h pom qdm 'd elpm w Imk3.hp . pmm Svdmm mds pm 0 ma ~ ~ d mm aam

frims noa yaw am #AS~ a m mem au maa mam et NOW ~ ya mlwm~w

t 0 rbide* yu (1) 2.OC3pabomy y (2)

S. 0.Dwflim*vw (2) s. 0 o&**dp (2)

6.C3 e bm* a jwp (0) 6. ON3hme bo a p (co)

Pap. 63 GA4o/GGDwm5 *ama Otidafs aComaaumas Tax cown

AwjildixV

Quesionnaire and Responses From StateTax Administrators

This appendix includes the questionnaire and responses of state taxadministrators from states with a retail sales tax. Because only fivestates do not have a retail sales tax, a limited number of responses wasreceived, and these showed no patterns sufficient for data analysis.

ApominbV-mdomeM ip - o seatsTh: Admmb&W

ua m an" Dmamu~ Oft-q of Sltet Tu -oblrginCoRrI a Powfb~k %dual Mmuntluh

Mw IL& amo Anf CU. MO a ip" dpopow b s inmft aa PvdE d. ON inI A am

ad ad.m&Am Is qwmb mi wa am ipo oinW eto ~am Adrdmw 0Pswb pqaOVONm doaya b do pub' n. dbidnW pmm

P, - - s d &a smpm mum V Ued 6a dham. a buu

lý uato b S 66M -mm m lbdi WNiS byd mm lb 6mi iamdwi iqai go S

~~~N of 05 hhlM A m dW 6 ad a ~db am.b~ad le am pim of pPq6 A r uu am a ~iim

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Page 65GAO/GjGDO450 SUaM Offldiars Cnsaumodo. Tax Concerns

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4. dO WOW PInmpCd*)____ (2)

Page Go GAO/GGD6OM *tam Officdal' Coommadma Tax Con"a

Appendix VI

Maor Conrtibutors to This Report

General Government Lynda Willis. Assistant Director

Division, Washington, Mary Phillips. Evaluator

D.C.

San Francisco George Zika. Evaluator-in-ChargeIra Carter, Evaluator

Regional Office .Julie Devault, Evaluator

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3

Collins, Stephen H. "A VAT in Your Future?" Journal of Accountancy(Nov. 1987) 62-69.

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Durenberger, Dave. "The Consumption Tax Alternative." The Consump-tdon Tax: A Better Alternative?, eds. Charls K Walker and Mark A.Bloomfield, pp. 167-177. Cambridge, Mass.: Ballinger Publishing Com-pany, 1987.

Esenwein, Gregg A. "Revenue Raising Options." Congressional ResearchService, Library of Congress, Issue Brief 87169. Washington, D.C., 1988.

Fowler, Henry H. "A Historical Perspective on Tax Policy." The Con-sumption Tax: A Better Alternative?, eds. Charis K. Walker and Mark A.Bloomfield, 3-23. Cambridge, Mass.: Ballinger Publishing Company,1987.

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Kotlikoff, Laurence J. '1TY for the Value-Added Tax." Tax Notes(Apr. 11, 1988) 239-244.

Page 75 GAO/Gi*Ow st.a Ofedul' co Tax C*eew

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Makin, John H. "Income Tax Reform and the Consumption Tax." TheConsumption Tax: A Better Alternative?, eds Charts L Walker and'M&A. Bloomfield, pp. 87-115. Cambridge Mass.: Ballinger Publishing Cornpany, 1987.

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(26634) Page 7" GAO/ GD*OM Satow Offlcisa s Commtpuen Taxi Coerns

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