TRENTON-New Jersey's sales tax turns 40 on July 1, and a new report from NJPP calls for a comprehensive revamp so this middle-aged tax can do more to help the state meet its short- and long-term revenue needs and better serve the people who live and work here.

Expanding the tax to cover more items could raise up to $6 billion more per year, while making the sales tax fairer, reflecting the modern economy and leaving the rate at the current 6%.

You're 40; Now Get to Work: Making the State Sales Tax Pull its Weight was written by NJPP Research Director Mary E. Forsberg. It puts the sales tax in historical perspective and notes that New Jersey's sales tax burden compares favorably to most other states. "You could say we've let the sales tax get old and lazy," said NJPP President Jon Shure. "The sales tax could do more to help solve New Jersey's short- and long-term financial problems."

In many instances, the report notes, New Jersey taxes the transactions of a generation ago, not having updated the tax to reflect the nature of today's economy. Today, more consumer spending goes for services than tangible goods. The Internet, dating services, tanning salons and cable TV are just a few examples of things people spend on today that did not exist when sales taxes were first conceived. New Jersey taxes 65 of 168 services surveyed by the Federation of Tax Administrators, or just under 40%. States range from taxing fewer than 20 of these services to taxing 160.

Meanwhile, growth in sales tax receipts as a share of all state revenue in New Jersey has not kept up with other taxes. Over the past 10 years, sales tax revenue grew by 59%, compared to 110% for the state income tax and 118% for corporate business tax.

And the tax is riddled with inconsistencies, many of which work against lower- and middle-income people. For example, laundry detergent is taxed but taking clothes to the cleaners is not; renting a car is taxed but hiring a limousine and driver is not; buying a ticket to a baseball game is taxed but playing a round of golf or joining a country club is not.

Specific steps called for in the report include:

• Stop treating similar items differently; recognize services as an integral part of today's sales tax base.
• Impose the sales tax on clothes above a certain value, so furs and other luxury items are taxable.
• Levy the sales tax on motor fuels and impose a luxury tax on cars costing over $35,000 that get under 20 miles per gallon.
• Make the overall tax system fairer for low-income people by raising the income tax threshold, expanding the state Earned Income Tax Credit and considering a credit against sales tax. The regressive tendencies of the sales tax should not be used to keep it off the table. The burden on low-income people should be acknowledged and addressed through a variety of methods.

"The full revenue potential of the sales tax must be realized," the report says. "This is especially true as the state faces a budget gap and under-funding of important programs, but also is an important consideration for the future. And while it might be tempting to broaden the base and lower the rate, the reality is that New Jersey's current financial situation and the need to address the state's longstanding structural deficit would make that unwise. Over the long term, significantly broadening the sales tax base and maintaining the current rate at 6% is better policy for funding state services."

TAX REFORM

WORK & WAGES

BUDGET & FISCAL POLICY

TRANSIT ISSUES

ECONOMIC DEVELOPMENT

VOTING & GOVT REFORM

© 2008 New Jersey Policy Perspective