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Tuesday, April 21, 2009

A sales tax increase from 6.5 cents per dollar to 6.8 cents has been proposed as a way to avoid making deep cuts in important health care investments. The proposal has linked the sales tax increase with a Working Families Tax Rebate, which will refund a portion of the sales tax for lower and moderate income families.

A 0.3 cent increase in the retail sales tax would cost lower income families with kids (those earning $28,000 or less) about $38 annually (see graph below). Upper income families would pay about $163 per year.

While upper income families would pay more in absolute terms, an increase in the sales tax would cost lower income families more as a share of their income. The Working Families Tax Rebate is an important tool for revenue policy because it can offset the impacts of a tax increase for families who are struggling to make ends meet during the recession.

The graph above also shows the net impact of a sales tax increase combined with a Working Families Tax Rebate. Families with kids whose income is $28,000 or less would actually see a net decrease in sales tax. The rebate would also significantly lower the cost of the sales tax increase for the next bracket of earners (those earning between $28,000 and $52,000) so that their total tax increase would be about $29 annually.

Note: Because of the structure of the federal EITC, the Working Families Tax Rebate primarily benefits families with children. Adults without children can qualify for the EITC, but they receive a much smaller credit. The source for these data is the Institute for Taxation and Economic Policy Microsimulation Model.


Shelly F. Cohen said...

OK, I admit I haven't read the text of the bill proposing the sales tax hike and the Working Family Tax Rebate. While it's reassuring to see your graph showing that the rebate would reduce the regressive impact of the sales tax increase, I still wonder how easy it will be for a family that qualifies to actually receive the rebate. What percentage of eligible families will actually get the money they're entitled to? I'd still rather see the state roll back the sales tax and have an income tax instead.

Jeff Chapman said...

Great comments, thanks!

Experience in other states suggests that most people who are eligible for the rebate would receive it, particularly because of the connection with the federal EITC.

I think a short-term revenue solution is necessary to avoid deep cuts in programs that would harm our health and economic security. However, I agree that it does not address our long-term problems.