Value-Added or National Sales Tax 

RILA urges Members of the House of Representatives and Senate to oppose legislation advocating a national retail sales or value-added tax.  Any tax-reform legislation considered by Congress should be developed with the full input of retailers, and RILA and its member companies stand ready to assist in that effort.

Some policymakers, economists, and academicians support replacing the current income tax system with a national consumption tax.  They argue that a sales tax is fairer than the current income tax system and will give Americans more incentive to save, simplify federal taxation, reduce the cost of tax filing compliance, and lower the cost of goods and services. 

Notwithstanding their arguments, a national retail sales or value-added tax raises a number of serious concerns, which undermine its viability:

• Experts believe Congress would need to impose a tax rate of 30 percent or more to offset the costs of moving from an income tax system to a consumption-based system.  Such a tax would put the cost of many basic commodities and goods out of reach for millions of Americans. 
  
• Sales taxes are generally regressive and particularly harm low- and middle-income consumers who spend a higher percentage of their income on basic necessities such as food, clothing, and household products.  While proponents of a national retail sales or value-added tax contend that rebates could be offered to mitigate its regressive nature, to be effective, such rebates would have to be made to the more than 300 million Americans each month, which would entail substantial administrative costs to the government and drive the tax rate even higher.
  
• Retail represents the third largest employer in the United States – behind only government and healthcare.  In 2010, the retail industry saw $3.9 trillion in annual sales and employed 15 million American workers. /4/  A national consumption tax would significantly depress retail sales and have a devastating impact on this important sector of our national economy and the critical jobs it provides.
  
• Many national consumption tax advocates wish to repeal the current income tax system to eliminate the possibility of layering a sales tax on top of the current federal income tax.  Permanent repeal of the income tax would require an amendment to the U.S. Constitution.  Given the difficulty and infrequency of constitutional amendments, the possibility of a national sales or value-added tax existing on top of the current federal income tax is highly likely.
  
• State and local governments already apply sales taxes to many goods and services.  A national consumption tax would simply add to the tax burden consumers are already asked to shoulder by these jurisdictions.
  
• A national sales or value-added tax of any amount, whether in lieu of or in addition to a federal income tax, would create significant administrative burdens for RILA members, which would be responsible for collecting and remitting the tax to the U.S. Treasury.
  
• Imposition of a national consumption tax in addition to the current tax system – a so-called add-on VAT – would be the worst of all options, increasing consumer prices with little chance of savings incentives, simplifications, or improved compliance espoused by the proponents of a national sales or value-added tax.

In confirmation of many of the foregoing structural flaws, the President's Advisory Panel on Federal Tax Reform, formed by President Bush in January 2005 to make recommendations on fundamental reform of the tax system, rejected a national retail sales tax in its final report, stating that such tax system would result in a high tax rate, be difficult to administer, and burdensome for state taxing authorities. /5/

For its part, the Obama Administration has undertaken two broad reviews of the U.S. tax system – the President’s Economic Recovery Advisory Board (PERAB) and the President’s National Commission on Fiscal Responsibility and Reform /6/ – to address the serious deficit projections over the next ten years and ballooning national debt.  In August 2010, the PERAB released a report that outlines a range of tax reform options, but with no specific recommendations. /7/  Notably, a national sales or value-added tax was not included as an option.  Similarly, the final report of the National Commission on Fiscal Responsibility and Reform, released in December 2010, included broad principles and illustrations for individual and corporate tax reform, but made no reference to a value-added or national sales tax. /8/

Following public remarks in September 2009 by PERAB Chairman Paul Volcker on the potential for a value-added tax, then-House Speaker Nancy Pelosi (D-CA) also stated publicly that such a tax should be on the table to address the country’s fiscal situation.  In response, RILA wrote to then-Speaker Pelosi expressing opposition to a value-added or national sales tax, noting its regressive nature and compliance burdens on retailers. /9/  RILA echoed similar concerns in a letter to the PERAB in December 2009, regarding tax reform. /10/

With talk of a value-added tax continuing in 2010, the Senate adopted, by a vote of 85 to 13, a Sense-of-the-Senate amendment on April 15, 2010, declaring that a value-added tax “is a massive tax increase that will cripple families on a fixed income and only further push back America's economic recovery and the Senate opposes the tax.” /11/  Similarly, on May 20, 2010, 154 House Republicans sent a letter to the National Commission on Fiscal Responsibility and Reform stating their opposition to an add-on  value-added tax. /12/