Monster Tax Heads for Vegas?

A proposed national sales tax has some influential support in D.C. Why this isn’t a good thing.

David McKee

Uncle Sam wants you ... to start paying more at the store—a lot more. That's the bottom line of the proposed national sales tax, a bottomless Pandora's box full of problems for both the bureaucrats who will have to administer it and (especially) the Joe Sixpacks who will have to pay it.


Las Vegas, and casino meccas like it, are in for a double whammy: In addition to taxing "all consumption of goods and services," the tax-to-be singles out the gambling industry (and only the gambling industry) for a 30 percent whopper of an excise tax, to be paid on all gaming revenues.


"It's disastrous, if it were ever to come into existence," says William Eadington, Nevada's leading expert on the casino industry. "You're talking about a $2.3 billion lien against an industry that last year reported profits of about $850 million. You will push companies over the brink, because they can't pass the tax on easily. My suspicion is that this would have a disproportionately harsh impact on a state [Nevada] that is terribly tourist-oriented."


Some Nevadans are still hopping mad over the tax increases passed by the 2003 Legislature and are taking it out in this year's election cycle. Just imagine how they'll feel when 30 cents' worth of federal tax is piggybacked onto every dollar they spend at Albertsons. Sound too bad to be true? It's not and, if George W. Bush is re-elected, it could become the law of the land. How did this sales tax-cum-casino tax creep up on us? Well, it began ...



Once a upon a time.


January 7, 2003, to be exact, when Rep. John Linder, of Georgia, introduced H.R. 25, proposing to abolish the IRS (and destroy its records) at the end of fiscal year 2007. In place of payroll, Social Security and Medicare withholding, Linder's bill (which now has 54 co-sponsors) would impose a federal sales tax, which would produce a variety of economic bonanzas—in theory.


Although the bill is comparatively new, Robert S. McIntyre, who writes the "Taxonomist" column for The American Prospect, says versions of it have "been introduced over and over since around '99 or '98."


The primary booster is a 527 group called FairTax.org, and the bill itself is, by a curious coincidence, called the Fair Tax Act of 2003. FairTax.org is allied with the plutocrat-friendly Cato Institute and the Heritage Foundation. The latter's trustees include such average consumers as Steve Forbes, Holly Coors and conservative conspiracy-theory obsessive Richard Scaife (patron of Kenneth Starr).


Aside from a couple of perfunctory floor debates, the Fair Tax Act slumbered beneath a legislative slag heap, like the Japanese movie monster Gamera, until rudely jolted awake by external events.


Early last month, rumblings were heard on cable news that the Bush administration would be making a big push for a national sales tax after the election. House Majority Leader Tom DeLay (a co-sponsor of the bill) and his front man, Speaker of the House Dennis Hastert, made it clear that the tax was a big part of their agenda


While campaigning in Florida, President Bush lent further substance to rumor, saying, "I'm not exactly sure how big the national sales tax is going to have to be, but it's the kind of interesting idea we ought to explore seriously."


Note the subtle semantic shift of the debate. Amidst his characteristically (deliberately?) imprecise speech, Bush reframed the debate in terms of "how big" the tax should be, not whether we should have one.


After speedy Democratic criticism, Bush went on Larry King Live three days later to issue a non-denial denial, saying, "People put words in my mouth. People shouldn't be worrying about me raising their taxes."


However, some of the groundwork was laid in the Economic Report to the President, and Bush stuck to the script in his acceptance speech at the Republican Convention. "Another drag on the economy is the current tax code, which is a complicated mess," he said. This parrots the rhetoric of Linder and fellow Rep. Steve King, of Iowa, cornpone philosophers who regularly refer to the tax code as a drag anchor on the American economy.


What's more, Bush remarked, "our economic future demands a simpler, fairer, pro-growth system," words practically plucked from Linder's mouth. So the White House and pro-sales tax congregation in Congress are singing from the same hymnal, despite protestations to the (sort of) contrary.


Even if the idea sounds good ...



What does it really mean?


As proposed, "all ... goods and services" would be taxed at a rate of $30 for every $100 spent. The proponents of the tax refer to this as "the 23 percent rate.'" How does 30 percent morph into 23 percent? It's easy. First, you must be shamelessly disingenuous and, secondly, you have to employ voodoo math.


That 30 bucks tax you're paying on the Benjamin that you spent at Wal-Mart is calculated as a percentage of the whole purchase price-plus-tax enchilada. Abracadabra, $30 as a percentage of $130 is 23 percent. Pay no attention to the man behind the curtain. He's from the government and he's here to help you.


To put it in everyday terms ...



Let's go to the store.


Hmmmm ... OK: A bottle of beer ($1.18), a 14-pound bag of cat litter ($4.98), a Glade scented candle ($2.08, the better to combat cat-box smells), a package of Therma-care heat wraps ($7.18) and some sinus-headache pills ($4.98). That's $20.40 in retail, plus $1.51 in state and local taxes. But add on that 30 percent national sales tax and the tab for our mundane shopping expedition goes from $21.91 to $28.03. Ouch! You'll need those pain relievers.


And if you're fuming about the gas taxes, get ready to grumble louder, because the Fair Tax Act would superimpose the 30 percent sales tax on top of the federal excise tax you're already paying.


When combined with state and county sales taxes, Las Vegans would be taxed at 37.5 percent on all consumption. Even when the local taxes don't apply, the national sales tax would. It would tax, among many other things:


• Telecom services (local and long-distance);


• Electricity (a $75.83 Nevada Power bill would go to $97.88);


• Car rentals;


• All domestic travel (whether by air or bus) and 50 percent of international travel;


• All "financial intermediation services," including brokering, banking, insurance premiums and the rental of the safe deposit box for all those additional savings you'll have.


Savings?! Yes, one of explicit purposes of the Fair Tax Act (an outgrowth of what's called the "strict father" model of government, favored by the far right) is to "promote savings" and improve our fiscal discipline.


And, quite frankly ...



You'd better save your money.


Because everything would cost significantly more in this future:


• A new Saturn 10N Sedan, with an MSRP of $10,995, becomes a $14,293.50 car after the national sales tax (state and local taxes not included).


• That single family home on Mountain View, priced at $219,990, now costs $285,987 (state and local taxes not included).


• The Hoover Wind Tunnel vacuum cleaner you've been eyeing, retailing for $269, will cost you $350 (state and local ... you get the idea).


One conservative writes that, "Implicitly, Americans would be taxed on ... all medical care, purchases of new homes, and services provided by state and local governments."


A white-collar worker making $33,217 a year, with minimal withholding, would regain use of the $2,659 withheld from his paycheck (or just over $51 a week), but would have to limit his annual consumption to $8,863 to break even on the new tax. His $640-per-month apartment, for instance, would now cost him $832 monthly.


By the way, if you're only paying payroll taxes, according to Linder you're "disproportionate beneficiaries" of the system, all 47 percent of you Americans. So get off your duffs, economic girlie men, and what's more ...



You'd better not get sick.


Not only would health insurance be taxed, so will doctor visits, medicines, tests, and hospitalization. Keith Schwer, director of UNLV's Center for Business & Economic Research, notes the tax's "adverse impact on retirees who are on fixed incomes. They're not paying a lot of income taxes, so they're not going to have any savings on the income tax. But they purchase a lot of items—prescriptions, whatever—and they're going to be paying huge," Schwer says, adding, "That group votes a lot."


"In addition," notes a study conducted by McIntyre for the Institute on Taxation & Economic Policy (a branch of the left-leaning Citizens for Tax Justice), "a quarter of the remaining sales taxes are supposed to be paid on things like church services, free care at veterans hospitals and a variety of hard-to-tax financial services like free checking accounts."


The bill, the study continues, would move the tax burden "away from better-off states and onto poorer states and states with a high proportion of elderly residents." So ...



Nevada, that means you.


Research and development activities would become taxable, as would certain kinds of education and training. Anything purchased with a "business intent" would not be taxable, although there is some question of where the buck stops on that one. The computer on which I am writing this was purchased with a "business intent," as it was when the dealer bought it from the manufacturer, as was the case when the manufacturer bought the components, as was the case ...


With so many "business intent" exemptions, the cost of the sales tax keeps getting passed further and further down the line, ultimately resting with John Q. Taxpayer. (Some things never change.) As John Cassidy, author of Dot.con, writes in The New Yorker: "If Bush's economic agenda was fully enacted, labor would end up shouldering practically the entire burden of financing the federal government."


To be fair, the proposed tax is predicated upon ...


An extremely optimistic assumption.


For all the numbers to add up, the bill's sponsors assume that a 22 percent across-the-board drop in prices would occur once they wave their wand and make the IRS vanish.


One might call this the "Clap your hands if you believe in fairies" school of economic theory. But even if it works, is it a good thing?


A former Reagan and Bush I economic advisor says no. Calling the Fair Tax Act "a very dumb idea" in National Review Online, Bruce Bartlett writes that it "can only be sustained by making completely absurd assumptions about what would be taxed." He argues that "a vastly higher rate would be needed," and the whole thing is an Rx for "massive tax revolt."


Bartlett goes on to cite a prediction by the Federal Reserve Bank of Dallas that the effect of the bill would be to induce 30 percent inflation or—if they prices sharply drop, as Rep. King predicts—more recession and diminished tax yields. (Which would necessitate a higher rate, which would depress the economy further, in a vicious circle.)


Don't forget, either, that even if prices fall 22 percent, your "23 percent" rate of tax is really 30 cents on the dollar, so you're still paying 8 percent more. That's assuming you use real math, not Peter Pan math.


"You start working toward what a lot of Europeans and Japanese confront," says Eadington, of the University of Nevada-Reno's Institute for the Study of Gambling & Commercial Gaming. "That's higher real income but much greater difficulty in spending because of higher prices."


Or, as Schwer puts it, "As prices go up, the quantity of consumption goes down: 'Instead of steak we're going to have hamburger.'" Not good for a tax that requires people to spend, spend, SPEND, damn you!


"It's a tax that has so much unfairness in it that there would be appeals for exemptions," observes William Thompson, professor of public policy at UNLV. "For instance, houses would be exempted. You're not going to buy a house for a $100,000 and all of a sudden it costs $130,000. You're going to have to have a food exemption. Does the restaurant count? When does the restaurant count? We go to Canada; we drive back with a car full of goods. Do we have to now pay 30 percent on everything, in addition to whatever tariff we're supposed to pay?" (Yes, actually, as one of the purposes of the bill is to discourage imports.)


Proponents of the bill claim it will eliminate the IRS, but that's ...



A bunch of B.S.


The IRS disappears, all right, its functions split among dozens of state and federal agencies. For instance, tax-collecting functions that aren't assigned outright to the Treasury Department will be performed by a newly created Excise Tax Bureau and a Sales Tax Bureau.


But the bulk of tax collection would fall upon the states, which would be obligated to establish problem resolution offices, in addition to stepping up their own tax-collecting activities. (One House sponsor openly gloated that the five states that don't have sales taxes would have to fall into line, just to have the mandated federal-tax-collection mechanism in place.)


Greg Bortolin, press secretary to Gov. Kenny Guinn, states that Nevada gets 85 cents back for every dollar it sends to Washington, and that Guinn would oppose anything creating a greater imbalance. Well ...



Kenny won't be happy.


Because, according to the ITEP study, Nevada will be paying out an extra $646 per each individual or family that files taxes as a unit. What's more, the additional cost and bureaucracy of collecting and enforcing the federal sales tax at the state level would be defrayed at the princely sum of one-fourth of a penny on every dollar of tax collected.


That's what the Fair Tax Act calls "a reasonable fee." What's more, if the states are tardy in filing those monthly tax payments, Washington will levy a fee in the form of an interest payment 50 percent above the Fed rate.


Sponsors of the national sales tax envision thousands of out-of-work IRS employees being forced to contribute to the economy in other capacities. The likelihood is that—with so many jobs redistributed at the federal level and/or sloughed off onto the states—they'll just be doing the same job out of a different office.


Nor do we need fear for the livelihoods of tax attorneys and H&R Block tax-preparers. Not only is the proposed law complicated enough to keep them in business, the various new reporting requirements and agencies, the "business intent" documentation and exemptions, the loopholes big enough to accommodate the Exxon Valdez, and the computation of rebates and discounts are certain to generate a blizzard of new paperwork.


Except that April 15 doesn't come once a year anymore ...



Now April 15 is every month.


And not just for businesses. In addition to a discounted rate for senior citizens, the tax bill allows for rebates on income up to $9,500. To give author Linder credit, he and his confederates don't even try to pretend that sales taxes aren't inherently regressive, falling disproportionately on those with the least amount of "wiggle room" in their budgets.


However, in order to qualify for the rebate, every eligible person would have to register with the federal government (even babes in swaddling clothes) and file monthly reports. "You'd be inviting the federal government into Las Vegas," says Thompson, "and we don't want the federal government into Las Vegas."


"There would be a tremendous cost to the retailer," Thompson argues. "How do they track all the information? How many reports do they give? Who checks them? How many policemen do you need to put at the Wal-Mart to make sure people aren't selling things out the back door? It would be a nightmare," he moans, "a nightmare!"


Schwer and Thompson fear the rise of a shadow economy, one in which goods and services are bartered, traded or carried off the books to escape taxation. "People would [avoid] buying any item from a store," Thompson says. "They would have a friend that would get them the refrigerator" they need.


"You're going to have a lot more avoidance and evasion of taxes," Schwer adds, "and it will drive up the administrative cost." Also, he points out, the Kenny Guinns of the world will have to find new ways of defraying those costs. With Las Vegans paying 37.5 percent in aggregate sales taxes, the state will have to either raise existing, non-sales taxes or create new ones. Just remember ...



"We're doing this for your own good."


Before King and Linder give us our self-improving economic spanking, they've still got a ways to go. The Senate clone of the bill is, at present, only sponsored by Georgia's two senators, Saxby Chambliss and Zell Miller.


But 55 House supporters, including the two most powerful ones, constitutes a running start, and they have the wink-and-nod blessing of the White House. What about our own lawmakers? "Clearly, the congressman feels we need to take a close look" at the tax system, says Adam Mayberry, spokesman for Rep. Jon Porter. "He would certainly oppose any gaming tax. He'd have to take a look at the language ... how it would impact people on all levels of the economic ladder. I think he would say those are interesting ideas," Mayberry says, adding with a laugh, "who isn't against abolishing the IRS?"


"This is what I'd typically associate with a very radical fringe," Eadington says of the Fair Tax Act, adding ruefully, "then, again, the radical fringe seems to have been getting closer to the middle, in terms of the attention they're getting.


"This is another good reason," Eadington concludes, "for Nevada to look very carefully at whom they vote for."



David McKee has covered the Las Vegas economy since 1998.

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