Higher State Income Tax vs Sales Tax: Do You Win With Sales Tax?

Many people in the past have told me that they refuse to live in Oregon just because of a state income tax as well as other taxes. They said they would much rather pay 9.5% (Seattle, WA) in sales taxes. I think it’s about time that these people got the rude awakening that they deserve by looking at this a little closer.

Just to clarify, this would only be an increase to a tax that already exists. Income tax is only taken out here and there throughout the year and you don’t have to worry about having enough for tax. However, when you have a sales tax it’s much more than just worrying about having enough money to cover the tax. You also deal with the lack of control that the people have over the increases and decreases in your sales tax. When I moved to a place nearby Seattle called Kent, the sales tax rate was about 6.5%. Now it’s up to 9.5%? Politicians lied to us, saying that it was only going to be a temporary increase.

In Oregon, we have an extra tax tacked on to our paychecks. It’s the state income tax and it’s not as bad as you might think. It’s just a simple bracket system of 5%, 7%, 9%, and 9.9%. If you’re married, then the bracket just doubles (the amounts, not the rates). On our pay stubs, this shows up as “OR W/H.” The beautiful thing about this is that, much like federal withholding, you usually end up overpaying on your state income taxes. This is why the federal government gives you a tax return.

In Washington, you don’t get a state tax return because you didn’t pay any state taxes. You could pay $3,000 in sales taxes. But you wouldn’t get any of that money back. However, in Oregon, if you paid $3,000 in state taxes and you only owed $2,700, you would be looking at receiving a $300 check from the state of Oregon. Don’t forget that this is on top of your $1,200 you’re getting back from the federal government. Just take a moment and think about what you could do with that $300.

There’s more below this line. It’s more to do with the economics behind it all. If you don’t care to understand, then please scroll down past the second line. Do understand, however, that it might not make sense without it.

So where’s the economics in all of this? How do these forms of taxation help or impact our economy? It’s simple. The help that we get from a state income tax is far more than the help from a sales tax. Refer to the chart below. I know, it’s labelled for excise taxes. But the principle is the same. When we impose a sales tax, it pushes the price of goods up. This is how businesses will shift the tax onto the consumer. There are some stores that will just take a loss and pay the sales tax themselves. But this usually isn’t the case.

In the graphic below, we have the red line labelled “Supply 1.” This is the starting supply curve and where it intersects the blue line labelled “Quantity Demanded” is where we have a price equilibrium of $3 at 30 units. What this means is that at the price of $3 per unit, 30 units will be sold. Let’s switch to excise taxes really quick since we’re not going to find a sales tax that is 2/3 of whatever amount of money you spend.

When it comes to an excise tax on, let’s say Big Gulps in New York City, it pushes the price up to $5 per unit. Consumers will find this unacceptable and will buy less Big Gulps. This isn’t surprising since the excise tax was kind of high. But does this mean that 7-Eleven will just roll over and take the loss? Of course not! They want to minimize their loss as much as possible. This means that they have to find a decent price along the demand curve. Since $4 is along the demand curve, consumers won’t mind paying only an extra buck for their Big Gulps.

The negative effects of the excise tax is the raising of the price of goods while the consumer buys less due to the price increase.

The negative effects of the excise tax is the raising of the price of goods while the consumer buys less due to the price increase.

Wait a minute! We’re not done here. 7-Eleven still has to pay the excise tax. It’s not like they get extra money from this. Since they compromised at $4 per unit at 20 units, their total revenue is $80. The excise tax was $2 per unit, meaning 7-Eleven has to pay the government $40 in their excise taxes. In this case, 7-Eleven took a big hit in revenue because they need to cover their costs. Just because they’re bringing in the revenue doesn’t always mean that they will get to keep it.

In the case of sales tax, it’s much like our example with an excise tax with an exception. The price of the products don’t change at all. Businesses will just tack on 9.5% in Seattle. One issue that was mentioned earlier was that we would worry from time to time about whether we had enough money to cover the tax. Another issue that some people have with a sales tax is that it’s a way to tax the homeless and unemployed. If you think about it, it’s not so crazy to understand how that works.

The way that an income tax helps us much more than a sales tax ever could is through that tax return. If you ever owe any taxes rather than get a return, it’s because you underpaid. Plain and simple. We’ve already learned how to get by on $1,200 per month instead of $1,500 per month. Not only have we learned to budget better than before, we get a nice refund and can go spend more money on something.

This boosts our economy because when you spend $100 at a store, it’s not just going to the store. It’s going to the cashier who rang up your order. It’s going to the stockman who put your items on the shelf. It’s going to the producer who made these products. It’s going to the employees of the producer. This means that the store, cashier, stockman, producer, and employee of the producer (five people/entities) were helped by your purchase. If you spend around $100 in total with your sales tax being 9.5%, you really only bought about $90 worth of stuff. What happens to the other $9 or $10? It goes straight to the government.

So what is the answer to the question in the title, “Do you really win with sales tax?” Now that you’ve read the post, I’d like to see what you decide. If the polling has closed, feel free to leave your decision and why in a comment below.



    1. You’re absolutely right. Oregon still makes up for the lack of tax revenue through a higher property tax. But from what I’ve seen, it’s not that much different from Washington. In some areas, the difference is only a few hundred dollars.

      Liked by 1 person

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s