The Right Way to Adopt a Consumption Tax

I’ve written dozens of columns explaining why it would be a terrible idea for the United States to enact a value-added tax.

But that’s not because I think consumption taxes are worse than income taxes. Indeed, sales taxes and VATs are less destructive because tax rates tend to be reasonable and there’s no double taxation of saving and investment.

My opposition is solely based on the fact that we shouldn’t give politicians an extra source of revenue to finance bigger government. That would effectively guarantee that the United States would morph into a stagnant European-style welfare state.

In other words, I’d be willing to accept a trade. Politicians get a VAT, but only if they permanently abolish the income tax.

There’s no chance of that happening in Washington, but it may happen in Nebraska, as reported by the North Platte Telegraph.

If Nebraskans can’t agree on reform…, state Sen. Steve Erdman of Bayard has a sweeping answer: …Income and property taxes in Nebraska would be abolished — and the state sales tax replaced by a “consumption tax” to fund state and local governments — if a constitutional amendment spearheaded by Erdman were approved by lawmakers and voters. …It would need “yes” votes from 30 of the 49 senators on final reading to appear on November’s general election ballot. …Nebraska’s state and local governments now collect a combined $9.5 billion annually in taxes, which would require a 10% consumption tax rate to replace, Erdman said. …If income and property taxes go away, Erdman said, all the state and local departments or agencies that enforce, set and collect them wouldn’t be needed, either.

Here’s some additional coverage from KETV.

Imagine not having to pay any property or income taxes in Nebraska, but there’s a catch you’d pay a new consumption tax on just about everything you buy, such as food and medical services, things that are not taxed right now. That is the idea behind a new constitutional resolution introduced by state Sen. Steve Erdman. …He and nine other lawmakers introduced LR300CA on Thursday. The resolution would allow voters to decide whether to replace all those taxes with a consumption tax. It is like a sales tax and would be about 10.6% on everything, including services and food. …He said under this proposal, everyone would get a payment called a prebate of about $1,000, which would offset the cost for low-income families. Erdman said it would also eliminate the need for property tax relief and the state having to offer costly tax incentives to attract businesses. “This is fixing the whole issue, everything. This is eliminating all those taxes and replacing it with a fair tax,” Erdman said. “Nothing is exempt,” Erdman said.

I have no idea if this proposal has any chance of getting approval by the legislature, but Senator Erdman’s proposal for a broad-based neutral tax (i.e., no exemptions) would make Nebraska more competitive.

Which would be a good idea considering that the state is only ranked #28 according to the Tax Foundation and is way down at #44 according to Freedom in the 50 States.

In one fell swoop, Nebraska would join the list of states that have no income tax, which is even better than the states that have flat taxes.

P.S. The switch to a consumption tax would address the revenue side of the fiscal equation. Nebraska should also fix the spending side by copying its neighbors in Colorado and adopting a TABOR-style spending cap.

P.P.S. Unlike advocates of the value-added tax, proponents of a national sales tax support full repeal of the income tax. I don’t think that’s realistic since it’s so difficult to amend the Constitution, but their hearts are in the right place.