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Minnesota’s Tax Expenditure Review Report Rejects Tax Pyramiding

The Minnesota Tax Expenditure Review Report (which I co-authored with Marsha Blumenthal, Laura Kalambokidis, P. Jay Kiedrowski, Judy Temple, and Jenny Wahl) agrees with economist Alan Viard’s call for treating state sales taxes as consumption taxes on final consumer purchases of goods and services.  The Tax Expenditure Review Report rejects tax pyramiding:

Economists and public policy analysts generally think of the sales tax as a consumption tax. As such, it should be levied only on sales to consumers, and not on sales between businesses. Taxing intermediate purchases – including capital equipment, office supplies, and building materials – will cause tax pyramiding as one business passes the tax cost along to the next. Ultimately, this creates an additional (and hidden) tax burden on consumers who purchase the final goods and products, as noted in a 2009 presentation to lawmakers:

Pyramiding occurs when a tax applies at multiple levels of business production and distribution. The result of this typically would be to pass the tax along in higher prices at the next level of production (e.g., a manufacturer  who sells to a wholesaler). The tax burden “pyramids” or cascades at each level, so that the total burden on the consumer is higher than the statutory or nominal rate. Pyramiding favors vertically integrated or larger businesses. These businesses can minimize the multiple levels of tax by performing functions – that would be taxable if purchased from a third party – with employees.  Pyramiding also undercuts statutory exemptions (e.g., the sales tax paid by grocers gets passed along in higher grocery prices, despite the exemption for food products) that are intended to reduce regressivity or exempt necessities.