Sales taxes are regressive, meaning that the poor pay a higher share of their income in these taxes than the rich. This is in contrast to progressive income taxes, which tax the rich at a higher rate. The reason for this regressive nature is that poorer families must spend more on necessities, and can less afford to save. In New York, low-income families typically spend about 75% of their income on items subject to sales tax, compared to 50% for middle-income families and 17% for upper-income families. Consequently, low-income families pay 7.9% of their income in sales taxes, compared to 4.9% for middle-income families and just 0.9% for those in the top 1% of the income distribution. Even taking into account other taxes, the lowest- and highest-income residents each pay about 11% of their income in taxes, and the middle class 12%-13%.
Regressive taxes do make sense in certain instances – for example, to discourage behaviors that have high social costs, such as smoking or driving (although some countries even base fine levels on income) . However, broad-based regressive consumption taxes are an example of poor public policy. Taxing underpaid home health workers and wealthy investment bankers at the same rate, while forcing teachers and firefighters to pay an even higher rate, goes against basic principles of fairness.
This unjust status quo is not a necessary state of affairs. Sales taxes in the US are a relatively recent phenomenon, with many states implementing them during the Great Depression to make up for lower income and sales tax receipts caused by the economic slump. New York didn’t implement a sales tax until 1965. There are many options for how the state and city could modify tax codes to reduce or eliminate the sales tax and increase revenue in other ways.
One obvious method is increasing income taxes, especially on the wealthy. Inequality has skyrocketed in the US, and it has done so at an even faster rate in New York. Today, the average income of the 1% is 44 times that of the bottom 99% – the highest ratio of any state. The state has taken some steps towards a more progressive income tax: after the COVID-19 pandemic, introducing new tax brackets for millionaires and multimillionaires However, considering the fact that the combined tax rate in New York State is still essentially a flat 11% rate for everyone, there is certainly room to make the state tax code more progressive.
On the other hand, New York City has lagged even further behind. While it does have a personal income tax, unlike many other municipalities, this tax ranges from roughly 3% to 4%, with the highest rate kicking in on every dollar earned over $50,000. This makes the city income tax essentially a flat tax – which, combined with sales taxes, make the city’s tax code overall regressive. A better income tax would introduce new brackets for higher earners. A report from the comptroller’s office found that, by raising tax rates on earners making above $500,000 by no more than 1.5%, the City could generate $1.5 billion in additional revenue – even accounting for potential outmigration and evasion. This could be used to offset a reduction of the sales tax, and higher rates or more brackets would raise even more additional revenue. Paired with a sales tax reduction, even income tax increases on low- and middle-class New Yorkers could also partially offset lost revenue, while still reducing costs for these taxpayers and distributing the tax burden more equitably.
Other options for increasing revenue include focusing more on targeted excise taxes and fines – increasing existing ones for cigarettes and littering, and introducing new ones on things like traffic congestion and financial transactions. Additionally, the sales tax is in a unique position to collect revenue from non-residents who benefit from city services – namely, suburban commuters and tourists. Policymakers should ensure that these groups still contribute to the upkeep of the city. This can be done through existing taxes such as hotel occupancy taxes, or new taxes like commuter income taxes (which actually did exist until the 1990s).
There are many tools at the disposal of local governments to generate revenue, and almost all would be better than the unjust and crude sales tax that exists today. Reducing or eliminating sales taxes would directly contribute to reducing costs for millions of working-class people, while also aligning our tax code with our values as a society.
Anil Singh is a senior at Hunter College majoring in political science and urban studies and minoring in public policy. His undergraduate research has focused on a variety of topics, ranging from the financing of municipal water systems to US federal housing policy to the democratic experiment of post-independence India. Currently, he is a Care for Future intern at the Intergovernmental Affairs division of the New York City Department of Housing Preservation and Development. Previously, he interned at the Coalition for Asian American Children and Families as a Data Policy Intern, working on the Invisible No More data disaggregation campaign. In the future, he is planning on pursuing a career in public service, in the fields of law, public administration, and/or urban planning. In his spare time, he is a member of the Hunter College men’s tennis team as well as co-captain of Macaulay Deewane, CUNY’s premiere competitive Bollywood-fusion dance team.
