Budget & Tax
J. Scott Moody & Wendy Warcholik, Ph.D. | September 17, 2015
Four Reasons a Sales Tax Hike Is a Bad Idea
J. Scott Moody & Wendy Warcholik, Ph.D.
In America, public education was traditionally funded by local governments through the property tax. Given our federalist system of government, a locally based educational system confers a number of advantages, including local accountability and tax transparency.
Unfortunately, over time, the educational system has become increasingly centralized. In Oklahoma, for example, the largest portion (48 percent) of school district revenue comes from the state, according to an April 2015 report from the Oklahoma Office of Educational Quality and Accountability. Only 40.2 percent of revenue comes from local and county sources, while 11.7 percent is provided by the federal government.
Some Oklahomans are talking about centralizing the system even further by providing additional financing through an increased sales tax. This is a bad idea for several reasons.
First, Oklahoma already has the 6th highest state-and-local sales tax in the country, according to data from the Tax Foundation. Increasing the sales tax will not only put a pinch on consumers, it will also hurt Oklahoma’s small businesses, which are the backbone of the economy. According to a recent study from the Council on State Taxation, 47 percent of the current sales tax is paid by businesses when they invest. By taxing investment, Oklahoma will create fewer jobs opportunities for future graduates.
While businesses also pay the property tax, they pay it to the communities in which they operate. The sales tax remitted on a business-to-business transaction may take place far from the community where the purchasing business resides. Therefore, this further reduces transparency for businesses, which are also major supporters of local educational opportunities.
Second, the sales tax would erode transparency within the educational system. Unless one is extremely meticulous about keeping every single sales receipt, it is nearly impossible for parents to understand how much they are supporting the educational system. As such, it becomes harder to do an effective cost-benefit analysis.
Third, as communities become more reliant on the sales tax, it will open the door for a more centralized educational system based in Oklahoma City instead of the local school board. This will make it more difficult for parents and students to influence the quality of their school. Instead, faceless bureaucrats in a far-away office building will be the ones making the decisions about your child’s education.
Fourth, and perhaps most importantly, there’s little reason to believe more money will improve Oklahoma’s educational performance. Cato Institute scholar Andrew Coulson, using a time-series regression approach, recently looked at Oklahoma’s SAT scores (adjusted for participation rate and demographics) and NAEP scores and found there is “essentially no link” between state education spending and student performance.
In sum, increasing the sales tax to pay for public education in Oklahoma is not a path to a better system. It will hurt small businesses and job creation, reduce transparency, and further centralize Oklahoma’s education system.
A superior solution would be to continue to empower parents and students with the ability to customize their own educational path—whether through traditional public schools, public charter schools, private schools, or homeschooling.
J. Scott Moody
OCPA Research Fellow
OCPA research fellow J. Scott Moody (M.A., George Mason University) serves as chief executive officer of State Budget Solutions. Formerly a senior economist at the Tax Foundation and a senior economist at the Heritage Foundation, he has twice testified before the Ways and Means Committee of the U.S. House of Representatives. Moody is the co-creator of the Tax Foundation’s popular “State Business Tax Climate Index.” His work has appeared in Forbes, CNN Money, State Tax Notes, The Oklahoman, and several other publications. This article is an updated version of an analysis published in 2008.
Wendy Warcholik, Ph.D.
OCPA Research Fellow
Wendy P. Warcholik (Ph.D., George Mason University) is an OCPA research fellow. She formerly served as an economist at the U.S. Department of Commerce’s Bureau of Economic Analysis, and was the chief forecasting economist for the Commonwealth of Virginia’s Department of Medical Assistance Services. She is a co-creator (with J. Scott Moody) of the Tax Foundation’s popular “State Business Tax Climate Index.”