Incidence of the retail sales tax as applied to Oklahoma.

Abstract

The incidence, or distributional effect, of the retail sales tax has long been a concern of both economists and state legislators. Because the sales tax is added to consumer expenditures, and because households with lower incomes spend a larger proportion of their total income on consumption, as compared to households with higher incomes, the sales tax has been labeled a regressive tax. The purpose of this study is to examine the incidence of the retail sales tax in Oklahoma, using recent incidence theories, as well as regional modifications of the traditional method.

The survey of retail sales tax incidence theory includes the development of general and partial equilibrium models, and presents the hypothesis allocating burden on the sources, as opposed to the uses, side of the income equation. An expanded measure of household income is developed for use as the incidence base, and the burden of Oklahoma's retail sales tax is expressed using various allocation methods and shifting assumptions. Actual published information for Oklahoma and interpolation of regional data provide the statistics used for the comparative analysis. The effect of the federal offset, since sales taxes can be deducted from federal income tax, and the portion of sales taxes paid by businesses, rather than consumers, influence the actual burden of the sales tax. It is concluded that the present sales tax in Oklahoma is indeed regressive, but not to the extent, either in real or proportional terms, generally assumed.