Republicans Propose Using Online Sales Tax Money for New Tax Cuts

JEFFERSON CITY, Mo. — A U.S. Supreme Court ruling making it easier to collect online sales taxes could yield billions of dollars for state and local governments — if they decide to keep it.

Rather than spend the windfall on schools, prisons or other government services, some Republican governors and lawmakers are proposing to give it away in the form of tax cuts.

Wisconsin Gov. Scott Walker, running for re-election this year, has suggested the extra revenue could be used to expand tax breaks for seniors or households with children. Nebraska Gov. Pete Ricketts, also on the November ballot, wants to put it toward property tax relief.

Some Kansas lawmakers are eyeing a reduction in the food sales tax; the Tennessee House speaker wants to lower the state’s 7 percent sales tax rate; and a Missouri lawmaker plans to sponsor an individual income tax reduction to negate the sales tax expansion.

“To just take that revenue would be a tax increase,” said Missouri Sen. Andrew Koenig, echoing the reasoning of many tax-adverse Republicans leery of simply spending or saving the expected influx.

The court ruled June 21 that South Dakota could enforce a law compelling many out-of-state businesses to collect taxes on sales made to its residents. The ruling overturned a decades-old precedent stating that businesses without a physical presence in a state — like a store, office or warehouse — didn’t have to collect sales taxes on behalf of the state. In such cases, customers technically were responsible for paying the tax, but most didn’t.

As online commerce has grown, some large retailers such as Amazon already had begun collecting sales taxes for all 45 states that charge them. But others with a physical presence in only a few places haven’t been doing so.

How quickly that will change could vary by state. In the past two years, 15 states have enacted laws attempting to require out-of-state companies to collect sales taxes, according to the National Conference of State Legislatures.

Many other states may have to wait until legislatures reconvene in 2019 to set specific requirements for out-of-state sellers. Most states already have set their budgets for the 2019 fiscal year.

State and local governments stand to gain $8 billion to $13 billion annually by collecting taxes from all remote sellers, according to a report issued last fall by the Government Accountability Office. Other estimates have been even higher.

Most states will see revenue gains equaling 1 percent to 2 percent of their total state tax collections, though states that rely more on sales taxes instead of income taxes could gain more, said Moody’s Investors Service.

In Tennessee, which ranks high in sales tax reliance, Republican legislative leaders already are discussing ways to offset the anticipated surge in revenue with a new tax reduction.

“I think it’s an opportunity for us to do something that I’ve wanted to do for some time now, which is lower our sales tax” rate, House Speaker Beth Harwell, who is running for governor, said during a recent candidate debate.

Tennessee’s Democratic gubernatorial candidates suggested the money could go toward higher pay for public school teachers.

How states decide to use sales tax revenue may depend on their overall financial situation and could be complicated by varying estimates of how much to expect, said Howard Gleckman, a senior fellow at the nonpartisan Tax Policy Center.

“The amount of money is uncertain, and that would suggest states would want to be a little careful before they go and spend it,” he said.

Mississippi Gov. Phil Bryant, a Republican, has said he will ask lawmakers to earmark the extra revenue for transportation.

In Kansas, lawmakers also may face pressure to use at least part of the money to comply with a court order to boost school funding, said House Taxation Committee Chairman Rep. Steven Johnson, a Republican.

In neighboring Missouri, however, the Supreme Court ruling could provide justification to continue a tax-cutting spree. A corporate income tax cut was signed into law in June. Legislation deepening an already planned individual income tax cut is pending before the governor. And Koenig said he will sponsor a bill during the 2019 session to use the online sales tax collections to offset yet another proposed cut to the individual income tax rate.

In some states, the ruling could lead to automatic tax cuts.

A 2016 South Dakota law raising the sales tax rate from 4 percent to 4.5 percent requires it to be scaled back by one-tenth of a percent for every additional $20 million the state reaps, if it’s able to collect from out-of-state online retailers. The rollback is likely to be a top issue next legislative session. Though a Democratic senator wants to use the money to reduce food sales taxes, Republican Sen. Jeff Partridge, who sponsored the provision, said his goal remains to “give the money back to the people.”

A 2013 Wisconsin law mandates an equal cut in state income taxes if federal law requires the collection of online sales tax. Walker said his administration is examining whether the Supreme court ruling triggers that provision.

“One way or the other,” Walker said, “we’d want to get that back to the hardworking taxpayers.”

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Associated Press writers Geoff Mulvihill in Cherry Hill, New Jersey; Jonathan Mattise in Nashville, Tennessee; and James Nord in Sioux Falls, South Dakota, contributed to this report.