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USA:
Following the Republican Party’s victory in the 2024 election and President Donald Trump’s re-election, tax reform is again at the forefront of the administration’s agenda.
The new term brings a renewed focus on stimulating economic growth and reducing the tax burden on individuals and businesses. While income and corporate tax cuts remain central to their policies, the conversation around Sales and Use Tax has taken on new urgency in the context of broader tax reforms.
A push for a national Sales Tax
One of the administration’s key initiatives is the consideration of transitioning from the current income tax system to a consumption-based tax system, such as a national Sales Tax. This approach aims to simplify the tax code and incentivise savings and investment by taxing consumption rather than income.
President Trump and Republican leaders argue that a national Sales Tax would streamline the tax system, encourage financial responsibility, and eliminate complexities associated with income taxation.
However, specific details regarding the implementation, such as the tax rate, covered goods and services, and measures to shield low-income households, are expected to be hammered out in the coming months. Such a shift would mark a profound transformation of the US tax structure.
State-level Sales Tax reforms
Republican-led states are also poised to expand on Sales Tax reforms. Governor Jeff Landry has already outlined plans in Louisiana to reduce or eliminate state income taxes while broadening the Sales Tax base.
This mirrors broader Republican strategies to shift away from income-based taxation, aligning tax systems with neighbouring states adopting similar models.
This approach reflects the party’s belief in reducing direct taxation on income to spur economic growth. However, expanding sales taxes also raises concerns about the disproportionate impact on lower-income households, as they spend a larger share of their income on taxable goods and services.
Building on prior success: Tax changes under Republican leadership
The Republican Party’s track record during President Trump’s first term provides insight into how these new policies might unfold.
The 2017 Tax Cuts and Jobs Act (TCJA) significantly reshaped the tax landscape, focusing on reducing corporate and individual income taxes.
While primarily an income tax reform, the TCJA also indirectly influenced Sales and Use Tax policy by capping the deduction for state and local taxes (SALT) at $10,000. This prompted several states to explore alternative tax structures, including expanding Sales Tax bases.
The Supreme Court’s 2018 decision in South Dakota v. Wayfair Inc. further bolstered the collection of Sales Taxes on online purchases, a move widely supported by Republicans as a way to level the playing field for traditional retailers. This ruling has since increased state revenues and underscored the potential of consumption-based taxation as a viable alternative to income taxes.
Implications and next steps
With the Republican Party in power, businesses and consumers must prepare for significant changes.
For businesses, especially in retail and manufacturing, a move toward a national Sales Tax or expanded state-level Sales Taxes could require adjustments to pricing strategies, compliance systems, and accounting practices. Consumers may see shifts in the cost of goods and services as the tax burden shifts from income to consumption.
While these proposals represent the Republican Party’s commitment to tax reform, their implementation will require extensive legislative effort and negotiation.
As the Trump administration settles into its second term, the debate over the role of Sales and Use Taxes in the broader economic framework is set to intensify, potentially reshaping the future of taxation in the United States.
