Commentary: Should Delaware institute a sales tax?

By Dr. John Stapleford

Delaware state government is facing two years of flat general tax revenue. If instituting a state sales tax becomes a legislative issue, retailers may suffer substantial nonresident sales losses.

Dr. John Stapleford

What are the pros versus the cons of a sales tax?

The biggest pro for a sales tax is that Delaware government revenues will grow at pace with inflation and the economy.

The biggest con is that lower-income families tend to spend almost all their money on consumption, while higher-income families save their money, thus making a sales tax a regressive tax.

The other obvious pro is being contiguous to several other states (New Jersey, Maryland and Pennsylvania). No sales tax induces nonresidents to spend their retail dollars in Delaware.

No sales tax boosts Delaware’s retail industry. Still, the benefits vary significantly by category (see chart).

According to the U.S. Bureau of Economic Analysis, in 2019, the retail industry in Delaware’s gross domestic product totaled $2.89 billion.

The U.S. Business Labor and Statistics Quarterly Census of Employment and Wages reports that nonresident spending is estimated to have accounted for 7% of Delaware’s total retail sales in 2019 ($202.3 million).

However, as shown in the chart, the contribution of nonresident spending varies widely by category:

• Retailers benefiting the most from nonresident sales include those selling large-ticket purchases: furniture and automobiles.

• Clothing, being such an essential part of total household spending, also benefits from Delaware’s lack of a sales tax.

• Next in importance are electronics and appliance stores, building materials and garden supplies retailers and drugstores. (But the same impact of large-ticket items is found within these retail categories. For example, only 4% of computer and software sales come from nonresidents, compared to 43% of household appliance sales.)

• Delaware’s lower gasoline tax compared to surrounding states (New Jersey, Maryland and Pennsylvania) does not seem to be an inducement to nonresident sales.

• Among the general merchandise stores, sales at warehouse clubs and supercenters are boosted by 4% by nonresidents.

• Still, department stores have sales substantially below what’s expected.

The overall magnitude of Delaware’s retail industry sales grows more slowly due to rising Internet sales. Over the past 10 years, electronics retail sales have increased from 9% to over 15% of total U.S. retail sales. COVID-19 has accelerated this. Between January and July 2020, total U.S. retail sales rose 18%, while electronics retail sales soared 33%. With “brick and mortar’s” share of retail sales diminishing, it would be a poor time to enact a Delaware sales tax.

Dr. John Stapleford is the Caesar Rodney Institute policy director for the Center for Economic Policy & Analysis. For more information go to caesarrodney.org.