VAT Experimentation -- New York & Illinois

Abstract

US States are experimenting with VATs to solve market-specific problems with tax compliance and revenue yields. Experimentation has been going on for years. Sometimes the experiment is a success; at other times it needs more work.

Although not called VATs either before, during or after adoption – that is what these experiments are. Market-specific VATs are producing benefits long promoted by VAT advocates, notably: an increase in revenue without an increase in tax rates; increased administrative efficiency without significant costs to business; more stable deposits from fractionated payments; and lower enforcement costs from the self-enforcing nature of the VAT.

There are strong technical disadvantages to the adoption of a VAT as a general proposition, most of which flow from efforts to make the VAT work well in multi-jurisdictional settings, but the market-specific approach to VAT adoption in the US minimizes these drawbacks. This is what makes the US experiments so interesting.

For analytical purposes it is easier to anticipate problems and to take corrective actions if we admit that what we are dealing with is a VAT (even if some do not want to call it that for political reasons). This paper takes two examples of US VATs, the New York VAT in hotel accommodations, and the Illinois VAT in the retail gasoline market, contrasts them, and shows what works and what does not.

Keywords: New York VAT, Illinois VAT, Hotel Room Occupncy Tax, Market-specific VAT, US VAT, Retail gasoline sales tax, ROT, Room remarketers, Online marketing, Priceline.com, Hotels.com

JEL Classification: K19, K34