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A group of House Republicans is reviewing the Fair Tax Act, which would replace certain federal levies with a state sales tax and decentralize the IRS.
While the plan may not receive a floor vote and would fail the Democratic-controlled Senate, policy experts say the plan would make the tax system more regressive, meaning that taxes decrease as incomes rise.
Introduced in early January, the proposal would eliminate income, payroll, estate and gift taxes and replace them with a 23% national sales tax. The proposal also aims to decentralize the IRS by cutting agency funding and relying on individual states to administer the levy.
Although the plan was first introduced in 1999, it never received a ground vote and is supported only by a small group of Republicans, explained Erica York, senior economist and research manager at the Tax Foundation.
“It’s not a mainstream or popular idea for tax reform,” York said, noting that the administrative side “doesn’t make a lot of sense,” since taxpayers would have to navigate 51 government agencies rather than a single IRS.
It is not a mainstream or popular idea for tax reform.
Eric York
Senior economist and research manager at the Tax and Customs Administration
The Fair Tax Act comes amid increased scrutiny of the $79.6 billion in IRS funding introduced through the Inflation Reduction Act in August. The money is earmarked for priorities such as enforcement, tax administration, technology upgrades and more.
After months of criticism, House Republicans voted to withdraw the funding in January. But the plan was largely seen as a political message, as neither Senate Democrats nor the White House supported the measure.
A ‘quite hefty’ tax increase for the middle class
While the Fair Tax Act is unlikely to win support in Congress, experts say the plan would represent a significant change for middle-income and wealthiest Americans.
According to John Buhl, senior communications manager at the Tax Policy Center, middle-income earners would see a “pretty significant tax increase” if enacted, and the wealthiest Americans would see the biggest cuts.
He said the plan would make the tax system more regressive despite built-in monthly discounts for families below a certain income level, especially since the 23% rate is “tax included” and will actually cost consumers about 30%.
In addition, both experts say the sales tax won’t be enough to make the plan “revenue neutral,” which could be a problem as Republicans fight for tighter spending amid the debt-ceiling battle.
