Date 9 February 1942
Author Unknown
Title History of federal general sales tax proposals
Description Internal staff memo, Division of Tax Research, U.S. Treasury Department
Location Box 1; General Sales Taxes; Records of the Office of Tax Analysis/Division of Tax Research; General Records of the Department of the Treasury, Record Group 56; National Archives, College Park, MD.

The Federal government has never imposed a general sales tax but at various periods in our history Congress has given consideration to such a tax.

CIVIL WAR. The first movement for a general sales tax in the United States occurred during the Civil War. While the proposal of a general sales tax was rejected by Congress, a comprehensive system of production and consumption taxes was established.

1918-1921. After the World War a demand arose for the repeal of the excess profits tax, reduction of the surtax rates on individual incomes, and elimination of the special war excises. The sales tax was brought forth as a possible alternative source of revenue.

Senator Borah introduced a bill in September, 1918, providing for a transactions tax. This proposal was presented at the Hearings before the Senate Finance Committee on the Revenue Act of 1918, but no action was taken.

The first session of the 67th Congress gave considerable attention to sales tax proposals. At the special invitation of the Senate Finance Committee, proponents and opponents of the sales tax appeared before the Committee's Hearings on the Revenue Act of 1921. /1/ During the session, Senator Smoot introduced a series of sales tax amendments (five in number) to the Revenue Act of 1921. The first proposal was a 1% turnover tax which applied to all sales (or leases) of goods in excess of an annual turnover of $6,000. When strong opposition was expressed to the proposal on the floor of the Senate, Senator Smoot presented a revised bill providing for a 3% manufacturers' sales tax. Later in the session the second Smoot amendment was reintroduced in a modified form providing for a 1% manufacturers' sales tax. This proposal was voted on and defeated November 3, 1921. The following day, Senator Smoot proposed a 0.5% turnover tax which would apply to sales at all levels of production and distribution but would allow credit for the amount of sales tax included in prices of commodities purchased. This proposal also was defeated. Three days later, a third and final proposal for a manufacturers' sales tax (3%) was defeated.

After the failure of the Smoot amendments, the sales tax issue remained closed for about ten years. /2/

1932. In 1932 the sales tax issue was revived. The Treasury Department's tax recommendations submitted to the House Ways and Means Committee in January 1932, expressed opposition to a general sales tax and favored excise taxes on selected commodities. /3/ A bill providing for a 2.25% manufacturers' sales tax introduced by Representative Crisp, Acting Chairman of the Committee on Ways and Means, was considered in connection with hearings on the Revenue Bill of 1932 and was reported as part of the Revenue Bill. The Treasury Department withdraw its objection to the sales tax and supported the Committee's bill. When the Revenue Bill was considered in the House on March 24, 1932, an amendment offered by Representative Doughton to strike the sales tax was adopted. Efforts to restore the tax to the Revenue Bill on April 1, 1932 were defeated.

1933-1941. A 1.75% manufacturers' sales tax was offered by Senators Reed, Walsh and Byrd as an amendment to the N.I.R.A. Act, but was defeated on June 9, 1933.

Beginning with the McGroarty bill (the first so-called "Townsend pension bill") introduced in January 1935, a series of bills, (more than a score in number providing for sales taxes of broad application (transactions taxes or gross income taxes) have been proposed as means of financing old-age pensions. Congressional committees have given careful consideration to certain of these bills in connection with House and Senate Hearings on the Social Security Bill in 1935 and Hearings of the House Select Committee Investigating Old-Age Pension Organizations in 1936. One of the bills (H.R. 6466) introduced by Representative Hendricks in May 1939 was reported by the Ways and Means Committee without recommendation and was defeated when it came to vote on June 1, 1939.

[Editor's Note: See Table in Supplementary Document (notice: large file)]

/1/ See Senate Finance Committee Hearings on the Proposed Revenue Act of 1921 (May 9-27, 1921), pages 21-496.

/2/ During the second session of the 67th Congress. Senator Smoot, as well as several of the Representatives, introduced bills which provided for the financing of veterans' compensation by a sales tax, but none of these proposals received serious consideration.

/3/ Secretary of the Treasury Mellon appeared before the House Ways and Means Committee on January 13, 1932, and stated his reasons for opposing a general sales tax and favoring taxes on selected commodities: "We laid aside all thought of a general sales or turnover tax, not only because generally speaking it bears no relation to ability to pay and is regressive in character, but because of the great administrative difficulties involved and the almost inevitable pyramiding of the tax in the course of successive sales. The objections to a general sales tax are not in this respect applicable to a tax on selective articles of the character heretofore employed in this country and now recommended. * * * We concluded that our immediate needs could best be met by utilizing a known general plan with such changes as might be appropriate in the light of altered conditions rather than embarking on new and untried ventures in taxation."