In an October 11 “Reality Check” analysis of an advertisement released by Democrat Bill Ritter's gubernatorial campaign criticizing Republican candidate Bob Beauprez's support for two sales tax proposals, the Rocky Mountain News uncritically repeated Beauprez's claim that the proposals would be “revenue neutral.” In fact, neither of the proposals Beauprez supported -- replacing all federal taxes with a “23 percent” national retail sales tax and replacing Colorado gasoline taxes with a statewide sales tax increase of 0.77 percentage points -- appear to be revenue-neutral over the long run. The News cited Beauprez's dubious claim in a section of its analysis that purported to identify "[w]hat's false" about Ritter's ad.

Beauprez co-sponsored the Fair Tax Act of 2003 (H.R. 25), which was introduced by Rep. John Linder (R-GA). The Fair Tax would repeal all federal taxes and replace them with a national sales tax initially set at a tax-inclusive rate of 23 percent. Beauprez has not co-sponsored a similar version of the bill -- the Fair Tax Act of 2005 -- that Linder introduced for the current Congress.

Additionally, Beauprez, according to a September 9 Rocky Mountain News article, recently proposed “scrapping Colorado's gasoline tax and replacing it with a statewide sales tax to fund road improvements.”

In response to the Beauprez-supported sales tax proposals, Ritter's campaign launched an ad that, according to the News' October 11 analysis, claimed “Bob Beauprez wants to hike the state sales tax and introduce a 23 percent national sales tax that would be applied to the sale of homes, food and medicine.” Under the "[w]hat's false" section of its analysis, the News stated that “Beauprez says his tax proposals are 'revenue neutral,' meaning they wouldn't hike tax revenues but replace one type of tax with another.”

But, as Colorado Media Matters noted, a federal tax-reform panel commissioned by President Bush suggested that in order to be revenue-neutral, the Fair Tax rate would have to be significantly higher than the 23 percent tax-inclusive rate specified in the legislation Beauprez supported. In other words, while it is true -- as the News article reported -- that a 23 percent Fair Tax would not “hike tax revenues,” it also apparently would not be revenue-neutral. Instead, it likely would result in a significant revenue shortfall for the federal government.

In its final 2005 report, President Bush's Advisory Panel on Federal Tax Reform explained that the figures Fair Tax proponents provided in claiming that their 23 percent sales tax proposal would be revenue-neutral conflicted with the calculations of the Bush administration's Treasury Department. In its report, the Advisory Panel described the 23 percent tax-inclusive rate cited in the Ritter ad as a 30 percent tax-exclusive rate. (The two figures represent different ways of describing the same tax):

In their submission to the Panel, proponents of the FairTax claimed that a 30 percent tax exclusive sales tax rate would be sufficient not only to replace the federal income tax, but also to replace all payroll taxes and estate and gift taxes and fund a universal cash grant. In contrast, the Treasury Department concluded that using the retail sales tax to replace only the income tax and provide a cash grant would require at least a 34 percent tax-exclusive rate.

Some may wonder why the tax rate estimated by FairTax advocates for replacing almost all federal taxes (representing 93 percent of projected federal receipts for fiscal year 2006, or $2.0 trillion) is so much lower than the retail sales tax rate estimated by the Treasury Department for replacing the income tax alone (representing 54 percent of projected federal receipts for fiscal year 2006, or $1.2 trillion).

The Advisory Panel explained in its final report that the Fair Tax proponents' proposal appeared to have made internally inconsistent assumptions that largely account for their “relatively low revenue-neutral tax rate.” According to the Advisory Panel:

First, it appears that FairTax proponents include federal government spending in the tax base when computing revenues, and assume that the price consumers pay would rise by the full amount of the tax when calculating the amount of revenue the government would obtain from a retail sales tax. However, they neglect to take this assumption into account in computing the amount of revenue required to maintain the government's current level of spending. For example, if a retail sales tax imposed a 30 percent tax on a good required for national defense (for example, transport vehicles) either (1) the government would be required to pay that tax, thereby increasing the cost of maintaining current levels of national defense under the retail sales tax, or (2) if the government was exempt from retail sales tax, the estimate for the amount of revenue raised by the retail sales tax could not include tax on the government's purchases. Failure to properly account for this effect is the most significant factor contributing to the FairTax proponents' relatively low revenue-neutral tax rate.

The Advisory Panel further stated that Fair Tax advocates “appear to assume that there would be absolutely no tax evasion in a retail sales tax,” an assumption the Advisory Panel called “unreasonable.”

The Advisory Panel did not provide an alternative revenue-neutral rate for the Fair Tax, and economists disagree about what that rate would be. But a 2000 study conducted by Lindy Paull of the congressional Joint Committee on Taxation after Linder first introduced a version of the Fair Tax Act in 1999 estimated that the revenue-neutral rate for the Fair Tax would be 36 percent using the tax-inclusive method employed by Fair Tax proponents, the Ritter campaign, and the Rocky Mountain News; and 57 percent using the tax-exclusive method that most states use to describe their tax rates.

In addition to his past support for the Fair Tax, The Denver Post reported on September 24 that “Republican candidate Beauprez says he would replace the state's 22 cents-a-gallon tax on gasoline by boosting the state sales tax by 0.77 percent.” The News analysis of Ritter's ad uncritically repeated Beauprez's claim that this proposal would be “revenue neutral.”

However, Colorado Media Matters previously noted that while Beauprez has said his state sales tax plan initially would be “revenue-neutral,” he also has suggested that, over the long run, the state sales tax increase would raise more revenue than the current gas tax. In other words, the proposal, at least according to Beauprez's description, is a long-term tax increase when compared to the current gas tax.

According to a September 14 Post editorial, Beauprez “put forth a transportation program” in early September that would increase “the state sales tax, currently 2.9 percent, to about 3.7 percent” to “generate about $516 million a year.” The editorial also noted that Beauprez would “simultaneously eliminate the 22 cent per gallon fuel tax, expected to generate about $514 million this year.” The September 14 Post editorial further noted, however, that “Beauprez believes that while the tax shift would initially be revenue neutral, it would ultimately produce more money for tranportation [sic] since sales taxes keep up with overall economic growth while gasoline taxes lose purchasing power to inflation and drop as motorists switch to more fuel-efficient cars.”

From the October 11 Rocky Mountain News “Reality Check, ”Taxes are talking point of ad blasting Beauprez":

Summary: The ad says that Bob Beauprez wants to hike the state sales tax and introduce a 23 percent national sales tax that would be applied to the sale of homes, food and medicine. The ad goes on to accuse Beauprez of supported [sic] unlimited increases in college tuition at state colleges.

What's true: Beauprez has proposed abolishing the state gasoline tax and replacing it with a 0.77-cent increase in the sales tax. He also was a co-sponsor of a proposal in Congress to replace the income tax with a 23 percent national sales tax. Beauprez also called for giving state colleges greater freedom to hike tuition rates.

What's false: Beauprez says his tax proposals are “revenue neutral,” meaning they wouldn't hike tax revenues but replace one type of tax with another.