The American debate on the value-added tax is complicated by an issue that was virtually absent from the European discussion of the VAT in the early 1960s. Although the United States has a federal system of government, five of the six original members of the European Economic Community have unitary governments; that is, except in West Germany, no government comparable to the American states is interposed between the national and local governments.
The existence of state governments raises at least two kinds of intergovernmental issues. First, a decision must be made about whether to tax the purchases and the commercial activities of subnational governments. These issues are discussed in chapter 8. Second, and more important, since the states and their localities have historically had exclusive access to the general sales tax base, the possibility of the federal government's introducing a VAT or retail sales tax raises fundamental issues of intergovernmental fiscal relations. 1 These are the topics of this chapter. 2
The question most commonly asked is whether federal entry into this area would preempt the sales tax base, making it more difficult for state and local governments to tap that traditional revenue source. In addition, there are important issues of coordinating a federal sales tax—whether a VAT or a retail sales tax—with the sales taxes levied by the states. These include concern for compliance problems of business, questions of the coordination of collection techniques (VAT versus retail sales tax) used by the two levels of government, and harmonization of state and federal efforts. Understanding of these more technical issues is necessary to flesh out concern about federal preemption.
A few preliminary remarks, including a statement of criteria of appraisal, are in order. First, the entire discussion of this chapter is predicated on the assumption that state and local governments will