I’ll admit I agree with almost all of President Donald Trump’s initiatives, but there’s one about which I have some doubts: stopping the minting of pennies.

Yes, I know that pennies cost more to make than they’re worth.  Yes, I know “experts” have long wanted to eliminate them.  Yes, there are all sorts of good reasons to stop making pennies.  But there might be one backlash side-effect: state sales taxes.

Forty-five states impose statewide sales taxes, ranging from 2.9 to 7.25%.  Many of them also allow local jurisdictions to tack on additional sales taxes and other fees — e.g., restaurant surcharges. 

Penny abolitionists claim they’ll adjust prices by rounding them down or up.  (How often do you think things will get rounded down?)  The nearest rounding option would be five cents (though there’s a smaller lobby gunning to kill the nickel, too).  That means every transaction in Colorado — the lowest state sales tax at 2.9% — will get rounded up.  New York City, whose combined tax cut on most sales is effectively 8.875%, will also get rounded up.  Right now, there are only three states with an even 5% state sales tax (Louisiana, North Dakota, and Wisconsin).  All three allow local jurisdiction add-ons.

Let’s take my home state, New Jersey.  The Garden State’s base state sales tax is 6.625%.  How much do you have to spend to have a sale that would not be rounded down or up?

Furthermore, what happens to those rounding adjustments?  I cannot imagine any state forgoing sales tax revenue by a round down: “Forget the two cents!”  And when prices are rounded up to the nearest five, who gets to keep the surplus?  The state?  The city?  The merchant?  The one party that seems assured not to get to keep it is...me.

So, in any cash transaction, how do we avoid automatic “adjustments” at taxpayers’ expense by state and local sales taxes?  It’s a legitimate question because without pennies, there’s no change to give those “adjustments” back.  Do we require merchants to adopt the European Value Added Tax model — i.e., build the cost of the tax into the stated price of a good?  That would represent a sea change in how Americans do business and taxes, including ending the $X.99 mental trick to that infer something is a buck cheaper than it really is.  It would radically reorder how most businesses calculate profit margins.  And if we’re exempting tips from taxation, how do we account for non-five multiple fractions adding a tip creates?

Some folks might respond by saying, “Well, duh — stop paying cash!”  It’s apparently only the Luddites who don’t whip out their credit cards to pay for that $1.25 candy bar.  “We can always credit your precious pennies to your card!”

That raises a different question: are we then on track to a purely digital currency?  I thought that was something most Republicans, for multiple reasons, don’t want — government control and manipulation (think Justin Trudeau and truckers’ bank accounts), banking security in an age of hackers, a culture that stimulates consumerism and deters savings when spending involves just pressing a button or swiping a phone rather than handing over hard cash.  And how is this not the logical final step in a process of disconnecting money from real value and assigning it one imputed purely by governmental fiat?

To all us non-economists out here in the United States, a question and challenge: How do we protect hardworking Americans, if we eliminate pennies (an economically commonsense move), from in-built state sales tax increases without resorting to digital currency?  Inquiring minds want to know.

Is it stupid to produce coins that cost more to make than they’re nominally worth?  Yes.  But good decisions can also have downstream consequences, like a practical tax increase, a bad result especially in an administration committed to cutting the size of government.  Canceling that effect has to be worked into any parting with the penny.

Image via Picryl.