The Sales Tax is Not Used in Some States: Here’s Why
|May 14, 2014||Posted by Staff under Good Press|
This 2014 excerpt of Strong Towns, Apr 16, is by Andrew Price.
Relying on sales tax means everything other than retail becomes a burden. Shops generate revenue for the city, while houses, businesses, and factories that do not make any direct sales do not generate any direct tax revenue – yet consume infrastructure and services.
In sales tax based cities, building more retail does not automatically mean more tax revenue. There are only so many toothbrushes, televisions, and cars a person will want to buy in a year. A new store opening up will not always mean we will buy more toothbrushes, televisions, or cars.
If a city invests downtown and that attracts more shoppers downtown, tax revenue won’t necessarily increase as people are not necessarily spending more – they are just spending their money downtown instead of in the suburbs.
Building a new restaurant does not mean I will eat out more, only that I will have more choices of where to eat when I decide to eat out.
There is also the threat of online retail where people can bypass paying sales tax completely. Wealthier residents that travel frequently may do most of their spending out of state, or even in a foreign country. The city has access to none of this.
The largest problem with sales tax based cities is that they have no way of capturing or measuring the performance of their investments. Building a neighborhood park or cleaning up a residential street will not lead to people spending more. We end up with a delusion that cities are like charities – to provide services and infrastructure for the people no matter the cost, because there’s no way to capture or measure it.
In order for a city to make a return on their investments, as well as to judge if an investment was productive, cities need a way to capture the increases in the value of their areas they invest in. Typically, cities capture the value of their communities through property taxes or land value taxes.
Ed. Notes: Beyond the POV of local government, there are more good reasons to not tax sales.
- First, even when tiny, there are still some people who can’t afford sales taxes and having to pay them adds up, forcing those poor people to consume less.
- Second, when sales taxes get high enough, some people dodge them and create black markets.
- Third, is it fair to turn to shopkeepers into tax collectors?
- Fourth, some retailers collect them and don’t pass them on to the government.
There may be more reasons but these four and those above are enough to quit using sales as a tax base and start using location value — which is generated by community anyway.