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Critical Thinking About State/Local Taxes in the Classroom
Cengage
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Contributing Author: William A. Raabe

State and local governments always look for new revenue sources, and one way to increase government revenues is to broaden the tax base for income and sales/use taxes.  Over time, for instance, the sales/use tax is applied in many jurisdictions to services (like hair care salons) and new products (like video and music streaming).

We may take this as a given, but state/local governments cannot run deficit budgets, and they hesitate to make large and/or frequent rate increases (such as taking the sales tax rate into double digits), so those jurisdictions and the providers of the goods/services that now are subject to (higher) taxes find these law changes difficult to accept.

State/local jurisdictions also have been getting into the business, as the federal government long has been, of using tax law changes to manipulate taxpayer behavior.  An excise tax on pollution is designed to steer the taxpayer into more eco-friendly systems, or an increased sales/use tax on cigarettes is used to keep young people from taking up the often long-term habit of smoking.

One of the tax planning principles discussed in the text is the optimal use of multiple tax jurisdictions, in managing the taxpayer’s current liabilities.  A taxpayer might be encouraged to move property, payroll, and sales activities into different jurisdictions, where the resulting tax obligations will be reduced.  Most often, this is seen by shifting an operating plant to a lower-taxing state, or moving entity operations to a state with a low or zero income tax rate.

In your classroom proceedings, you might use an interesting current topic to illustrate the causes and effects of such tax increases.  Here are some materials to help you do that.

States and cities have been considering increased excise or sales/use tax on consumer goods that are shown to increase obesity, proclivities toward diabetes, and the like.  A few early attempts in this regard were to exclude from the exemption for groceries (and make the items now subject to tax) a list of “candy” or “sugary” items.  These provisions proved difficult to define and enforce, so the trend today is to place an additional tax on sugared sodas, or on extra-large (think “big gulp”) portions thereof.

Berkeley, Chicago, and Philadelphia have been early adopters of these “soda taxes.”  Generally, the new taxes do not apply to water, tea, and diet beverages, although there have been some initial difficulties in defining certain drinks as taxable or nontaxable.  In the typical case, the proceeds of such taxes are at least partially earmarked for public health initiatives and pre-K or K-12 education uses. The taxes are not levied at insignificant rates, a penny an ounce in Chicago and 1.5 cents per ounce in Philadelphia.

Initial tax collections for these provisions have been substantial (good for the taxing jurisdictions’ cash flow), but far below projected amounts (bad for the taxing jurisdictions’ budgeting process).  Some observers see the soda tax, like most consumer sales/use taxes, as regressive in its application.

Any new tax faces resistance by those who believe that they pay them, and there is some evidence that Chicago politicians are paying a price for supporting the soda taxes there.  But how else might taxpayers respond to a new tax on sugary sodas? 

Classroom Activities / Exercises

Have your students develop a list similar to the following.  Ask them “What would you do if a new tax were placed on an item that you use regularly?”  In a slide deck or panel presentation, have them provide arguments supported by data with respect to the jurisdictions that have adopted these taxes.  Encourage your students to broaden their findings to applications using other products or other taxes, such as sales/use taxes on recreational drugs, or job location decisions as they conduct interviews with prospective employers.

  • Sales of the taxable items would decrease within the taxing jurisdiction. Sales of competing items, like beer and water, would increase, partly because the corresponding tax rate on these items is much lower.  Milk sales are not affected
  • Sales of the taxed sugary items increase in jurisdictions where the tax does not exist, such as the neighboring county or state.
  • Incomes of those who work in the industry, like truck delivery drivers and cashiers, would decrease. This is an unintended negative affect on the working class.
  • Expenditures to expand retail operations may be greater in areas that are not subject to the tax.
  • The government programs that are targeted to receive soda tax revenues may be jeopardized, if collections remain at low levels.
  • Politicians who are up for reelection may come out in opposition to the taxes.
  • Out-of-jurisdiction groups, like trade associations of retailers and medical associations, may fund lobbying efforts concerning the taxes. Trade groups that sell the taxed items might move sales conventions out of the city or not consider meeting in the city.

 

SWFT Chapters             

Individuals, Chapter 1

Corporations, Chapters 1, 16

Comprehensive, Chapters 1, 24

Essentials, Chapters 1, 16

 

BillRaabe_2017.png William A. Raabe, Ph.D., CPA, was the Wisconsin Distinguished Professor of Taxation. He taught at Ohio State, Arizona State, the Capital University (OH) Law School, and the Universities of Wisconsin – Milwaukee and Whitewater. A graduate of Carroll University (Wisconsin) and the University of Illinois, Dr. Raabe’s teaching and research interests include international and multistate taxation, technology in tax education, personal financial planning, and the economic impact of sports teams and fine arts groups. Dr. Raabe also writes the PricewaterhouseCoopers Tax Case Studies. He has written extensively about book-tax differences in financial reporting. Dr. Raabe has been a visiting tax faculty member for a number of public accounting firms, bar associations, and CPA societies. He has received numerous teaching awards, including the Accounting Educator of the Year award from the Wisconsin Institute of CPAs. He has been the faculty adviser for student teams in the Deloitte Tax Case Competition (national finalists at three different schools) and the PricewaterhouseCoopers Extreme Tax policy competition (national finalist). For more information about Dr. Raabe, visit BillRaabeTax. com and BillRaabeTax on YouTube and Twitter.