The One Major Source Of Tax Revenue For Local Governments

Sales taxes are the major source of revenue for local governments.

Photo by Nathan Dumlao on Unsplash

“A penny saved is a penny earned”…before this main source of revenue was created!

We’ll let you know now that the sales tax is the major source of tax revenue for local governments.

This article also highlights a couple more things:

  • Background of the tax, within the United States
  • Why it’s a controversial topic
  • The coverage of the tax
  • Gaps that may need to be filled

A brief background of the major source of tax revenue for local governments; sales taxes

Sales taxes in the United States originated around the early 1820s near Pennsylvania. What you may see now as you walk through your local grocery is a retail sales tax, which most people credit to Kentucky as the first state to impose it. Vermont was the latest state to put a tax on goods and services in 1969. There are currently five states that don’t have a sales tax: Delaware, New Hampshire, Alaska, Oregon, and Montana.

States govern which goods and services are allowed to be taxed. Meals that you eat out at a restaurant are more likely to be taxed. On the other hand, your medications and foods for processing at home are not. Some of the services that are taxed include essential services such as woodworking or advertising. A doctor’s office checkup, visit with a lawyer, or wisdom tooth extraction are often not taxed services.

What’s included (and not included) in the sales tax?

The majority of transactions of goods or services between a business and consumer have a retail sales tax; there are no retail taxes for business-to-business because it’s not considered retail. Company services are included in the sales taxes and because of this, renting, repairs, beauty treatments, and more are a source of revenue. Some local municipalities focus on specific services. For example, Colorado’s tax on marijuana. With most new businesses opening up as services, it makes sense to have them taxed a little more.

The sales tax is a simple tax. One of which many state and local governments miss out on because of loose borders. Cigarettes, for example, are transported from low-taxed areas to places where a pack can increase a significant amount because of the tax implications. On top of that, the inability to tax income streams from the internet provides even more controversy and limitations – leaving municipalities out thousands, even millions of dollars.

A controversial topic around local government

A controversial source of revenue, the sales tax doesn’t benefit a large portion of the population. Although it’s exempted from necessities like food and medication, other goods and services require more of a poorer person’s paycheck. Most businesses aren’t in favor of sales taxes, especially with a broader transition into more services. That brings up the question of what happens when it expands even further into e-commerce.

There’s a long road ahead for taxing online services and e-commerce. As mentioned above, state and local government agencies don’t place taxes on services very well. Though the positive sentiment is, of the services used (hair salons, dry cleaning, decorating, auto and house services, etc.), wealthier folks tend to spend more money on them and it’s a “by use” tax.

Taxing sales via the internet has been blocked by the Internet Tax Freedom Act. For local governments, it’s cost them billions of dollars as more and more transactions are placed online. It’s simply too difficult to define borders on the internet, creating the dilemma of how to create revenue off of the fastest growing type of services: online.

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