Public Budgeting and Finance
1. Retailers collect the tax on behalf of the customer so the customer might not realize they are paying sales taxes. What are advantages and disadvantages from the above-mentioned feature of sales tax? Be sure to answer this from the perspective of both the retailer and customer.
2. Imagine you are a tax policy analyst for New Jersey. You asked to advise the governor on a way to reduce the regressivity of the sales tax. Would you recommend a sales tax exemption or a sales tax credit? In your response, please address the following questions:
Which option is better for tax equity?
Which option is better for tax neutrality?
Which option is better for administrative feasibility?
3. Imagine you are trying to figure out a family’s state income tax liability. Below is the following information about the family’s income situation:
The total income was $80,000
$5,000 of the total income came from a nontaxed source (i.e., a $5,000 gift from their parents)
The state allows a personal income tax exemption of $1,000 per adult and $1,500 per child. There are two adults and two children in the family.
They are homeowners and can deduct the property taxes they paid this year ($10,000)
They paid for daycare this year. Assume they qualify for a $500 tax credit.
Assuming the tax rates are the same as NJ (see slide 25 for full list of tax rates), how much do they owe in state income taxes? What is their effective tax rate? What is their marginal tax rate?
4. Calculate the state income tax liability for another family. Below is the following information about their income situation:
• Their total income was $40,000 and all of their income is taxable.
• The state allows a personal income tax exemption of $1,000 per adult and $1,500 per child. There are two adults and two children in the family.
• They are renters and the state allow renters to deduct 18% of their total annual rent. Assume they rented a rent-controlled apartment this year at $600 per month.
• They provide their own childcare at home. Therefore, they have no childcare expenses that qualify for a tax credit.
Assuming the tax rates are the same as NJ (see slide 25 for full list of tax rates), how much do they owe in state income taxes? What is their effective tax rate? What is their marginal tax rate?
Based off your calculations, evaluate the tax equity of this state’s income tax. Make an argument for why this income tax structure is fair. Additionally, make an argument for why this income tax structure is not fair.
5. Continue to work on your revenue analysis project. Specifically, start your research on:
• Describing and explaining the revenue structure of the government unit. What sources of revenue does it rely on? What comprises each source’s tax base? What are the tax rates? How similar are they compared to neighboring government units (in terms of tax base and tax rates)?
• Based off your research above, does your unit of government have a diverse set of revenue sources? What revenue sources does the unit of government lack? Should they include other revenue sources? Why or why not?
Sample Solution
The retailer does not have to manage complex sales tax codes from multiple locations, as they are collecting and remitting taxes on behalf of their customers.
Advantages for the Retailer:
The retailer does not have to manage complex sales tax codes from multiple locations, as they are collecting and remitting taxes on behalf of their customers. This can save them time and money, especially if they have a large customer base. Additionally, it allows them to remain compliant with the relevant laws, avoiding costly penalties or fines imposed by authorities over non-compliance.
Advantages for the Customer:
Customers will not need to worry about calculating their sales tax when making purchases. This makes shopping more convenient and it helps ensure that customers do not unintentionally underpay their sales taxes.
Disadvantages for the Retailer:
Retailers must keep track of multiple state and local tax codes in order to properly collect applicable taxes from each customer at checkout. They may also be subject to audits by taxing authorities if any discrepancies arise between what was collected versus what should have been paid in sales tax. Lastly, some retailers may face potential liability issues if they do not correctly process payments or accurately file returns when due.
Disadvantages for the Customer:
Customers may end up paying higher prices than expected due to additional taxes collected at checkout; this is especially true in states where there is no cap on how much local jurisdictions can add on top of state rates. Additionally, customers who move frequently could potentially be charged incorrect rates based off of out-of-date information held by retailers if adjustments are not made upon relocation
The best option for tax equity would be a sales tax exemption, as this would allow those with lower incomes to pay less in taxes. This could be done by exempting certain essential items such as food or medical supplies from the sales tax altogether. This option is also better for administrative feasibility, since it is simpler to administer than a credit, which requires more paperwork and record-keeping on the part of both businesses and customers.
The better option for tax neutrality would be a sales tax credit, as credits provide individuals with an equal amount of assistance regardless of their income levels. Additionally, this type of policy allows individuals to choose how they want to use their credits. For example, if an individual were eligible for $500 worth of credits but only spent $200 on taxable goods over the course of the year, they could use the remaining $300 for other expenses instead.