Chapter 14: Second
Half
State and Local Taxes/ Details About
Taxes…
$$$ STATE AND LOCAL
TAXES$$$
• -Sales taxes- taxes on the value of certain
retail sales of goods and services.
• Added to the end of a bill as a percentage.
• Firms that sell these goods and services are
responsible for collecting and sending in these
taxes.
• SO WHO PAYS?!?!?!
$$$ STATE AND LOCAL
TAXES$$$
• Gross Receipts Taxes- calculated as
a percentage(usually a fraction of a
percent) of a firm’s receipts from
wholesale and retail activities.
• Buyers are unlikely to know these are
being passed onto them.
$$$ STATE AND LOCAL
TAXES$$$
• BOTH SALES TAX AND GROSS RECEIPTS TAX
are principle sources of income for many
states because they are easy to
collect/administer.
o Stores/ businesses have to collect them and do at the
point of a sale/ exchange of money for goods or
services
• These taxes are often regressive so items
like food, medicines, and rent are often
free of sales/ gross receipts tax.
$$$ STATE AND LOCAL
TAXES$$$
• -Property Taxes- Real Property Taxes- levied
on buildings and land, by far more wide
spread.
• Personal property- expensive items such as
jewelry, furniture, securities, clothing,
automobiles.
$$$ STATE AND LOCAL
TAXES$$$
• -Assessment of Property Taxes
• Local government officially evaluates each
taxpayer’s holdings.
• The community’s total assessment serves as
the basis for the setting the real property
tax rate.
• IT IS EXTREMELY REGRESSIVE because it is a
flat rate regardless of who owns what.
• Smaller properties also tend to be
OVERRATED rather then larger ones
$$$ STATE AND LOCAL
TAXES$$$
• -User Taxes- taxes that are imposed on
people who use a product or service.
• These taxes include:
o Gasoline taxes
o License and registration fees for motor vehicles
o Hunting and fishing licenses
o Highway and bridge tolls.
• State Gasoline taxes are used to continue the
upkeep, construction, and repairs for the
roads.
$$$ STATE AND LOCAL
TAXES$$$
• - Other User Taxes in NJo Hunting and Fishing Licenses
o Professional Licenses
o Business Licenses
$$$ STATE AND LOCAL
TAXES$$$
• -Personal Income Taxes:
• Most states and some localities impose
personal income taxes that are similar in
concept to federal personal income taxes.
• This makes up about 25% of state revenue
and only 6% of funds raised by localities.
$$$ STATE AND LOCAL
TAXES$$$
• -Inheritance Taxes- Similar to the Federal
Estate, aka DEATH TAX, states can have
inheritance taxes
• -Payroll and Business Taxes- are often used
to finance unemployment insurance
programs, as well as health, disability, and
retirement programs collected in variety of
forms by state and local governments,
•
$$$ STATE AND LOCAL
TAXES$$$
• -Corporate Income Taxes- Some states and
localities impose taxes on corporations that do
business in that state or locality. Similar to federal
Corporate Income Tax.
• -Unincorporated Income Taxes- To raise money
from businesses that are not corporations (and thus
do not pay CIT’s) some states and localities impose
this tax.
• This name comes from the fact that sole
proprietorships and partnerships are not
incorporated businesses.
$$$ STATE AND LOCAL
TAXES$$$
• -Grants-in-Aid: Grants in aids are given for a
specific purpose by the federal government to
the states and localities. NOT A TAX obviously, but
a crucial source of income for them. In 2000, $292
Billion or 15% of state and local governments total
receipts.
• Example of the Interstate Highway Act
• The Interstate Commerce Act for example is a
program that matches every $1 spent by states
with $9 in federal funding for highway
construction
The Kitchen Sink of Taxes
• Is The Tax System Working Well? -Criticisms of the
Tax System (3)
• 1. It has not raised enough revenue
• 2. Too complex and inefficient for its own good
• 3. Too many people are able to evade paying
taxes
The Kitchen Sink of Taxes
• What are ingredients of a good tax systems? –
• Wealth of Nations 1776 by Adam Smith THE BIBLE
OF THE MARKET SYSTEM, along with the other
amazing observations of economics, set for three
standards for a fair tax system in Great Britain.
The Kitchen Sink of Taxes
• -Fairness- 1st Standard: Taxes should be fair and
taxpayers should believe taxes are fair. Smith
argued taxes should be a percentage of one’s
income.
• -Clarity and Certainty- 2nd Standard: Everyone
should be able to understand what the rate of
the tax is and how the tax is to be paid. Smith felt
that if people knew exactly what they were
paying taxes for, they would more willing to pay
them.
The Kitchen Sink of Taxes
• -Simplicity and Efficiency- 3rd Standard: Taxes
should be easy to collect, difficult to evade, and
inexpensive to administer.
• -Flexibility: (Added standard of Modern day
economists): Taxes should adjust to economic
conditions. Depending on the economic climate,
taxes are easier or harder to pay. The income tax
is the best example because if people make less,
they pay less.
The Kitchen Sink of Taxes
• Fairness in Taxation- “WHEN QUESTIONED with
fairness, 2 opposite principles come up:
• -Benefits-Received Principle- Belief that taxes
ought to be paid by individuals in proportion to
the benefits they receive from the governments.
In other words, “User Tax”.
• PROBLEM: If it is a program that helps the poor,
can the poor pay for it? NO
• Should just parents with kids in public schools pay
for public schools? NO All property owners must
pay
The Kitchen Sink of Taxes
• Fairness in Taxation- “WHEN QUESTIONED with
fairness, 2 opposite principles come up:
• -Ability-to-Pay – Most widely supported principle
of taxation is that people should be taxed in
accordance with their ability to pay. This principle
says the more you make, the more you pay which
is a “progressive tax”.
The Kitchen Sink of Taxes
• Progressive, Regressive, and Proportional Taxes
• -Progressive Taxes: “More money, more taxes”
Example: Federal Income Tax
• -Regressive Taxes: “Less money made, high
percentage of money is taxed” For example a
cigarette smoker who makes $25,000 versus a
cigarette smoker who makes $100,000 when they buy
their pack of cigarettes.
• -Proportional Tax- Taxes that take the same share of
everyone’s income at ALL LEVELS. Try Engel’s law?
• Problem or not a problem?
The Kitchen Sink of Taxes
• Tax Incidence: Who Really Pays?
• -Shifting- the process of transferring the burden of
a tax from those on whom it is levied
o For example, an excise is paid for by consumers, not the
manufacturers of harmful goods and services
• -Incidence- refers to whom the burden of the tax
falls upon.
o For example: From retailers to their customers with excise taxes. The
Incidence is now on the customer, not the retailer.
The Kitchen Sink of Taxes
• Direct and Indirect Taxes
• - Direct Taxes- taxes levied on people and
cannot be shifted are called direct taxes.
o Examples include: income taxes and inheritance/ estate taxes for
surviving family members (DEATH TAX).
• -Indirect Taxes- Taxes that can be shifted to
others are indirect taxes. They are usually levied
on goods and services rather that people.
o Examples include excise taxes, sales taxes, and tariffs because the
person or company on whom the taxes is levied can shift the
burden on to another.
The Kitchen Sink of Taxes
• Interesting example: “real property tax” is usually
a direct tax. However if it is an apartment
complex, and the government raises taxes, it
becomes indirect as the building owner passes
this tax to their renters in the form of higher rent.
• -Hidden Taxes- taxes that are hidden in the selling
price of an item without the buyer’s knowing
about them
• For example, an imported sweater from Peru, the
consumer was not aware that they paid the tariff
within the price of that sweater.
The Kitchen Sink of Taxes
• The Effects of Tax Incidence- This is something
legislators, from the Federal to local level have to
consider when passing a new tax.
o For example, a new “wheat” tax: Will farmers pay that? Food
processing companies? … or consumers?
• -Passed onto Consumers- Passed to consumers
because farmers will not pay it, nor will bakeries
making wheat products
• -Absorbed by Producers- If farmers or bakeries do
“absorb” the tax, they will have lower profits.
The Kitchen Sink of Taxes
• -Reducing Profits of Businesses: If producers eat the
tax instead of passing it on to their consumers
• -Reduced Wages: Will this tax require these
producers, such as farm help or bakery workers, to
take a salary cut in order to not charge their
customers and keep profits the same. Will the labor
accept that?
• -Results of Prices on Substitute Products- With wheat
going higher, will flour, oats, or rye products go up.
With a higher price on one product, the demand for
the substitutes of that product will go up.