The Challenge of Balancing the Budget in Lawsona City
Every level of government is faced with the challenge of balancing its budget in order to fulfill financial obligations, maintain operations, and expand public programs. The city of Lawsona is described as having experienced a deficit during the previous budget cycle. It can be assumed that the town’s participation in redeveloping a mall contributed significant expenses to the long-term budget. The city administration is seeking methods to yield revenue and maintain the operation of services such as public transportation.
Economic vitality results from increased spending on goods and services. This is especially relevant on a smaller scale as such revenue goes directly to private businesses owned by and directly cooperating with people from the local community. Any economic factors that could result in individuals and businesses cutting spending may lead to a recession. Sales tax is usually regressive, forcing those with a low or middle level of income to pay proportionately more than wealthy consumers.
This inverse relationship between tax rate and income affects consumption (Shafritz, Russell, & Borick, 2016). Therefore, fiscal policy that attempts to fix budget deficits through an indirect tax increase will have a negative impact on consumer spending and tax revenues.
Introducing or increasing sales tax without proper consideration is a poor decision in terms of fiscal management on the part of the city leaders of Lawsona. The rate should be based on the condition of the city budget and possible contingencies in the economy. Basic sales tax accounts for less than 10% of own-source general revenue at the local government level (Tax Policy Center, 2015).
Supporters argue that a sales tax can be a vital tool for quickly gaining revenue, being administratively easy to implement and apply on a wide scale. The tax is transparent, and the public is usually aware of the rates. However, a higher sales tax will increase the burden on family households, resulting in tax base erosion, decreased sales, and falling housing prices (Shon & Chung, 2017). Rising sales taxes discourage consumer purchasing and shift behaviors to reduce expenditures for services and entertainment. In combination, these factors deteriorate revenue capacity and drive customers to seek alternatives for goods and services through e-commerce or neighboring geographical areas offering lower tax rates for consumer products (Mazerov, 2015).
Thus, this tax will decrease local consumer spending, a detrimental outcome if the city wants to support and receive a return on investment from the new shopping center. As a result, the local businesses and economy will begin to experience a financial crisis. Insignificant revenue gains by the city administration will come at the cost of frugal consumer behavior that is difficult to reverse.
The realities of the modern economy make it necessary to implement a sales tax as a method for collecting revenue. The recession in the property market and stateside industrial production has severely limited tax revenue streams. Instead of cutting back on critical public programs, city officials can consider a balanced fiscal approach that brings in revenue together with modernizing the tax code and considering the needs of working-class families.
The increase in the sales tax must be gradual and should be legally constrained as temporary. An established time period for the increase will enable a large part of the population to understand the necessity for a sales tax as a revenue-boosting method to fund public programs. Furthermore, selective sales and excise tax should be implemented to target non-critical products. A modernized tax code must consider various aspects of the economy and eliminate tax breaks for out-of-state and e-commerce shoppers to target more affluent consumers.
In order to support the working class, policies can be developed to increase tax rebates to low-income families. Meanwhile, budget cuts should avoid vital programs that aid families facing hardship (Washington State Budget and Policy Center, n.d.). A carefully planned and socially competent approach to implementing a sales tax will help the city of Lawsona to balance its budget without creating an economic downturn that affects the consumer population.
References
Mazerov, M. (2015). Shifting from income to sales taxes won’t boost state economies. Web.
Shafritz, J. M., Russell, E. W., & Borick, C. P. (2016). Introducing public administration. New York, NY: Routledge.
Shon, J., & Chung, I. H. (2017). Unintended consequences of local sales tax: Capitalization of sales taxes into housing prices. Public Performance & Management Review, 1-22. Web.
Tax Policy Center. (2015). State (and local) taxes. Web.
Washington State Budget and Policy Center. (n.d.). Increasing and modernizing the sales tax. Web.