Diversity of tax revenues at Swobodaville
Cities always prefer a diversified tax base to avoid being vulnerable in the event of an economic downturn. Additionally, having a diversified base ensures a continuous stream of income. An assortment of tax mixes such as sales, property, natural resources, income (both individual and corporate) and licenses make up for a healthy city. Most of the tax rates are imposed by either the central government or the local authority.
Property tax generates a more stable source of revenue unlike sales tax. It can easily be carried out and unrealized capital gains can be taxed. Its disadvantage lies on the fact that an increase in its tax can cause loss of home ownership. In the U.S.A, the Great Recession caused a decline in property tax due to foreclosures (Chernick, Langley, and Reschovsky, 2011, p. 1). In the U.S.A, the national average for property tax is 30.1% (Wash Park Prophet, 2009, para.9).
Comparing Swobodaville at 36% with other cities at 38%, a margin of 2% is found. This shows that property tax is one major mainstay of the cities. The sales tax is very expedient and is normally imposed on expenditure rather than savings (Advisory Commission on Intergovernmental Relations, 1988, p. 4). Its demerits include the fact that it is very regressive and in some instances, it causes a hostile business environment. Income tax, both individual and corporate, offers flexibility to the tax structure with increasing costs and demand for service.
When the income tax rates are set locally, there is a tendency for the authority to offer lower tax rates such that majority of people on payroll tax are retained in the city as well as offering tax breaks to the corporate bracket. Sales and property taxes are the major sources of revenue in Swobodaville (36%).
Sales taxes are very cyclic while property while property tax remains constant. The loss of personal or corporate income tax may have minimal impact on the tax collections since property and sales taxes are sufficient to cover their loss. The comparator cities have almost the same trend as Swobodaville with slight deviations. Therefore, Swobodaville tax types represent a good mix of revenue which could be due to its diversified economy.
Factors to consider when carrying out a complete analysis of the tax mix
- To conduct a complete analysis of the tax mix situation in Swobodaville, one ought to know how the central government contributes towards funding the city. In some countries, the central government gives grant to the local authorities to ensure equal treatment of all persons especially in the education and health sectors.
- Some central governments also maintain and regulate the taxing authority. This means that a city can use a tax rate however, its base and rates are governed by the central government. When the taxing authority is local to Swobodaville, it may be offering tax breaks to corporate income consequently less revenue is generated from them. Moreover, distortion in markets for mobile goods may occur if the set rates are not synchronized across cities (World Bank Group, 2001, para.15).
- Cities/states may be sharing taxes or revenues from the central government and this may reduce the states efficiencies as well as accountability.
Actions to improve the tax base
- When taxation is done locally, there is a tendency of double taxation or no taxation on some revenues hence policies and rules should be formulated for assigning rates and ensuring 100% of the revenue is collected.
- States should ensure budgets and accounts are balanced yearly to match expenditures and revenues to avoid carrying forward deficits over time.
References
Advisory Commission on Intergovernmental Relations, (1988). Local revenue diversification. Local income taxes. Web.
Chernick, H., Langley, A., & Reschovsky, A. (2011). Revenue diversification in large U.S cities. Web.
Wash Park Prophet, (2009). Colorado tax mix typical. Web.
World Bank Group, (2001). Decentralization & sub national regional economics. Intergovernmental fiscal relations. Web.