Question

You are a state budget analyst. Your state generates revenue by graduated income tax, sales tax on all items and lottery sales. List and explain three other potential revenue sources. Which of the three currently in use would you eliminate or reduce? Explain your reasoning.

Answer 1

With increasing business scenarios, taxation have become a complex thing and business do find loopholes to evade the taxes. As state budget analyst, I would propose three new sources of generating revenue:

1. Digital tax- Major business are now making sales through online giants like amazon or eBay. To increase the sales, retailors do not charge taxes and end customer get the goods at lower price. There is a need to bring the e-commerce players into the compliances of taxes and they should ensure all sales eligible for taxes are charged with taxes and reported to the tax authorities.

2. Economic Nexus: It refers to the business presence which is not physical. For example, if a retailer from Florida is making sales to customers and do not charge taxes because he is not physically present. There is need to bring out of state retailers under the bracket of sales tax compliance if annual sales are above $100,000.

3. Taxation of Software Server Services- Most of the states have zero sales or only city level taxes on software’s which are operated from the servers of the service providers. With increasing technological advancements, this area can bring up higher revenues

From the current list of sources, I would like to do away with the below source, not completely but with modification

Sales tax on all items: There are essential life items such as baby food where full tax is not justified.

Recommendations:

Essential household items- Zero Sales Tax

Manufacturing and R&D- Partial Sales Tax