The 1% Local Option Sales Tax
Local governments in Utah
have the option to levy a 1% sales tax. The
sales tax is collected by the Utah State Tax Commission and divided between
local governments using a formula of 50% of local sales tax collections distributed
based on population and 50% distributed on the basis of where the sale was made
or “point of sale.” Prior to 1991,
distributions were more heavily weighted towards point of sale. When the 50/50 formula was adopted, all
communities were guaranteed that they would receive at least 75% of the sales
taxes generated within their community. In
2006, a bill passed the legislature that will phase out this hold harmless
provision and, eventually, result in distributions based only upon the 50/50
formula.
The local option sales tax has changed the incentives to
local governments for generating revenue to provide government services and
planning for the future of the community.
At present, most localities try to increase their revenue from sales tax
so that they can either increase services or decrease property taxes. Although sales taxes are considered to be a
regressive tax, surveys of taxpayers consistently indicate that sales tax is a
preferable tax to the property tax. It
is paid in small increments and is reliably computed. Local governments in Utah
do not share in the income tax, so they are not particularly interested in attracting
jobs. But, from a tax perspective,
employees are better than residents.
Commercial buildings generate property taxes based on 100% of their
value, while residential properties generate taxes from only 55% of their
value.
Retailers that generate sales volumes in excess of $25
million per year are the type of business most financially savvy communities
want to attract. Under the current
formula, a $25 million per year retailer will generate at least $187,500 per
year in tax revenue. ($25 million X 1% X
75%) The cumulative effects of many
communities competing for large retailers include:
- Winners
and losers re tax burden: People
who live in communities that are well located for retail expansion pay
lower taxes for the same level of services than people who live in less
well located communities. This
occurs because people who live in less well located communities travel to
other communities to make their purchases.
They pay the local option sales tax to the community where the sale
is made and pay relatively higher property taxes to support public
services in their home community.
- Winners
and losers re tax investments: Large
retailers are often offered a tax reimbursement to cover some of their
site development or building costs since they generate sales taxes for the
community. In the end, the large
retailers are receiving some level of services for free while all other
property owners in the community must pay.
Additionally, when the retail is located in a redevelopment or
economic development project area, the tax reimbursement is usually made
from the property taxes which are levied by the local municipality, the
county, the schools and the special districts. Since the schools and the special
districts do not receive sales tax, their property taxes are being used to
increase sales taxes to the municipality.
- Zoning
excessive land for strip retail and a dramatic expansion in retail square
footage: If retail uses provide a
higher tax return than all other uses, it is reasonable for each community
to zone as much land as possible for retail. National statistics show that between
1986 and 2003, the amount of shopping center retail space per capita
increased 37%. Slowly, our communities are becoming
indistinguishable retail corridors.
- Lower
cost goods: It is probable that the
extensive retail competition, combined with the outsourcing of the
manufacture of retail products, has resulted in lower prices for most
categories of standard retail goods.
- Loss
of small town community: The growth
of large retailers has occurred at the expense of smaller retailers. Large retailers can take advantage of
cost savings related to economies of scale—centralized purchasing,
centralized shipping, lower employee costs, etc. But, small retailers do more than
provide generic goods for sale.
Small retailers have a vested interest in the community and provide
a personalized shopping experience.
The communities who actively compete for the large retailers
claim that they must do this to attract the stores that their constituents
want.
League members can choose to support or not support these
trends by choosing where to spend their retail dollars. But, these small steps will not result in
changes in public policy. League members
may also want to support tax proposals that encourage a distribution of a
larger portion of sales taxes based on population and a lower distribution based
on point of sale. If most retail sales
taxes were distributed based on population, municipalities would care more
about attracting residents, rather than retail.
Alice Larkin
Steiner
January, 2007
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