Local Tax: Ups and Downs
There’s an article in the Columbia Daily Tribune today that discusses the latest flap in Jefferson City about a sales tax issue (link via Combest). The article deals with some general perverse incentives, and is an interesting study in public choice theory, but the precise issue at hand also touches on some interesting free-market ideas.
It seems that a lawyer has been suing some small towns in Missouri for charging what he claims is an illegal sales tax. State law is a bit ambiguous on this point. From the article:
State law allows cities to levy sales taxes for general purposes and capital improvements, subject to voter approval. The rates vary up to 1 percent for a general sales tax and one-half percent for a capital improvements tax. In 1999, the Department of Revenue issued a letter saying there was “no limit to the number of taxes” that could be adopted under the law.
The legality of such taxes is not as important to me as whether they should be illegal — that is, whether there is a compelling reason to allow or disallow local taxation of certain levels. I will refer once again to one of my favorite economic concepts: the Tiebout Model, which shows that under certain conditions, local government can do the best possible job at satisfying its constituents’ preferences.
In short, I am not entirely opposed to local sales taxes, because they are the most likely form of taxation to be approved by people who want them, and the least likely to subject unwilling people to taxation that they feel does not fund things they of which they approve. Moreover, local taxes tend to fund services that make the most sense for government provision, such as police and fire protection.
Here’s a glance at the current sales tax picture in St. Louis:
City of St. Louis Sales Tax Breakdown
4.225% State of Missouri
1.000% City – General Fund
0.375% City – General Fund
0.500% City – Transportation
0.500% City – Capital Improvements
0.250% Public Transit
0.100% Metro Parks/Recreation District*
0.666% Transitional School District
0.125% City-Parks and Recreation
0.500% Public Safety8.241% Retail Sales Tax Rate
1.500% Sit Down Restaurants
9.741% Sit Down Restaurant Rate
This is a far cry from 1.5 percent, to be sure, but the Tiebout model indicates that these tax rates are by and large acceptable to and may accurately reflect the preferences of the residents of St. Louis, given the services they provide. On the other hand, here’s an article that discusses the possibility that residents of population centers are more willing to trade away economic freedom in exchange for the conveniences and efficiency gains of metropolitan living — an unsettling notion for the Tiebout model, and for those who love freedom.
It surprises you that people are willing to make that trade-off? How can it possibly surprise you? Each of us makes these decisions every day of our lives, in big and small ways. For myself, less expensive property, less regulation, and everything else takes a distant backseat to the ability to walk to, and more importantly walk home from, the bars and restaurants of Clayton and University City. I value the ability to enjoy beer and wine and get home safely (for myself and others) much more than it bothers me that I have to get a permit to redo my backyard fence.
Comment by David Stokes — June 22, 2009 @ 12:55 p.m.
Josh,
Do you think this lawyer will eventually sue the City of St. Louis over their taxes? Further, do you think that lawsuit should force the city to lower its sales tax rates (via removing part of the generaly sales tax), or should the state adjust the laws as discussed in the article?
Comment by David Stokes — June 22, 2009 @ 12:57 p.m.
I wasn’t really surprised that people would make that trade off, just disheartened, as it may predict bad things for the future of free markets.
“Do you think this lawyer will eventually sue the City of St. Louis over their taxes?”
Unlikely, but it was suggested in the article that he may be after larger cities in the future. I doubt he will try it in St Louis.
“Do you think that lawsuit should force the city to lower its sales tax rates (via removing part of the generaly sales tax), or should the state adjust the laws as discussed in the article?”
I thought about mentioning in my post something that has come up in book club before: jury trials are black boxes where the outputs scarcely resemble the inputs. One of the reasons for huge out-of-court settlements is that even if it’s a nuisance suit which likely shouldn’t even get the courts time, a jury may find in favor of the frivolous-lawsuit-filer. My point is, I doubt that what these cities are doing is illegal, but it is easier to pay off this guy than risk a pricey court battle. So while I don’t think that a lawsuit should force St Louis to lower it’s tax rate, I do think that lower taxes are better, even if it means less local benefits, because of the pernicious problem of aggregating preferences. This is especially true of large population centers: more people means more possible outliers who don’t want the services their taxes pay for.
Comment by Josh Smith — June 22, 2009 @ 1:12 p.m.