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Local Tax: Ups and Downs

Posted by on June 22, 2009

[This post was originally written for my employer’s blog, Show-Me Daily.]

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 Safety

8.241% 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.

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