We are now in the thick of gift buying season. As Kansas consumers navigate Black Friday, Small Business Saturday, and other seasonal sales, they must consider the burden of sales taxes in their shopping plans.
In Kansas, many local governments rely on a sales tax as part of their revenue stream. Cities and counties often adopt new and/or increase existing sales taxes through voter approval. This was the case in the most recent November elections in cities including Derby and Benton. While these ballot initiatives passed in some cities, they failed in others including Haysville where the proposed tax increase failed by one vote.
Over time, Local governments have become more reliant on sales taxes in their pursuit of a diverse revenue strategy.
Cities can experience certain benefits when using a sales tax to generate revenue.
Sales tax revenue can be a substantial source of income for cities. Sales taxes tap into consumer spending, providing funding for essential government services. In this sense, the sales tax contributes to the overall development and health of the city or county.
Another benefit is the ability of a sales tax to capture revenue from non-residents who purchase taxable goods through tourism or when commuting for work. This can provide an attractive revenue option to city leaders, particularly political leaders, hoping to boost city funds without placing the entire tax burden on their own residents. In fact, several Kansas cities, including Benton, proposed new or increased sales taxes to provide property tax relief for their own residents in 2023.
However, cities should also consider the volatility of sales tax revenue when determining how much to rely on this source of income. Economic downturns or changes in consumer behavior can lead to fluctuations in the amount of revenue generated. This makes it challenging for local governments to plan their budgets effectively.
This instability may result in financial strain in maintaining public services during lean times when these services may be critical to residents.
Furthermore, local governments must remember that sales taxes create a competitive disadvantage for local businesses trying to compete with online retailers. This is because these online businesses may not be subject to the same tax regulations. Local sales taxes may negatively affect the economic environment for brick-and-mortar stores within the city.
Finally, sales taxes are regressive. They impose the same rate on goods and services for all consumers, regardless of income. Sales taxes disproportionately affect lower-income individuals. It can impact their purchasing power and exacerbate economic inequality within the city. This is particularly true when a sales tax is imposed on necessities like groceries.
In summary, while a local sales tax offers cities a robust revenue stream with the potential to attract funds from non-residents, its regressive nature, volatility, and impact on economic competition pose significant drawbacks.
Achieving a balanced revenue strategy that considers the welfare of all residents and adapts to the ever-changing economic landscape is crucial for the long-term fiscal health of Kansas cities.
Brianne Heidbreder, PhD is an Associate Professor of Political Science at Kansas State University.