Wednesday, October 15, 2008

Sales Tax- Part II

In an earlier post I delved into the importance of shopping locally, mainly within the boundaries of South Ogden City. In case you missed it, here is a link to that post: Does it matter if I shop in South Ogden?

Sales tax is a vital tax for most cities in the State of Utah. For South Ogden City it represents roughly nearly 30% of our budget. Fortunately for us we have seen good commercial growth in our city that has slowly increased our sales tax revenues.

How is sales tax generated?

Sales tax is generated every time you purchase something whether it be at a retail establishment or a good that you purchase by another means. Sales taxes are sent from these establishments to the State of Utah where they turn around and distribute that sales tax to the various entities that are entitled to it.

How is sales tax distributed?

Once collected by the State, sales taxes are distributed by formula. A certain percentage goes to the State of Utah and a portion also goes to counties. Cities get 1% of all sales taxes generated statewide.

That 1% is then distributed to cities by another formula. This formula says that 50% of the city share is allocated by "point of sale". Meaning, if the store that the sales tax was generated is in your city limits then you get 50% of the city portion generated in that store. For example, sales in stores like Costco, Macey's, Albertsons, or similar places are critical to the success of our city due to the sales tax generated.

The other 50% is distributed by another formula that is based on population. South Ogden's population in relation to the state's population produces a percentage that is used. For example, South Ogden is currently .0059% of the state population. Therefore we get .0059% of the population portion of the sales tax revenues generated state wide.

It might sound confusing, but each month we get a printout from the State that shows our point of sale distribution and our population distribution.

What are sales tax revenues used for?

Sales tax revenues go in the the City's general fund. This means these revenues are used for the general services provided by the City. A good example of this are the parks in our city. We don't charge people to use our parks so we have to figure out a way to pay the cost to maintain them each year. This is picked up through general fund revenues in which sales tax is a large part of that.

What are the downsides to sales tax revenues?

Sales tax revenues are cyclical. Each year when we set our budget we have to estimate our sales tax revenues. Because they are such a large part of our budget we monitor these revenues monthly as they come in. A trend downward could cause us to cut back in some of our expenditures if necessary.

The last few years have been great for sales tax revenue growth due to a robust economy. As we projected our revenues for this year we were a lot more conservative due to the signs of the economy slowing down. Our revenues so far this year are pretty close to what we have projected. But as things slow down nationally we'll continue to monitor the effect that will have on our state and local economies.

I hope this has helped our resident's understanding of sales tax revenues. If there is something else that you've always wondered about local government please post a comment below and I'll do my best to find the answers.