Reading a Local Tax Proposal
A city proposes a 1% local sales tax increase to fund road repairs. The current combined sales tax is 7%. Supporters cite a projection: "The new tax raises $24 million per year." The projection assumes $2.4 billion in annual taxable sales. A council member notes that taxable sales fell 6% the last time the rate rose, and that the road budget needs $20 million to avoid deferring projects. A resident earning $40,000 per year says, "This will cost me $400 a year." The council must decide whether the proposal reliably funds the roads and whether the resident's figure is sound.
1. Check the $24 million projection and test it against the 6% sales-drop scenario.
Read the worked answer
Baseline projection: 1% × $2.4 billion = 0.01 × 2,400,000,000 = $24 million. The arithmetic is correct.
With a 6% drop in taxable sales:
- New base = $2.4B × 0.94 = $2.256 billion.
- Revenue = 0.01 × 2.256B = $22.56 million.
That still exceeds the $20 million need by $2.56 million, so the road budget survives the drop - but the cushion is thin if the drop is larger. A 17% drop would bring revenue to roughly $19.9 million, below the need.
2. Evaluate the resident's "$400 a year" claim.
Read the worked answer
The claim assumes the resident spends their entire $40,000 income on taxable goods at the new 1%: 0.01 × $40,000 = $400. But sales tax applies only to taxable purchases, not all income, and people save and buy exempt items (groceries in many places, rent). If the resident spends, say, $18,000 on taxable goods, the cost is $180. The $400 figure is an upper bound that treats all income as taxable spending - it overstates the typical burden.
3. What single assumption most threatens the $24 million projection, and how would you test it?
Read the worked answer
The projection depends on the $2.4 billion taxable-sales base holding steady after the rate rise. The most direct threat is behavioral response - consumers shifting to untaxed purchases, buying across the border, or online. To test it, compare taxable sales in comparable cities before and after similar rate increases, or model revenue at several drop levels (0%, 6%, 12%) to see where the $20 million floor breaks. The projection is a point estimate, not a guarantee; presenting a range is more honest than a single $24 million figure.