Memorandum

City of Lawrence

City Manager’s Office

 

TO:

David L. Corliss, Interim City Manager

 

FROM:

Jonathan Douglass, Management Analyst

 

CC:

Debbie Van Saun, Assistant City Manager

Casey Liebst, Budget Manager

 

DATE:

August 2, 2006

 

RE:

Sales Tax Burden at Varying Income Levels

 

 

 

This memorandum responds to Commissioner Highberger’s inquiry concerning the sales tax impact on different income earners in our community. 

 

The following analysis of the sales tax burden is based on data from the U.S. Bureau of Labor Statistics report titled Consumer Expenditures in 2003.  This report, released last year, breaks consumer spending down by expenditure category and income level.  Using this data I have calculated the amount of expenditures that are subject to sales tax for each income bracket, and the effect of the proposed additional 1.0% sales tax applied to those expenditures.

 

Annual Household1 Income2

Purchases subject to sales tax

Purchases plus 7.3% sales tax

Purchases plus 8.3% sales tax

Tax increase

7.3% sales tax as percentage of income3

8.3% sales tax as percentage of income3

Tax increase as a percentage of income3

$5,000-$9,999

$9,218

$9,891

$9,983

$92

8.97%

10.20%

1.23%

$10,000-$14,999

$11,672

$12,524

$12,641

$117

6.82%

7.75%

0.93%

$15,000-$19,999

$13,753

$14,757

$14,895

$138

5.74%

6.52%

0.79%

$20,000-$29,999

$17,087

$18,334

$18,505

$171

4.99%

5.67%

0.68%

$30,000-$39,999

$20,220

$21,696

$21,898

$202

4.22%

4.80%

0.58%

$40,000-$49,999

$22,337

$23,968

$24,191

$223

3.62%

4.12%

0.50%

$50,000-$69,999

$28,449

$30,526

$30,810

$284

3.46%

3.94%

0.47%

$70,000-$79,000

$32,287

$34,644

$34,967

$323

3.14%

3.57%

0.43%

$80,000-$99,999

$36,433

$39,093

$39,457

$364

2.96%

3.36%

0.40%

$100,000-$119,999

$39,493

$42,376

$42,771

$395

2.62%

2.98%

0.36%

$120,000-$149,999

$44,277

$47,509

$47,952

$443

2.39%

2.72%

0.33%

 

1 Household defined as a) all occupants related by blood, marriage, adoption, or some other legal arrangement; b) a single person living alone or sharing a household with others, but who is financially independent; or c) two or more persons living together who share responsibility for at least two of the three major types of expenses - food, housing, and other expenses.

 

2 Food Sales Tax Refund: Kansas residents with income of $27,600 or less who also must meet one of the following three requirements are eligible for the Food Sales Tax Refund: 1) Must have been born prior to 1951 OR 2) Must have been totally and permanently disabled or blind during the entire year, regardless of age OR 3) Must have had one or more dependent children who can be claimed as a personal exemption and who was under the age of 18 all of last year.  If qualifying income is $13,800 or less, food sales tax refund is $72 for each dependent in household. If qualifying income is greater than $13,800, but not over $27,600, food sales tax refund is $36 for each dependent in household.

 

3Sales tax as a percentage of income was calculated using the midpoint of each income range.

 


Conclusions

 

The Food Sales Tax Refund (FSTR) somewhat reduces the regressiveness of the sales tax, as shown in the table below.  While the qualifying income levels for the Kansas FSTR do not cleanly line up with the income brackets in the Bureau of Labor Statistics data, they are close enough to give rough idea of the effect of the FSTR on the sales tax burden.  To see the difference, compare the numbers in the bolded columns below with the same columns in the table above. 

 

Sales tax burden adjusted to account for Food Sales Tax Refund, assuming 2 qualifying dependents

Annual Household Income

Purchases subject to sales tax

Purchases plus 7.3% sales tax, minus FSTR

Purchases plus 8.3% sales tax, minus FSTR

Tax increase

7.3% sales tax as percentage of income

8.3% sales tax as percentage of income

Tax increase as a percentage of income

$5,000-$9,999

$9,218

$9,747

$9,839

$92

7.05%

8.28%

1.23%

$10,000-$14,999

$11,672

$12,380

$12,497

$117

5.66%

6.60%

0.93%

$15,000-$19,999

$13,753

$14,685

$14,823

$138

5.33%

6.11%

0.79%

$20,000-$29,999

$17,087

$18,262

$18,433

$171

4.70%

5.38%

0.68%

$30,000-$39,999

$20,220

$21,696

$21,898

$202

4.22%

4.80%

0.58%

$40,000-$49,999

$22,337

$23,968

$24,191

$223

3.62%

4.12%

0.50%

$50,000-$69,999

$28,449

$30,526

$30,810

$284

3.46%

3.94%

0.47%

$70,000-$79,000

$32,287

$34,644

$34,967

$323

3.14%

3.57%

0.43%

$80,000-$99,999

$36,433

$39,093

$39,457

$364

2.96%

3.36%

0.40%

$100,000-$119,999

$39,493

$42,376

$42,771

$395

2.62%

2.98%

0.36%

$120,000-$149,999

$44,277

$47,509

$47,952

$443

2.39%

2.72%

0.33%

 

Commissioner Highberger also expressed a desire to analyze how a sales tax increase would affect different demographics, such as homeowners versus renters, or students versus families.  Unfortunately, that analysis is not possible at this time because no data was found that empirically differentiates the spending of these groups from one another. 

 

One could speculate that students pay a higher percentage of their income on sales tax because 1) they are generally low income earners, and 2) they spend more on sales taxable items (food, entertainment, retail goods, etc.) and less on non-sales taxable items such as professional services (doctors, lawyers, etc.).

 

We could also assume that homeowners generally have higher incomes than renters, meaning that renters would be spending a higher percentage of their income on sales tax than homeowners.  There would be important exceptions to this generalization, such as the elderly and others on fixed incomes who are low income homeowners.  Once again, we unfortunately do not have good data with which to empirically examine these issues.