Question 3 (10 marks)

The following is an excerpt (with dates changed) from Against the Grain, a series of recommendations by the State Comptroller of Texas on how to save $4.5 billion and thereby balance the states budget:

Require an Annual August Remittance of One-Half of Augusts Sales Tax Collections by Monthly Taxpayers. The Legislature should require sales taxpayers to remit half of Augusts collections during that month.

Background

Currently, sales tax payments are remitted either monthly, quarterly, or annually. They also may be prepaid either on a quarterly or on a monthly basis.

Monthly taxpayers, including those who collect taxes on their own purchase or use of taxable items, are required by law to remit to the state all tax collectionsless any applicable discountsby the twentieth day of the month following the end of each calendar month. The states fiscal year ends on August 31.

Recommendation

The Legislature should require all monthly taxpayers to remit one-half of each Augusts sales tax collections during that month.

Specifically, sales taxes collected between August 1 and August 15 would be due with their regular August 20th payment. Monthly taxpayers would remit tax in the usual manner during all other months.

This is not a prepayment plan, but a speeding up of the remittance of actual taxes collected and owed to the state. This would impose an additional burden and would reduce taxpayer cash flow, but should be considered as preferable to a tax increase.

Implications

An annual payment by monthly filers of taxes actually collected during the first 15 days of August would increase Augusts collections and decrease Septembers collections. Although the initial imposition of this proposal might temporarily inconvenience some taxpayers, the prompt payment to the state of some of its sales tax revenuescollected, but not yet remittedwill enhance the revenue stream at a critical time each fiscal year. During the first year of implementation, all months would have normal collection patterns except August, which would be larger than usual, thereby producing a fiscal gain.

Each following year would see smaller than normal (current) collections in September and larger collections in August. These differences would essentially offset each other. It is important to stress that failure to speed up collections each year after implementation would cause a fiscal loss. The gain to the general fund in the year of implementation would be $215 million.

Fiscal Year Gain to the General Revenue Fund

2016 $215,113,000

2017 $ 0

2018 $ 0

2019 $ 0

2020 $ 0

1a. On what basis does the state probably prepare its appropriation budget? Explain.

1b. Do you believe the state will be better off, in economic substance, as a result of the proposed change?

2. According to the comptroller (last paragraph), the change would have no impact on revenues in future fiscal years as long as collections are also pushed forward in those years. Do you agree? If so, is there any reason not to adopt the proposal?