The case for im­pos­ing broad-based sales taxes in the states

De­vel­op­ment doesn't come cheap. It comes when the lead­ers do what is right and the cit­i­zens pay their fair share and de­mand ac­count­abil­ity from the lead­ers.

Financial Nigeria Magazine - - Contents -

The Nige­rian sub-na­tional economies have al­ways had cash­flow prob­lems, which have be­come acute in the last two years. With very few ex­cep­tions, the states are find­ing it dif­fi­cult to pay work­ers and pen­sion­ers. Be­tween four to 12 months' – or more in some cases – salaries and pen­sions are be­ing owed by the states. This is an ab­sur­dity.

Over the last two years, the fed­eral gov­ern­ment has bailed out the states more than once to en­able them meet their pay­roll obli­ga­tions. It is true that even in times of high oil rev­enue, some of th­ese states owed salaries. The fall in oil rev­enue has made the sit­u­a­tion worse.

The gath­er­ings of states' com­mis­sion­ers at the fed­eral cap­i­tal to re­ceive statu­tory al­lo­ca­tions ev­ery month is not only anti-de­vel­op­ment; it is an un­for­tu­nate prac­tice in a fed­er­al­ism. It could also be likened to gath­er­ing of wel­fare re­cip­i­ents, re­ceiv­ing their monthly wel­fare ben­e­fits. It is high time states be­gan to tap their hu­man and nat­u­ral re­sources to in­crease their rev­enue and im­prove the well­be­ing of their peo­ple.

One of the most com­mon av­enues that sub-na­tional gov­ern­ments in other climes use to gen­er­ate rev­enues is by im­pos­ing sales taxes. A sales tax is a tax levied on the sale of goods or ser­vices. It is usu­ally pro­por­tional to the price of the goods and ser­vices sold.

The sales tax has a fas­ci­nat­ing his­tory and it is be­lieved to have been around for a long time. In 415 BC, dur­ing the auc­tion of slaves in Pi­raeus, Greece, a sales tax of 1% was im­posed. The Ro­man em­peror Au­gus­tus also col­lected a 1% gen­eral sales tax, known as the cen­tes­ima re­rum ve­nal­ium (hun­dredth of the value of every­thing sold), which he used to fund his mil­i­tary.

The first broad-based gen­eral sales tax in the United States was in­tro­duced by the state of Mis­sis­sippi in 1930. Twen­ty­four other states in­tro­duced theirs in the late 1930s, fol­lowed by six states in the 1940s, five in the 1950s and 11 in the 1960s. Ver­mont was the last state to en­act its sales tax in 1969. Five states (Alaska, Delaware, Mon­tana, New Hamp­shire and Ore­gon) do not im­pose state-wide sales taxes. For some of th­ese states with­out state-wide taxes, they have ex­cise taxes, mu­nic­i­pal sales taxes, gaso­line taxes, as well as cig­a­rette and al­co­hol taxes.

Ba­si­cally, there are two types of sales taxes, one is a con­sump­tion tax or re­tail tax, which is a straight per­cent­age tax placed on the sale of goods. It is con­sid­ered the tra­di­tional type of sales tax. The sec­ond is the value added tax (VAT). The VAT is dis­tinctly dif­fer­ent from the con­sump­tion tax. It is an in­di­rect tax de­signed as a fi­nal tax li­a­bil­ity on the fi­nal con­sump­tion of goods or ser­vices. Cur­rently, VAT is the only sales tax op­er­ated in Nige­ria and it is col­lected by the fed­eral gov­ern­ment.

VAT was es­tab­lished in Nige­ria on Au­gust 24, 1993 un­der the Value Added Tax Act 1993. It re­placed the sales tax, which had op­er­ated un­der De­cree No. 7 of 1986. The old sales tax was deemed to in­suf­fi­ciently cover the grow­ing con­sump­tion in­dus­try, hence the need for its re­place­ment.

I am not un­der the il­lu­sion that im­ple­ment­ing sales taxes in the states in the cur­rent dis­pen­sa­tion is go­ing to be a soft sell, es­pe­cially given the lack of trust in the lead­er­ship at ev­ery level. But de­spite the mis­trust by the cit­i­zens, there needs to be more ways of gen­er­at­ing funds to pro­vide ba­sic ameni­ties. The onus is now on the lead­ers to prove that funds col­lected will be ap­pro­pri­ately uti­lized.

As a coun­try, both the cit­i­zens and their lead­ers are quick to com­pare Nige­ria to the de­vel­oped na­tions. But the re­al­ity is that de­vel­op­ment doesn't come cheap. It comes when the lead­ers do what is right and the cit­i­zens pay their fair share and de­mand ac­count­abil­ity from the lead­ers.

The fact is the rev­enue to meet the obli­ga­tions of states has to come from some­where. In my opin­ion, the sales tax re­mains one of the best op­tions for the states to in­crease their rev­enue and in­vest in in­fras­truc­tural de­vel­op­ment.

In an in­ter­nal re­port by the econ­o­mists at the Or­gan­i­sa­tion for Eco­nomic Co­op­er­a­tion and De­vel­op­ment (OECD) on the ef­fects of var­i­ous types of taxes on the eco­nomic growth of de­vel­oped na­tions within the OECD, it was found that sales taxes are some of the least harm­ful taxes for growth. They are also eco­nom­i­cally ef­fi­cient in col­lect­ing per dol­lar of rev­enue spent.

In a 2002 study con­ducted by the Fraser In­sti­tute on tax­a­tion in Canada, and fo­cused on the mar­ginal ef­fi­ciency cost of var­i­ous taxes in the coun­try, it was

found that per dol­lar col­lected, cor­po­rate in­come taxes did $1.55 in dam­age to the econ­omy. In­come taxes were found to be some­what more ef­fi­cient, do­ing only $0.56 eco­nomic dam­age per dol­lar col­lected; while sales tax came out on top with only $0.17 in eco­nomic dam­age per dol­lar col­lected.

A sales tax is con­sid­ered a re­gres­sive tax. What this means is that the rate does not change based on a per­son's in­come or wealth. Those against sales tax are quick to point out its re­gres­sive na­ture as the rea­son it does not favour the low-in­come earn­ers. While this is cor­rect, states who have im­ple­mented sales taxes mit­i­gate the neg­a­tive ef­fect on low-in­come earn­ers by ex­clud­ing some goods and ser­vices such as rent, elec­tric­ity, food, cloth­ing and med­i­ca­tions.

In a coun­try with a very large in­for­mal econ­omy and low tax-to-GDP ratio, the sales tax re­mains the most ef­fec­tive tool that can raise money from the in­for­mal sec­tor, in­clud­ing the un­der­ground econ­omy. Con­sider an ex­am­ple of a drug dealer who does not pay in­come tax. But he would have no choice but to pay taxes un­der the state's sales tax when­ever he pur­chases goods and ser­vices.

It is also ev­i­dent that de­spite the high poverty rate in Nige­ria, the coun­try still ranks high in the pur­chase of ex­otic and lux­ury items like wines, de­signer clothes, cars and many oth­ers. Th­ese are po­ten­tial sales tax items.

As stated ear­lier, sell­ing a sales tax pol­icy will be a hard sell. Tax­pay­ers would need to be con­vinc­ingly re­as­sured that funds gen­er­ated would be uti­lized for the ben­e­fit of the cit­i­zens. Some of the steps the gov­ern­ment must take to re­as­sure the peo­ple is to cut waste and show more se­ri­ous­ness in fight­ing cor­rup­tion.

The states' sales tax may not be a per­ma­nent tax in some cases, sim­i­lar to what we have seen in the case of the prov­ince of Al­berta in Canada. In Canada, the fed­eral gov­ern­ment op­er­ates a value added tax, called the Goods and Ser­vices Tax (GST), while most of the prov­inces op­er­ate the Provin­cial Sales Tax (PST). The fed­eral GST rate is 5% while the PST rates vary from prov­ince to prov­ince. Only the prov­ince of Al­berta and the ter­ri­to­ries of Yukon, North­west ter­ri­to­ries and Nu­navut have no sales taxes.

While Al­berta is with­out a provin­cial tax or har­mo­nized tax, it was the first prov­ince to im­pose a sale tax back in 19361937 dur­ing the Great De­pres­sion. The prov­ince, rich in nat­u­ral re­sources, has gone 80 years with­out a sales tax.

En­act­ing and im­ple­ment­ing the sales tax is a her­culean task. But it is not un­sur­mount­able. Any state that in­tends to im­ple­ment a sales tax must be ready to back it up with tech­no­log­i­cal sup­port and in­no­va­tion. Each state must also be aware that in im­ple­ment­ing a sales tax, it needs to pay at­ten­tion to the sales tax, if any, in the neigh­bour­ing state. If tax­pay­ers see that it's cheaper for them to cross the bor­der to the next state to pur­chase an item just to evade a sale tax, they will do so.

For in­stance, the state of Texas doesn't im­pose in­come tax. This makes it very at­trac­tive to cor­po­rate ex­ec­u­tives. But prop­erty and sales taxes in Texas are high. One study found that the bot­tom 20 per­cent of the Texan pop­u­la­tion pays 12 per­cent of their in­come in state and lo­cal taxes.

While the sales tax may not be a one­size-fits-all ap­proach to solv­ing the peren­nial cash­flow prob­lems of Nige­rian states, each state would have to dig deep and de­cide on what is best for its pop­u­lace.

Ola­jide Olu­tuyi, a Fi­nan­cial Nige­ria Guest Writer, is a grad­u­ate in Man­age­ment from the Uni­ver­sity of Leth­bridge, Canada. He is Found­ing Part­ner, Green­touch Con­sult­ing Inc. Canada, CoFounder/CEO Top-Olax En­ergy Ltd. He is on the Board of Cal­gary Quest School, Canada. Email: Ola.olu­tuyi@green­touch­con­sult­ing.com. Twit­ter: @jide­o­lu­tuyi

States who have im­ple­mented sales taxes mit­i­gate the neg­a­tive ef­fect on low­in­come earn­ers by ex­clud­ing some goods and ser­vices such as rent, elec­tric­ity, food, cloth­ing and med­i­ca­tions.

Kaduna State Gover­nor Mal­lam Nasir el-Ru­fai

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