One of the reasons that sales tax rules and rates change so frequently is that they can. States and municipalities facing revenue shortfall can pass a new sales tax more easily than they can increase other kinds of income or reduce expenses. But some tax jurisdictions are taking that strategy a step further: passing new sales taxes to entice investors.
One example is Cook County, Illinois, where a new penny on the dollar sales tax brought debt rankings from “negative” to “stable.” This change allowed the county to refinance bonds on better terms and draw in new investors as well. “We received a great deal of interest from investors,” said Cook County Board President Toni Preckwinkle, “due to our willingness to face our challenges and stabilize our long-term financial position.”
Puerto Rico, now facing a debt crisis that has gotten Congress involved in the territory’s budget, was able for many years to sell bonds briskly because they were backed by sales tax revenue (and triple tax-exempt, which is a different story). Puerto Rico, like the city of Chicago, boasts sales taxes of over 10%, the highest in the nation.
Kansas announced a plan to lower sales taxes, but investors balked and investor services like Moody’s threatened to cut the state’s credit scores. Kansas ended up raising sales taxes instead, and it’s not yet clear how that will turn out, but the state is hoping to stave off problems with investors.
In all three cases, the jurisdictions in question are and have been facing financial challenges. Higher sales taxes haven’t always stabilized their economies. But strategic sales tax increases to increase borrowing ability are yet another factor that muddies the waters of sales tax rates.
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