In the past few months, I have been interviewed or heard stories about state and local government practices to generate revenue in new and unusual ways. For example, some California cities are willing to enter agreements with vendors to locate a sales office in their borders and receive a return of some of the sales tax generated. I think the opportunities for doing this will increase when/if the Marketplace Fairness Act passes. With the MFA, more vendors will be required to collect California sales tax despite the lack of a physical presence in the state. So, why not locate some small office in a city that is willing to rebate some of the tax collected for the city to the vendor?

Another instance is a government hiring a third party to help it collect taxes owed. While that might seem innocent enough – outsourcing, it raises a variety of issues. There is a nice write-up of many of these issues in a Action News Alameda article I was interviewed for a few weeks ago – “City of Alameda Moves Forward With Contingency Fee Business Tax Audit Effort,” David Howard, 7/30/13.

The tax sharing is problematic as this is not what we pay taxes for. Taxes are to help fund government operations. When people learn that part of their taxes go into the coffers of a vendor, they will think that the government doesn’t really need the revenue so why not lower rates and will be puzzled about what the purpose of tax is. This is also a race to the bottom as local governments reduce their hard to generate tax revenues and compete against each other for tax dollars. Read More