Sales taxes are tricky, but the way the system of collecting them has evolved raises some serious questions of fairness for most cities in the region.
Out of the 9 or 10 percent tax added to purchases in most of the Puget Sound area, one cent is collected for local use. Of that, half a cent is mandatory for cities to impose. The other half cent is optional, but all cities impose it. Then, counties get to skim off 15 cents on each dollar collected inside cities, and cities get the remaining 85 percent of the sales tax collected within their boundaries.
What makes sales taxes tricky is the disconnect between the “incidence” of taxation and the beneficiaries of the tax. Incidence refers to “who pays.” When taxes are embedded in the price of a good, such as in Seattle’s soda tax, there will be a lively debate about who ends up paying the tax in the end–how much is passed on to the consumer and how much is eaten by the merchant. In the case of the sales tax, however, the incidence is very clearly on the consumer—that’s why the tax is added to the end of the bill, and not usually embedded in the price. But although the consumer is paying the tax, it is collected and remitted by the business.
The big question is, where does that city 0.85 percent end up? In the case of services, say a landscaper, the tax is supposed to be designated for the city where the service took place. Similarly with construction. The “destination-based sales tax” system ensures that the city sales tax collected on internet sales goes to the city where the product was delivered.
But when it comes to brick and mortar retailing, the city tax stays in the city where the retailer is located. So the consumer, who would probably like to see their tax dollars go to fund their own local services, often sees those tax dollars go to another jurisdiction when they shop outside their city. The fact that the incidence of taxation is on the consumer suggests that those taxes should go to pay for the government service needs of that consumer (i.e. remitted to the city of residence), not the service requirements of the businesses that collected the tax (remitted to the city where the business is located). (Cities with large retail footprints will likely disagree with this premise.)
Perhaps the most striking example of this discrepancy is in the sales of motor vehicles by dealers. Motor vehicle dealerships are spread unevenly around the region, such that some cities collect vast amounts of sales tax from car and truck sales, while most don’t.
Figures 1, 2 and 3 show the degree to which cities collect more or less than their “fair share” of sales tax on vehicles. The fair share is calculated using Census data on household incomes, and assumes that all households would spend, on average, the same proportion of their income on cars bought from dealers. So, the fair share is the amount of tax that a city would collect if the local sales tax paid on all car purchases by the city’s residents was captured by that city. The bars show the percentage of the fair share for each city that it collected in 2019. Yellow bars indicate collections above fair share (red dotted line) and gray bars indicate below fair share.
Most cities do not collect their fair share of sales taxes paid on motor vehicles. Some collect barely any tax at all (they have no dealers, and a small amount of tax is remitted to the city for various reasons. Taxes paid on private car sale transactions are classified as “use” taxes and not included here). Others have some dealers, but not enough to get to the fair share.
Fife really stands out. Fife has a population of about 10,000 people. Dealers in the city recorded over a half a billion dollars in motor vehicle sales in 2019, and the city collected $4.7 million in sales tax on those transactions. That comes to over $1,000 per Fife household. In contrast, the adjacent city of Edgewood collected just $11 per household in car sales taxes.
Like clothing stores, car dealers seem to like being near each other, and encouraging the development of auto malls and other clusters of motor vehicle dealers has long been a tax generation strategy for cities that can pull it off. Such a strategy requires large contiguous land areas, a central location in a market area, and enough dealerships to go around. Dealerships are franchised by car manufacturers who limit the number of dealers for their brands in any market area, making it unlikely that any city not now enjoying a tax stream from dealers will be able to get in on the action.
Looking Ahead
Is this pattern of tax distribution a problem that should be remedied? It depends on whether you accept the premise that sales taxes should go, to the greatest extent possible, to the jurisdiction where the payer lives. The argument is that local services are used most heavily by residents, not businesses, and therefore residents should pay taxes—including sales tax—to cover those service costs. That can’t happen if the sales taxes are being captured by the jurisdictions that happen to have the retail outlets. Car dealers pay a number of other local taxes—property, utility, B&O—that should cover the modest service demands of a dealer with its city.
Sending sales tax revenue from car sales to the residence city of the payer would present little administrative challenge. With private sales of used cars, the Department of Licensing ensures the use tax gets paid and remitted to the city of the buyer. The politics are another story. This would require state legislation, and cities tend to avoid issues where there are winners and losers among them.
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