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The case for imposing broad-based sales taxes in the states 19 Sep 2017

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. Twenty-four 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 Co-operation 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 1936-1937 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 one-size-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, Co-Founder/CEO Top-Olax Energy Ltd. He is on the Board of Calgary Quest School, Canada. Email: Ola.olutuyi@greentouchconsulting.com. Twitter: @jideolutuyi