Question

This year, State A raised revenues by increasing its general sales tax rate from 5 percent to 6 percent. Because of the increase, the volume of taxable sales declined from $890 million to $759 million. In contrast, State Z raised revenues from its 5 percent sales tax by expanding the tax base to include certain retail services. The volume of services subject to tax was $145 million. Compute the additional revenue raised by State A. Compute the additional revenue raised by State Z.

Answer 1

Answer: (a) $1.04 million

(b) $7.25 million

Explanation:

Additional revenue raised by State A :

Initial revenue = $(5% x 890) million

                         = $ 44.5 million

Revenue from increased tax rate = $(6% x 759) million

                                                       = $45.54 million

Additional Revenue raised by State A = $ (45.54 - 44.5)million

                                                               = $1.04 million

Additional revenue raised by State Z :

Revenue from increased tax base = $(5% x 145) million

                                                         = $7.25 million