South-Western Federal Taxation 2022 Essentials of Taxation Individuals and Business Entities 25th ed

As reflected in Example 5, re-registration of a car purchased out of state is
the occasion for the owner’s home state to collect the use tax.
b.
Completing the state income tax return reminds (or forces) the taxpayer to
pay use tax on out of state purchases.
109. What are the pros and cons of the following state and local tax provisions?
a. An ad valorem property tax holiday made available to a manufacturing plant that is relocating.
b. Hotel occupancy tax and a rental car surcharge.
c. A back-to-school sales tax holiday.
ANSWER:
a.
Such a holiday is designed to attract new industry to the area. This will bring
more jobs and growth in consumption. On the other hand, if the tax holiday is
too generous, this places a strain on available public revenue. The result could
be that schools and capital maintenance (roads, public services) will suffer.
b.
The hotel occupancy tax and car rental surcharges are popular because they
mainly impact visitors. Also, they can generate considerable revenue to
finance major capital improvements. If these taxes become excessive,
however, they could discourage major events (such as conventions).
c.
Such holidays are very popular with both merchants and consumers and serve
the social need of defraying some of the costs of sending children to school.
Once established, however, they are difficult to get rid of. Thus, they become
an annual drain on sales tax revenue.
110. What is a severance tax? How productive can it be in terms of generating revenue?
ANSWER: A severance tax is one imposed when natural resources (e.g., oil, gas, iron ore, coal) are extracted. It is based
on the notion that the state has an interest in such resources. For some states, the revenue from severance taxes
can be significant. Alaska, for example, relies heavily on its severance taxes and has been able to avoid both a
state income tax and a general sales tax.
111. What is the difference between an inheritance tax and an estate tax? Who imposes these taxes?
ANSWER: An inheritance tax is a tax on the right to receive property from a decedent. An estate tax is imposed on the
right to pass property at death. The Federal government imposes estate taxes and states impose inheritance
taxes. Some states impose both, whereas others impose neither.
112. Antonio dies with an estate worth $20 million. Under his will, $10 million passes to his wife and $10 million goes to
his church. What is Antonio’s Federal estate tax result?
Name:
Class:
Date:
Ch 1 Introduction To Taxation
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ANSWER: None. After a marital deduction of $10 million and a charitable deduction of $10 million, Antonio’s taxable
estate is $0.
113. What might cause an individual to owe income taxes in more than one state?
ANSWER: Working in more than one state or owning income-generating property in more than one state can cause this.
114. Virtually all state income tax returns contain checkoff boxes for donations to various causes. On what grounds has
this procedure been criticized?
ANSWER: In many cases, the procedure is overused (i.e., a multiplicity of boxes). This overuse adds complexity to the
return. Also, in most cases, the donation is being drawn from any income tax refund that might be due. Thus,
taxpayers may not fully appreciate that they are paying for such checkoffs.
115. State and local governments are sometimes forced to find ways to generate additional revenue. Comment on the pros
and cons of the following procedures:
a. Decouple what would be part of the piggyback format of the state income tax.
b. Tax amnesty provisions.
c. Internet shaming.
ANSWER: a.
The decoupling process is easily accomplished regarding new Federal tax changes that have never
taken effect at the state level. Taxpayers are not apt to miss what they never have enjoyed.
b.
Tax amnesty provisions generate considerable revenue. It also unmasks many taxpayers who have
not previously paid taxes. Now that the taxing jurisdiction is aware of their existence, they will tend
to pay taxes in the future.
c.
By use of a public internet site, the taxing authority posts the names of those taxpayers that are
delinquent as to various taxes (e.g., sales, income). This public humiliation (or threat of) very often
results in compliance.
116. Briana lives in one state and works in the adjoining state. Both states tax the income she earns from her job. Does
Briana have any relief from this apparent double taxation of the same income?
ANSWER: Most states allow their residents some form of tax credit for the income taxes paid to other states. In Briana’s
case, the credit would be allowed by the state where she lives for the taxes paid to the state where she works.