his 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 $800 million to $710 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 $50 million. Required: Compute the additional revenue raised by State A. Compute the additional revenue raised by State Z.

Answer and Explanation:

The computation is shown below

a.

For Additional revenue raised by State A:

Following calculations need to be done

Initial revenue = 5% × 800 million

= $40 million

Revenue from increased tax rate is

= 6% × $710 million

= $42.6 million

Now Additional Revenue raised by State A is

= $42.6 million - $40million

= $2,600,000

For Additional revenue raised by State Z :

Revenue from increased tax base is

= 5% × $50 million

= $2,500,000

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