Chapter 2, Problem 3AP

The city of Clement levies a 5 percent tax on the base price of rooms provided by hotels and motels located within the city limits. This year, the aggregate room price subject to tax was $25 million, so current year revenue was $1.25 million. Clement’s city council recently voted to increase the hotel tax rate to 6 percent for the next fiscal year. Compute next year’s hotel tax revenue assuming:

1. a. Next year’s tax base equals the current year base.
2. b. Next year’s tax base decreases to $22 million.
3. c. Next year’s tax base decreases to $19 million.