Sales tax rates are an important part of the overall tax structure of most states, as well as for many local governments. A new report released by Tax Foundation documents how states compare to one another, and how local tax rates affect the business climate in those states.
Forty-five states collect a state sales tax according to the Tax Foundation’s “State and Local Sales Tax Rates Midyear 2014” report. Of those states, California has the highest state sales tax rate at 7.5 percent, followed closely by Indiana, Mississippi, New Jersey, Rhode Island, and Tennessee with a 7 percent statewide tax. Five states — Alaska, Delaware, Montana, New Hampshire, and Oregon — have no statewide sales tax at all.
However, a simple review of statewide sales tax rates, tells an incomplete tale. Thirty-eight states allow local governments to assess sales taxes, which can contribute significantly to the overall sales tax picture in a state. When average local taxes are combined with the statewide rates, Tennessee taxes its citizens the most, with a whopping 9.45 percent overall rate. Arkansas’s 9.24 percent rate and Louisiana’s 8.91 percent rate make those states, respectively, the second- and third-most taxed states in the nation, followed by Washington and Alabama.
When state and local sales taxes are combined, Alaska’s 1.69 percent burden is the lightest, followed — in ascending order of taxpayer burdens — by Hawaii, Wisconsin, Wyoming, and Maine.
Strictly speaking in terms of local taxation, Louisiana municipalities levy the heaviest burden against citizens, hitting taxpayers with a 4.91 percent average local tax, followed by Alabama’s 4.85 percent rate, Colorado’s 4.51 percent rate, New York’s 4.48 percent rate, and Oklahoma’s 4.26 percent burden.
On the other end of the continuum, Idaho currently has the lowest non-zero average local tax rate — a comparatively feather-light 0.03 percent burden — with only a few counties and municipalities choosing to layering taxes on top of the state’s 6 percent sales tax.
Even in light of the additional analysis, variations in the tax base — such as definitions of what is taxable and non-taxable — exist between different states and localities. While most states exempt groceries from the sales tax, some states may tax food at a lower rate than other goods.
Additionally, items considered necessities, such as clothing, are exempted from taxation. Due to the many factors contributing to a state’s income tax structure, it is difficult to make an exact “apples-to-apples” comparison.
While state and local sales taxes have an immediate impact on revenues for a state or locality, tax rates also influence consumer purchasing decisions. According to the Tax Foundation, “research indicates that consumers can and do leave high-tax areas to make major purchases in low-tax areas, such as from cities to suburbs.”
The report warns that state and local governments should be cautious about raising rates too high, relative to their neighbors “because doing so will amount to less revenue than expected, or in extreme cases, revenue losses despite the higher tax rate.”
Many Moving Parts
Sales tax rates are only one factor in state and local tax structures and must be considered in the overall tax scheme that includes business taxes and income taxes.
Despite the intricacy of such systems, the study concludes that “while many factors influence business location and investment decisions, sales taxes are something within policymakers’ control that can have immediate impacts.”
The report’s conclusions mirror existing academic research on relative tax rates’ effects on individuals’ migration, as well as the migratory habits of businesses.
In 2011, Florida Gulf Coast University Associate Professor of Economics Dean Stansel studied population shifts between 100 metropolitan areas, between 1980 and 2007. Perhaps unsurprisingly, Stansel found that “areas with low taxes do indeed tend to grow faster than those with high taxes” and “that there is a negative correlation between state and local taxes and employment growth in the 100 largest metro areas.”
Paula Bolyard ([email protected]) writes from Doylestown, Ohio.
“Why Some Cities Are Growing and Others Shrinking,” Dean Stansel, Florida Gulf Coast University: http://heartland.org/policy-documents/why-some-cities-are-growing-and-others-shrinking