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Study Points Out Differences In US State Sales Taxes

by Leroy Baker, Tax-News.com, New York

16 April 2012


The Tax Foundation (TF) has pointed out that sales taxes in the United States, which are levied not only by state governments but also by city, county, Native American and special district governments, can have a profound impact on the total rate that consumers see at the check-out register.

In a report, the TF has combined the state and local sales tax rates in major US cities, and has found that Birmingham and Montgomery, both in Alabama, have the highest combined state and local sales tax rate at 10%. They are followed by Chicago, Illinois; Glendale, Arizona; and Seattle, Washington, each with rates of 9.5%.

On the other hand, Portland, Oregon and Anchorage, Alaska have neither a state nor local sales tax. Honolulu, Hawaii has the third lowest sales tax among major cities with a rate of 4.5%; but its overly broad sales tax makes this not strictly comparable with other states. Five local jurisdictions in Virginia (Arlington, Chesapeake, Norfolk, Richmond, and Virginia Beach) are also relatively low on the list, levying just a 5% state-wide sales tax.

With regard to the role of competition in sales taxes, the TF confirms that the evasion of sales tax is most likely to occur in areas where there is a significant difference between two jurisdictions' sales tax rates.

It says that 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. For example, it says that strong evidence exists that Chicago-area consumers make major purchases in surrounding suburbs or online to avoid Chicago's high sales tax rates.

At the state-wide level, it confirms that businesses sometimes locate just outside the borders of high sales tax areas to avoid being subjected to their rates, and state and local governments should be cautious about raising rates too high relative to their neighbours because doing so may lead to revenue losses despite the higher tax rate.

The TF, however, warns that their report is purely based on tax rates and does not account for differences in tax bases. States can vary greatly in regard to what is taxable and non-taxable. For example, some states exempt clothing or tax it at a reduced rate, while the taxation of services and business-to-business transactions also vary widely by state.

Whereas Hawaii has the broadest sales tax in the US, ultimately taxing an estimated 99.2% of the state's personal income, this base is far wider than the national median, where the sales tax base applies to almost 34.5% of personal income.

Finally, the TF concludes that, although sales taxes are just one part of an overall tax structure (for example, Washington State has high sales taxes but no income tax; Oregon has no sales tax but high income taxes), and while many factors influence business location and investment decisions, sales taxes are something within policymakers' control that can have an immediate impact, particularly between neighbouring states.

TAGS: tax | business | sales tax | commerce | tax rates | United States | retail

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