State and Local Sales Taxes at Midyear 2012

August 7, 2012

Retail sales taxes are one of the more transparent ways to collect tax revenue. While graduated income tax rates and brackets are complex and confusing to many taxpayers, the sales tax is easier to understand: people can reach into their pocket and see the rate printed on a receipt. With this transparency, however, comes the ability to exploit rate differentials between contiguous jurisdictions, says Scott Drenkard, an economist with the Tax Foundation.

State sales taxes already vary widely between states.

  • California, despite a 1 percent reduction in its sales tax rate that took effect July 1, 2011, still has the highest state-level rate at 7.25 percent.
  • Five states tie for the second highest statewide rate with 7 percent each: Indiana, Mississippi, New Jersey, Rhode Island and Tennessee.
  • Five states do not have a statewide sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon.
  • The lowest non-zero statewide sales tax is in Colorado, with a rate of 2.9 percent, and seven states follow with 4 percent: Alabama, Georgia, Hawaii, Louisiana, New York, South Dakota and Wyoming.

When these differentials are combined, population-weighted local tax rate differences between bordering regions become even more severe.

  • The five states with the highest average combined rates are Tennessee (9.43 percent), Arizona (9.12 percent), Louisiana (8.86 percent), Washington (8.83 percent) and Oklahoma (8.68 percent).
  • The five states with the lowest average combined rates are Hawaii (4.35 percent), Maine (5 percent), Virginia (5 percent), Wyoming (5.18 percent) and Wisconsin (5.43 percent).
  • The highest total sales tax rate in the United States is in Tuba City, Arizona, which has a combined rate of 13.725 percent.

Avoidance of sales tax is most likely to occur in areas where there is a significant difference between two jurisdictions' sales tax rates. 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.

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.

Source: Scott Drenkard, "State and Local Sales Taxes at Midyear 2012," Tax Foundation, July 31, 2012.

 

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