Many people are beginning to wrap their minds around the House Republicans’ proposed destination-based cash-flow tax and what it means for tax reform. Most people are still looking into the tax’s impacts on trade and how...
- State and Local Sales Tax Rates, Midyear 2015
State and Local Sales Tax Rates, Midyear 2015
- Forty-five states and the District of Columbia collect statewide sales taxes.
- Local sales taxes are collected in thirty-eight states.
- The five states with the highest average combined state and local sales tax rates are Tennessee (9.46 percent), Arkansas (9.27 percent), Louisiana (9.01 percent), Alabama (8.93 percent), and Washington (8.90 percent).
- Sales tax rates differ by state, but sales tax bases also impact how much revenue is collected from a tax and how the tax affects the economy.
- Differences in sales tax rates cause consumers to shop across borders or buy products online.
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, sales taxes are easier to understand; consumers can reach into their pockets and see the rate printed on receipts.
In addition to state-level sales taxes, consumers face local-level sales taxes in 38 states as well. These rates can be substantial, so a state with a moderate statewide sales tax rate could actually have a very high combined state and local rate compared to other states. This report provides a population-weighted average of local sales taxes as of July 1, 2015 in an attempt to give a sense of the statutory local rate for each state. See Table 1 at the end of this Fiscal Fact for the full state-by-state listing of state and local sales tax rates.
Five states do not have statewide sales taxes: Alaska, Delaware, Montana, New Hampshire, and Oregon. Of these, Alaska and Montana allow localities to charge sales taxes.
The five states with the highest average combined state and local sales tax rates are Tennessee (9.46 percent), Arkansas (9.27 percent), Louisiana (9.01 percent), Alabama (8.93 percent), and Washington (8.90 percent).
The five states with the lowest average combined rates are Alaska (1.78 percent), Hawaii (4.35 percent), Wisconsin (5.43 percent), Wyoming (5.43 percent), and Maine (5.43 percent).
California has the highest state-level sales tax rate at 7.5 percent. Five states tie for the second-highest statewide rate at 7 percent: Indiana, Mississippi, New Jersey, Rhode Island, and Tennessee.
The lowest non-zero, state-level sales tax is in Colorado, which has a rate of 2.9 percent. Seven states follow with 4 percent rates: Alabama, Georgia, Hawaii, Louisiana, New York, South Dakota, and Wyoming.
Several states have contemplated sales tax rate adjustments or wrestled with the possibility of restructuring their sales tax bases this year, but thus far, only Kansas has made any changes to its state sales tax. In June, the state adopted a package of tax changes, including a sales tax rate increase, in an attempt to address the state’s underlying tax and budget instability. As of July 1, the statewide rate increased from 6.15 to 6.5 percent, with the state leapfrogging California and New York (both at 8.48 percent) in imposing the seventh-highest combined state and local sales tax rate in the nation.
Although territories are not included in our analysis, which only reaches states and the District of Columbia, it is worthy of note that Puerto Rico, staring down possible insolvency, recently voted for a dramatic sales tax increase, from 7 percent to 11.5 percent (including a mandatory, commonwealth-wide local rate), effective July 1, 2015. A four percent tax on professional services, previously exempt, is set to go into effect on October 1, 2015, with a transition to a value-added tax scheduled for April 1, 2016.
Elsewhere, a number of states have rejected, or in some cases continue to mull, sales tax modifications. Louisiana legislators voted down a one cent sales tax hike, Illinois Governor Bruce Rauner was elected in part on the strength of budget and tax proposals that included sales tax base broadening, Maine Governor Paul LePage championed a tax reform package with a base broadening component, and Pennsylvania Governor Tom Wolf continues to press for a tax increase package with both sales tax rate and base increases.
The five states with the highest average local sales tax rates are Louisiana (5.01 percent), Alabama (4.93 percent), Colorado (4.54 percent), New York (4.48 percent), and Oklahoma (4.28 percent).
Alabama and Louisiana both experienced slight increases in their average local sales tax rates since the beginning of the year, but Louisiana’s rate increased faster, with the state slipping past Alabama to claim the dubious title of imposing the highest average local sales tax. Both Alabama and Louisiana impose below-average statewide rates of 4 percent but rank third and fourth highest, respectively, on combined state and local rates. North Dakota and New Mexico saw the largest average local rate increases with 0.21 percent and 0.15 percent increases, respectively.
Salem County, New Jersey is exempt from collecting the 7 percent statewide sales tax and instead collects a 3.5 percent local tax. We represent this anomaly as a negative 0.03 percent statewide average local rate (adjusting for population as described in the methodology section below), and the combined rate reflects this subtraction. Despite the slightly favorable impact on the overall rate, this lower rate represents an implicit acknowledgement by New Jersey officials that their 7 percent statewide rate is uncompetitive with neighboring Delaware, which has no sales tax.
The Role of Competition in Setting Sales Tax Rates
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. For example, evidence suggests that Chicago-area consumers make major purchases in surrounding suburbs or online to avoid Chicago's 9.25 percent sales tax rate.
At the statewide level, businesses sometimes locate just outside the borders of high sales tax areas to avoid being subjected to their rates. A stark example of this occurs in New England, where even though I-91 runs up the Vermont side of the Connecticut River, many more retail establishments choose to locate on the New Hampshire side to avoid sales taxes. One study shows that per capita sales in border counties in sales tax-free New Hampshire have tripled since the late 1950s, while per capita sales in border counties in Vermont have remained stagnant.
The state of Delaware actually uses its highway welcome sign to remind motorists that Delaware is the “Home of Tax-Free Shopping.” 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.
Sales Tax Bases: The Other Half of the Equation
This report ranks states based on tax rates and does not account for differences in tax bases (e.g., the structure of sales taxes, defining what is taxable and non-taxable). States can vary greatly in this regard. For instance, most states exempt groceries from the sales tax, others tax groceries at a limited rate, and still others tax groceries at the same rate as all other products. Some states exempt clothing or tax it at a reduced rate.
Tax experts generally recommend that sales taxes apply to all final retail sales of goods and services but not intermediate business-to-business transactions in the production chain. These recommendations would result in a tax system that is not only broad based but also “right-sized,” applying once and only once to each product the market produces. Despite agreement in theory, the application of most state sales taxes is far from this ideal.
Hawaii has the broadest sales tax in the United States, but it taxes many products multiple times and, by one estimate, ultimately taxes 99.21 percent of the state's personal income. This base is far wider than the national median, where the sales tax applies to 34.46 percent of personal income.
Although Governors in Maine, Illinois, and Pennsylvania championed base expansion this year, no state has acted upon such proposals as of July 1. Puerto Rico expanded its sales tax base to include additional business inputs and “professional designated services” at a four percent rate. Business inputs already included in the old base will be subject to the new 11.5 percent rate. Conversion to a value-added tax is scheduled for April 2016, but until then, these taxes on business-to-business transactions will lead to tax pyramiding.
Sales Tax Clearinghouse publishes quarterly sales tax data at the state, county, and city levels by ZIP code. We weight these numbers according to Census 2010 population figures in an attempt to give a sense of the prevalence of sales tax rates in a particular state.
It is worth noting that population numbers are only published at the ZIP code level every ten years by the Census Bureau, and that editions of this calculation published before July 1, 2011 do not utilize ZIP data and are thus not strictly comparable.
It should also be noted that while the Census Bureau reports population data using a five-digit identifier that looks much like a ZIP code, this is actually what is called a ZIP Code Tabulation Area (ZCTA), which attempts to create a geographical area associated with a given ZIP code. This is done because a surprisingly large number of ZIP codes do not actually have any residents. For example, the National Press Building in Washington, D.C., has its own ZIP code solely for postal reasons.
For our purposes, ZIP codes that do not have a corresponding ZCTA population figure are omitted from calculations. These omissions result in some amount of inexactitude but overall do not have a palpable effect on resultant averages because proximate ZIP code areas which do have ZCTA population numbers capture the tax rate of those jurisdictions.
Sales taxes are just one part of an overall tax structure and should be considered in context. For example, Washington State has high sales taxes but no income tax, whereas Oregon has no sales tax but high income taxes. While many factors influence business location and investment decisions, sales taxes are something within policymakers' control that can have immediate impacts.
|State and Local Sales Tax Rates as of July 1, 2015|
|State||State Tax Rate||Rank||Avg. Local Tax Rate (a)||Combined Rate||Combined Rank||Max Local Tax Rate|
|New Jersey (e)||7.00%||2||-0.03%||6.97%||24||3.50%|
|New Mexico (c)||5.13%||32||2.37%||7.49%||15||3.56%|
|South Dakota (c)||4.00%||38||1.84%||5.84%||40||2.00%|
|(a) City, county and municipal rates vary. These rates are weighted by population to compute an average local tax rate.|
|(b) Three states levy mandatory, statewide, local add-on sales taxes: California (1%), Utah (1.25%), Virginia (1%). We include these in their state sales taxes.|
|(c) The sales taxes in Hawaii, New Mexico and South Dakota have broad bases that include many services.|
|(d) Due to data limitations, this table does not include sales taxes in local resort areas in Montana.|
|(e) Salem County is not subject to the statewide sales tax rate and collects a local rate of 3.5%. New Jersey's average local score is represented as a negative.|
|Sources: Sales Tax Clearinghouse, Tax Foundation calculations, State Revenue Department websites|
 Due to data limitations, this study does not include local sales taxes in resort areas in Montana.
 This number includes a mandatory 1 percent add-on tax which is collected by the state but distributed to local governments. Because of this, some sources will describe California's sales tax as 6.5 percent. A similar situation exists in Utah and Virginia.
 The sales taxes in Hawaii and South Dakota have bases that include many services and so are not strictly comparable to other sales taxes.
 Joseph Henchman, Kansas Approves Tax Increase Package, Likely Will Be Back for More, Tax Foundation Tax Policy Blog, June 12, 2015, http://taxfoundation.org/blog/kansas-approves-tax-increase-package-likely-will-be-back-more.
 Puerto Rico: Legislators Approve Much-Debated Sales Tax Increase, NBC News, May 27, 2015, http://www.nbcnews.com/news/latino/puerto-rico-legislators-approve-much-debated-sales-tax-increase-n365256.
 Brian Slodysko, House Rejects Tax Bump for Roads, The Advertiser, May 28, 2015, http://www.theadvertiser.com/story/news/local/louisiana/2015/05/28/house-rejects-tax-bump-roads/28092715/.
 Jessie Hellmann & Ray Long, Rauner Presses for Sales Tax Expansion in U. of I. Speech, The Chicago Tribune, Jan. 29, 2015, http://www.chicagotribune.com/news/local/politics/ct-bruce-rauner-champaign-appearance-met-0130-20150129-story.html.
 Jared Walczak & Scott Drenkard, Maine Gears Up for a Serious Tax Reform Conversation, Tax Foundation Fiscal Fact No. 446, Jan. 9, 2015, http://taxfoundation.org/article/maine-gears-serious-tax-reform-conversation.
 Jared Walczak, Testimony: Pennsylvania Income and Sales Tax Increase in Context, June 10, 2015, http://taxfoundation.org/article/testimony-pennsylvania-income-and-sales-tax-increases-context.
 Mehmet Serkan Tosun & Mark Skidmore, Cross-Border Shopping and the Sales Tax: A Reexamination of Food Purchases in West Virginia (Working Paper, 2005), http://www.rri.wvu.edu/pdffiles/Tosunwp2005-7.pdf. See also Randolph T. Beard, Paula A. Gant, & Richard P. Saba, Border-Crossing Sales, Tax Avoidance, and State Tax Policies: An Application to Alcohol, Southern Economic Journal, 64(1), 293-306 (1997).
 Susan Chandler, The Sales Tax Sidestep, Chicago Tribune, July 20, 2008, http://articles.chicagotribune.com/2008-07-20/business/0807190001_1_sales-tax-tax-avoidance-tax-landscape.
 Art Woolf, The Unintended Consequences of Public Policy Choices: The Connecticut River Valley Economy as a Case Study, Northern Economic Consulting, Nov. 2010, http://vtdigger.org/vtdNewsMachine/wp-content/uploads/2011/02/20101101_woolfArtUnintended.pdf.
 Len Lazarick, Raise taxes, and they'll move, constituents tell one delegate, Marylandreporter.com, Aug. 3, 2011, http://marylandreporter.com/2011/08/03/raise-taxes-and-theyll-move-constituents-tell-one-delegate/.
 For a list, see Tax Foundation, 2015 State Business Tax Climate Index, Tax Foundation Background Paper No. 68 (Oct. 28, 2014), http://taxfoundation.org/article/2015-state-business-tax-climate-index/.
 Liz Malm & Richard Borean, How Does Your State Sales Tax See That Blue and Black (or White and Gold) Dress?, Tax Foundation Tax Policy Blog, Feb. 27, 2015, http://taxfoundation.org/blog/how-does-your-state-sales-tax-see-blue-and-black-or-white-and-gold-dress.
 Justin M. Ross, A Primer on State and Local Tax Policy: Trade-Offs Among Tax Instruments, Mercatus Center at George Mason University, Feb. 25, 2014, http://mercatus.org/publication/primer-state-and-local-tax-policy-trade-offs-among-tax-instruments.
 For a representative list, see Scott Drenkard & Joseph Henchman, 2015 State Business Tax Climate Index, Tax Foundation, (Oct. 28, 2014), http://taxfoundation.org/article/2015-state-business-tax-climate-index/.
 John Mikesell, The Disappearing Retail Sales Tax, State Tax Notes, Mar. 5, 2012, 777-791.
 Increase in Sales and Use Tax Effective in Phases Starting July 1, 2015, EastIslandPR.com, May 29, 2015, http://www.eastislandpr.com/assets/tax-law7-2015.pdf.
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