This week’s taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. map shows state and local sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. rates in each state as of January 1, 2015 and comes from our larger report on sales taxes released earlier this week. While consumers might be aware of the statewide sales tax rate, local sales taxes can differ widely, so our population-weighted average allows for comparability across states.
This ranking is useful for a state like Colorado, where the statewide sales tax is 2.9 percent (very low), but local sales taxes add on an additional 4.54 percent on average, meaning consumers face a combined rate of 7.44 percent, the 15th highest in the country.
The five states with the highest average combined state-local sales tax rates are Tennessee (9.45 percent), Arkansas (9.26 percent), Alabama (8.91 percent), Louisiana (8.91 percent), and Washington (8.89 percent).
These rates are important because sales tax policy is one of the ways that states can compete. 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 the Northeast, 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.
Be sure to give our full report a read—it’s full of information, anecdotes, and a discussion of sales taxes as a part of the broader tax code.
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