Introduction
Retail sales taxes are one of the more transparent ways to collect 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. 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.
Less known, however, are the local sales taxes collected in 37 states. These rates can be substantial, so a state with a moderate statewide 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. rate could actually have a very high combined state-local rate compared to other states. This report provides a population-weighted average of local sales taxes in each state 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.
Combined Rates
Five states do not have a statewide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. Of these, Alaska and Montana allow localities to charge local sales taxes.[1]
In Alaska, high local rates in populous places like Juneau and Kodiak (5 and 6 percent, respectively) certainly increase the average local rate, but not enough to give Alaskans a higher combined rate than any state that charges a statewide rate.
The five states with the highest average combined rates are Tennessee (9.44 percent), Arizona (9.16 percent), Louisiana (8.87 percent), Washington (8.86 percent), and Oklahoma (8.67 percent).
The five states with the lowest average combined rates are Alaska (1.69 percent), Hawaii (4.35 percent), Maine (5 percent), Virginia (5 percent), and Wyoming (5.34 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. This rate is composed of a 6.6 percent state tax, a 1.125 percent Coconino county tax, and an additional 6 percent tribal tax levied by the To’Nanees’Dizi local government.[2]
State Rates
California, which raised its sales and income taxes through the initiative process last November, has the highest state-level rate at 7.5 percent.[3] Five states tie for the second-highest statewide rate with 7 percent each: Indiana, Mississippi, New Jersey, Rhode Island, and Tennessee.
The lowest non-zero statewide sales tax is in Colorado, with a rate of 2.9 percent. Seven states follow with 4 percent: Alabama, Georgia, Hawaii, Louisiana, New York, South Dakota, and Wyoming.[4]
Local Rates
The five states with the highest average local sales tax rates are Louisiana (4.87 percent), Colorado (4.49 percent), New York (4.48 percent), Alabama (4.45 percent), and Oklahoma (4.17 percent).
Mississippi has the lowest non-zero average local rate of 0.004 percent, attributable to the state’s only local sales tax: a 0.25 percent sales tax in Tupelo, the birthplace of Elvis Presley, with a current population of 35,059.[5]
The highest city rate is 7 percent in Wrangell, Alaska which, thanks to its small population (Census estimates 2,382 people), does not have a substantive effect on the average local rate.
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.[6] For example, strong evidence exists that Chicago-area consumers make major purchases in surrounding suburbs or online to avoid Chicago’s 9.25 percent sales tax rate.[7]
At the statewide level, businesses sometimes locate just outside the borders of high sales tax areas to avoid being subjected to their rates. The state of Delaware actually uses its state border welcome sign to remind motorists that Delaware is the “Home of Tax-Free Shopping.”[8] 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 and cities 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.[9] Some states exempt clothing or tax it at a reduced rate.[10]
The taxation of services and business-to-business transactions also vary widely by state.[11] Experts generally agree that Hawaii has the broadest sales tax in the United States, taxing many products multiple times and, by one estimate, ultimately taxing 99.21 percent of the state’s personal income.[12] This base is far wider than the national median, where the sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. applies to 34.46 percent of personal income.[13]
Methodology
Sales Tax Clearinghouse publishes quarterly sales tax data at the state, county, and city level 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, so the methodology in this version is slightly different than editions of this calculation published before July 1, 2011.
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., where the Tax Foundation is located, 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 on the whole should not have a palpable effect on resultant averages, because proximate ZIP code areas which do have a ZCTA population number assigned to them capture the tax rate of whatever jurisdiction the area is located in.
Conclusion
Of course, 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; 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.
Table 1. State and Local Sales Tax Rates, As of January 1, 2013
| State | State Tax Rate | Rank | Avg. Local Tax Rate (a) | Combined Rate | Rank | Minimum Local Rate | Maximum Local Rate |
|---|---|---|---|---|---|---|---|
| (a) City, county, and municipal rates vary. These rates are weighted by population to compute an average local tax rate. (b) Three states collect a separate, uniform “local” add-on sales tax: California (1%), Utah (1.25%), Virginia (1%). We include these in their state sales tax. (c) The sales taxes in Hawaii, New Mexico, and South Dakota have broad bases that include many services, so their rates are not strictly comparable to other states. (d) Due to data limitations, table does not include sales taxes in local resort areas in Montana. (e) Some counties in New Jersey are not subject to the statewide sales tax rate and collect a local rate of 3.5%. Their average local score is represented as a negative. Sources: Sales Tax Clearinghouse, Tax Foundation calculations, state revenue department websites |
|||||||
| Ala. | 4.0% | 38 | 4.45% | 8.45% | 8 | 0.0% | 8.0% |
| Alaska | None | 46 | 1.69% | 1.69% | 46 | 0.0% | 7.5% |
| Ariz. | 6.6% | 9 | 2.56% | 9.16% | 2 | 0.0% | 5.125% |
| Ark. | 6.0% | 16 | 2.61% | 8.61% | 6 | 0.0% | 7.5% |
| Calif. (b) | 7.5% | 1 | 0.88% | 8.38% | 9 | 0.0% | 2.5% |
| Colo. | 2.9% | 45 | 4.49% | 7.39% | 15 | 0.0% | 7.5% |
| Conn. | 6.35% | 11 | None | 6.35% | 31 | ||
| Del. | None | 46 | None | None | 47 | ||
| Fla. | 6.0% | 16 | 0.62% | 6.62% | 29 | 0.0% | 1.5% |
| Ga. | 4.0% | 38 | 2.99% | 6.99% | 22 | 2.0% | 4.0% |
| Hawaii (c) | 4.0% | 38 | 0.35% | 4.35% | 45 | 0.0% | 0.5% |
| Idaho | 6.0% | 16 | 0.02% | 6.02% | 36 | 0.0% | 2.5% |
| Ill. | 6.25% | 13 | 1.88% | 8.13% | 12 | 0.0% | 3.25% |
| Ind. | 7.0% | 2 | None | 7.00% | 20 | ||
| Iowa | 6.0% | 16 | 0.82% | 6.82% | 25 | 0.0% | 3.25% |
| Kans. | 6.3% | 12 | 1.95% | 8.25% | 10 | 0.0% | 3.5% |
| Ky. | 6.0% | 16 | None | 6.00% | 37 | ||
| La. | 4.0% | 38 | 4.87% | 8.87% | 3 | 0.0% | 7.0% |
| Maine | 5.0% | 31 | None | 5.00% | 43 | ||
| Md. | 6.0% | 16 | None | 6.00% | 37 | ||
| Mass. | 6.25% | 13 | None | 6.25% | 33 | ||
| Mich. | 6.0% | 16 | None | 6.00% | 37 | ||
| Minn. | 6.875% | 7 | 0.29% | 7.16% | 17 | 0.0% | 1.0% |
| Miss. | 7.0% | 2 | 0.00% | 7.00% | 19 | 0.0% | 0.25% |
| Mo. | 4.225% | 37 | 3.23% | 7.46% | 14 | 0.5% | 4.7% |
| Mont. (d) | None | 46 | None | None | 47 | ||
| Nebr. | 5.5% | 28 | 1.28% | 6.78% | 27 | 0.0% | 1.5% |
| Nev. | 6.85% | 8 | 1.08% | 7.93% | 13 | 0.0% | 1.25% |
| N.H. | None | 46 | None | None | 47 | ||
| N.J. (e) | 7.0% | 2 | -0.03% | 6.97% | 23 | ||
| N.M. (c) | 5.125% | 30 | 2.13% | 7.26% | 16 | 0.375% | 3.563% |
| N.Y. | 4.0% | 38 | 4.48% | 8.48% | 7 | 3.0% | 4.875% |
| N.C. | 4.75% | 35 | 2.12% | 6.87% | 24 | 2.0% | 2.5% |
| N.D. | 5.0% | 31 | 1.52% | 6.52% | 30 | 0.0% | 3.0% |
| Ohio | 5.5% | 28 | 1.30% | 6.80% | 26 | 0.75% | 2.25% |
| Okla. | 4.5% | 36 | 4.17% | 8.67% | 5 | 0.25% | 6.5% |
| Ore. | None | 46 | None | None | 47 | ||
| Pa. | 6.0% | 16 | 0.34% | 6.34% | 32 | 0.0% | 2.0% |
| R.I. | 7.0% | 2 | None | 7.00% | 20 | ||
| S.C. | 6.0% | 16 | 1.08% | 7.08% | 18 | 0.0% | 3.0% |
| S.D. | 4.0% | 38 | 1.82% | 5.82% | 40 | 0.0% | 2.0% |
| Tenn. | 7.0% | 2 | 2.44% | 9.44% | 1 | 1.5% | 2.75% |
| Tex. | 6.25% | 13 | 1.89% | 8.14% | 11 | 0.0% | 2.0% |
| Utah (b) | 5.95% | 27 | 0.72% | 6.67% | 28 | 0.0% | 2.0% |
| Vt. | 6.0% | 16 | 0.14% | 6.14% | 34 | 0.0% | 1.0% |
| Va. (b) | 5.0% | 31 | None | 5.00% | 43 | ||
| Wash. | 6.5% | 10 | 2.36% | 8.86% | 4 | 0.5% | 3.0% |
| W.Va. | 6.0% | 16 | 0.04% | 6.04% | 35 | 0.0% | 1.0% |
| Wis. | 5.0% | 31 | 0.43% | 5.43% | 41 | 0.0% | 1.5% |
| Wyo. | 4.0% | 38 | 1.34% | 5.34% | 42 | 0.0% | 2.0% |
| D.C. | 6.0% | (16) | None | 6.00% | (37) |
The author would like to thank Ellen Kant for her assistance on this report.
[1] Due to data limitations, this study does not include local sales taxes in resort areas in Montana.
[2] To’Nanees’Dizi Local Government Sales Tax Return, TC-FORM 600, http://www.tndtaxcode.com/forms/amended_FORM_600_07-12-11.pdf.
See also Vertex Inc., 2012 Sales Tax Rate Report, http://www.vertexinc.com/pressroom/2013/Vertex%20Inc%20-%202012%20Sales%20Tax%20Rate%20Report.pdf.
[3] 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 7.5 percent. A similar situation exists in Utah and Virginia.
[4] The sales taxes in Hawaii and South Dakota have bases that include many services and so are not strictly comparable to other sales taxes.
[5] U.S. Census Bureau, Annual Estimates of the Resident Population for Incorporated Places: April 1, 2010 to July 1, 2011, http://www.census.gov/popest/data/cities/totals/2011/SUB-EST2011-3.html.
[6] 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).
[7] 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.
[8] 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/.
[9] For a list, see Tax Foundation, 2013 State Business Tax Climate Index, Tax Foundation Background Paper No. 64 (Oct. 9, 2012), https://taxfoundation.org/article/2013-state-business-tax-climate-index.
[10] Joseph Henchman, State Sales Taxes on Clothing, Tax Foundation Tax Policy Blog (Jan. 24, 2012), https://taxfoundation.org/legacy/show/27915.html.
[11] For a representative list, see Tax Foundation, 2013 State Business Tax Climate Index, Tax Foundation Background Paper No. 64 (Oct. 9, 2012), https://taxfoundation.org/article/2013-state-business-tax-climate-index.
[12] John Mikesell, The Disappearing Retail Sales Tax, State Tax Notes, Mar. 5, 2012, 777-791.
[13] Id.
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