Tax Break

Sales tax rates stay high for many, revenue vital for cities, states

April 16, 2012
A shopper stands outside Saks’ famed flagship store in New York City where sales tax is 8.875 percent REUTERS/Mike Segar

When it comes to sales tax three things matter: location, location, location. 

Depending on where you live you may be paying 10 percent sales tax on your purchases, or zero. The tax could be marginal to your community’s fiscal health, or absolutely vital.

States rely on taxes rung up at the register for about one-third of their revenue on average, but as Cate Long pointed out in a recent MuniLand post, that rate varies widely depending on where you are.

Five states collect no sales tax, and 13 have a local average sales tax rate of zero, she notes.

But four states raised more than half their 2010 revenue from sales tax receipts, and locally sales taxes accounted for nearly 11 percent of all government revenue that year, according to a recent report by Indiana University Professor John L. Mikesell, published in State Tax Notes.

Sales tax is second only to property tax in its importance to local government budgets.

Despite their importance and size, sales taxes are unlikely to move up, wrote MuniLand’s Long. She’s betting cash-strapped governments will instead up income taxes on the well-to-do. 

States have actually decreased their sales tax by a cumulative $5.2 billion this year, she wrote.

There’s been no relief for the citizens of Birmingham and Montgomery, Alabama, however. The duo have once again topped the list of highest-taxed cities put together annually by the Tax Foundation. Each city charges a 6 percent sales tax on top of the state’s 4 percent levy.  

Birmingham’s most recent sales tax hike was in 2008 when then-mayor Larry Langford pushed for a 1 cent per dollar increase to help pay for a domed sports stadium, an overhaul of mass transit and scholarships.

Langford has since been jailed for public corruption, and the Birmingham News has reported that all three initiatives — the stadium, mass transit renewal and scholarships — are now “delayed, downsized or dropped altogether.”

The tax, on the other hand, has not gone away.

Birmingham, like many cities, is struggling to make ends meet. The extra revenue from the sales tax hike fell short of expectations - adding up to $90.4 million in 2010, rather than an expected $106.7 million – but even so has  become key to keeping the city afloat, Councilwoman Valerie Abbott told the News.

According to the Tax Foundation, other cities with sizable sales tax burdens include Glendale, Arizona, Chicago, and Seattle, all of which have combined state and city sales taxes of 9.5 percent.  

Anchorage, Alaska and Portland, Oregon occupy the other end of the spectrum, with a sales tax rate of zero. Honolulu is next-best with a 4.5 percent combined sales tax, though the Foundation notes in its report that the tax applies to a broader spectrum of items in that city than it does in many others. 

How many items are subject to sales tax can vary widely and can be as important as the rate itself.

In Honolulu a large number of professional and personal services are taxed alongside hard goods purchased, but that’s relatively rare.  In his paper, Indiana University’s Mikesell argued that sales taxes have failed to follow spending habits and that as we started putting more money into services and less into hard goods, sales tax receipts have fallen behind.

You may be paying tax on your morning Starbucks fix, or that splurge at Saks Fifth Avenue, but you’re far less likely to be paying it on your cut and color at the hair salon or last week’s round of 18 holes of golf, a shift we analyzed last fall.

One comment so far | RSS Comments RSS

This is one thing that people seem to neglect when asking for tax cuts – tax cuts – tax cuts…
The tax revenue is going to come from somewhere; unless of course we want many millions more homeless – sick – and hungry. The only other place to draw from is local/state/city taxes. Consequently we will see our sales tax go up, fuel and communication surcharges go up, property taxes go up, fees for usually free programs enacted, etc. I would think it’s more efficient to pay into a large pool at the federal level rather than tens of thousands of separate rules and rates in each and every city. But then again when has tax policy ever made much sense???

Posted by ProfMagyar | Report as abusive

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see