Sales taxes, for all their transparency and ease of understanding compared to other taxation, have more pervasive influences than taxpayers, business owners, and policymakers might think. They can affect where taxpayers choose to shop and buy, bolster online purchases, and influence where businesses decide to locate – all of which, naturally, affects local economies.
That’s the underlying message in the Tax Foundation’s recent report, State and Local Sales Tax Rates in 2016.
There’s a wide gamut nationwide among states that collect state sales taxes, or state and local sales taxes, or none at all.
Statewide sales taxes are levied in 45 states and the District of Columbia.
Local taxes are collected in 38 states.
The five states with the highest average combined state and local sales tax rates are Tennessee (9.46 percent), Arkansas (9.30 percent), Louisiana (9.0 percent), Alabama (8.97 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 (5.41 percent), Wyoming (5.42 percent), and Maine (5.55 percent).
The five states that don’t levy state sales taxes are Alaska, Delaware, Montana, New Hampshire, and Oregon. But Alaska and Montana allow local governments to levy sales taxes.
It all has to be kept in context, too, the report states. Oregon, for example, has no sales tax but high income taxes. But neighboring Washington has high sales taxes but no income tax.
“This report is all about the rates, but it’s important to keep in mind that rates are only half of the equation,” Tax Foundation economist Nicole Kaeding said in a written statement. “Equally important is the sales tax ‘base,’ or which products and services are subject to the sales tax. This can vary widely by product and by state. As policymakers work to improve their tax codes, both of these elements must be addressed.”
For example, groceries may be exempt from taxes, taxed at a limited rate, or taxed the same as other products are. Hawaii has the broadest sales tax in the United States, according to the report. But many products are taxed multiple times.
Here are two examples from the report of how sales taxes affect local economies.
In Illinois, Cook County, whose county seat is Chicago, raised its sales tax from 1.75 percent to 2.75 percent in January. That raised Chicago’s sales tax rate to 10.25 percent – the highest sales tax of any large city in the United States. That rate includes sales taxes levied by the state, county, city, and local transit agency. So, what do Chicago shoppers do? Citing a report in the Chicago Tribune, the Tax Foundation’s study notes that Windy City shoppers go to nearby suburbs or shop online.
It’s well-known in northern New England that shoppers from Maine, Vermont, and Massachusetts take their business to sales-tax-free New Hampshire, the home of many outlet stores. The Tax Foundation’s report cites one study indicating that sales in New Hampshire’s border counties have tripled since the late 1950s.
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.