Highest Sales Taxes Are in Alabama

Sales taxes in major American cities range from 10 percent down to zero and can have a significant impact on a locality’s economic competitiveness, according to a new Tax Foundation report.

“Evasion of sales tax is most likely to occur in areas where there is a significant difference between two jurisdictions’ sales tax rates,” the report states.

“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.”

Also, businesses sometimes locate just outside high tax areas to avoid their rates.

“State and local governments should be cautious about raising rates too high relative to their neighbors because doing so may lead to revenue losses despite the higher tax rate,” the report adds.

Among U.S. cities with a population over 200,000, residents pay the highest combined state and local tax rate in two Alabama cities, Birmingham and Montgomery. The state imposes a 4 percent tax, and the local rate in both cities is 6 percent, for a total of 10 percent.

They are followed by Chicago, Seattle, and Glendale, Ariz., where the combined rate is 9.5 percent.

Next is Phoenix at 9.3 percent, followed by Memphis and Nashville in Tennessee, at 9.25 percent.

The report notes that in some cases, parts of the city are in different counties and so the total rate may vary within the city.

Also, the items that are taxed can vary greatly. For example, most states exempt groceries from sales taxes, others tax them at a lower rate, and others tax them at the same rate as other items.

At the other end of the rate scale are two cities that are in states with no sales tax and impose no local sales tax: Portland, Ore., and Anchorage, Alaska.

Cities where buyers pay no local sales tax but do pay a state tax include Norfolk and Richmond, Va.; Louisville and Lexington, Ky.; and Newark and Jersey City, N.J., along with Indianapolis, Detroit, Boston, and Baltimore.

The Tax Foundation concludes: “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. One gauge of competitiveness is how a city’s sales tax rate compares to its neighbors.”