Sales Tax
A consumption tax collected on retail purchases. Many cities levy a local sales tax on top of state and county rates.
How It Works
Local sales tax rates typically range from 0.5% to 3%, stacked on top of state sales taxes to produce combined rates of 6-10% in most jurisdictions. The Tax Foundation's annual State and Local Sales Tax Rates report documents combined rates exceeding 9.5% in Louisiana, Tennessee, Arkansas, Washington, and Alabama. Cities with strong retail sectors (shopping centers, entertainment districts, tourism destinations, regional shopping hubs) benefit disproportionately because residents of surrounding jurisdictions contribute to the tax base through cross-border shopping, "leakage" that Brookings Institution researchers have quantified at $50-200 per capita annually in major regional centers. Sales tax revenue is significantly more volatile than property tax because it rises and falls with consumer spending, which contracted roughly 10% in the second quarter of 2020 during the pandemic before rebounding. Sales tax therefore provides upside during expansions but amplifies downside during recessions. The June 2018 South Dakota v. Wayfair Supreme Court decision overturned the physical-presence nexus rule from Quill (1992) and allowed states to require out-of-state e-commerce sellers to collect and remit sales tax, recovering an estimated $13-23 billion annually in revenue for state and local governments per GAO analysis. Cities without sales tax authority (most of Pennsylvania, Maryland, and Vermont outside their largest cities) depend more heavily on property tax. The share of revenue from sales tax is a direct input to the revenue diversity (10%) factor of the CitySpend Fiscal Health Score, calculated using an HHI-adapted concentration measure.
Related Terms
- Property Tax, A tax levied on real estate (land and buildings) based on assessed value. Property taxes are the single largest revenue source for most U.S. city governments.
- Revenue Diversity, The degree to which a city's revenue comes from multiple sources (property tax, sales tax, fees, grants) rather than being concentrated in a single stream.
- Excise Tax, A tax on a specific good or activity, such as hotel rooms, rental cars, alcohol, tobacco, or fuel, rather than a broad sales tax.
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About This Definition
This definition is part of the CitySpend Municipal Finance Glossary, 59 terms explaining how city governments fund and manage public services. All definitions are written in plain language for taxpayers, journalists, students, and municipal bond investors.