September 6, 2005
RAISING SALES TAX RATES FOR MUNICIPAL AID
By: Kevin E. McCarthy, Principal Analyst
You asked whether any states have increased the states sales tax rate in order to provide more revenue to municipalities.
According to National Conference of State Legislatures staff, few states have increased their tax rates in recent years. However, in 2002, Rhode Island raised $9.5 million from a 1% increase in the tax rate on food and beverage sales (not the general sales tax) to be earmarked for local government. In 2001, Arkansas increased the sales tax rate 0.5% to 5.125% to fund property tax relief.
In most cases when states have increased sales tax rates, the additional revenue was primarily used to increase education spending or address state budget deficits rather than provide revenue to municipalities. (In most states, education funding goes to school districts, which are separate from municipalities.) In 2004, Virginia increased its sales tax by 0.5% as part of a package of measures that was projected to raise $1.36 billion in new revenue over the following two years. Of this amount $984 million went to the state's general fund. The remaining $377 million went to local governments to spend on public schools. At the same time, the bill capped the reimbursement the state provided to local governments for the revenue they lost when the property tax on motor vehicles was phased out. Also in 2004, Arkansas increased the sales tax rate by seven-eights of one percent and extended the tax to services not previously covered, in response to a state Supreme Court ruling ordering reform of education funding. In 2003, Ohio raised its tax rate by 1% for two years and expanded the tax to cover new services, including satellite television, haircuts, and dry cleaning, in order to avoid cuts in state programs. In 2002, Tennessee increased its sales tax by 1% to address a state budget deficit. In 2001, Arizona voters increased the sales tax rate by 0.6% to provide additional funding for K-12 education. Other states that increased their sales tax rate to address budget shortfalls or provide additional money for education include Indiana (2002), Kansas (2002), New York (2003), and Vermont (2003.
While there has been little legislation increasing state sales tax rates to benefit municipalities, 34 states allow municipalities or counties to impose there own sales tax as a means of raising revenue.