U.S. State and Local Tax Rates Reach All-Time High

by Michael Bernard

Tax changes over the last few years have challenged businesses across the United States. Yet, as these tax changes level-off, recent research indicates that both state and local rates are at an all time high.

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The last few years have been a rollercoaster ride for businesses following tax changes in cities, counties, and districts across the United States. And while organizations will find some relief in the fact that local tax changes are beginning to level off, both state and local rates are at an all-time high, according to research in Vertex’s Mid-Year Rates and Rules Report.

Just as businesses have been nimble in navigating the supply chain, employment and e-Commerce challenges over the past two years, government budget managers now realize the unprecedented amount of federal aid which bolstered state and local governments will not be continuing. As federal money eventually stops flowing, many budget managers understand that state and local governments will once again need to rely on their own tax base.

It's also important for tax leaders to understand the broader economic, business and policy factors which have a direct impact on the cost of government. Factors such as wage inflation, rising interest rates, an inability to take on additional debt, and the long-term narrowing of the sales tax base are likely to continue increasing rates well into 2023 and beyond.

Sales Tax Reaches All-Time High

City and county sales tax rates have soared. City tax rate increases (126) far outnumber decreases (20) by a more than a six-to-one ratio. Counties enacted almost twice as many sales tax increases compared to decreases (15).

The average U.S. sales tax has reached an all-time high. Following a brief COVID-induced lull from 2020 to 2021, the average U.S. sales tax rate—which combines the average state, county, city, and district rates—started climbing upward again this year, hitting 10.17% so far.

There is some good news. The implementation of new district sales taxes has begun to level off. Following the first two years of the pandemic, districts imposed new sales taxes at a record-setting pace. Thankfully, the pace of new rates also seems to be leveling off in 2022. During the first six months of this year, districts only implemented 54 new sales taxes compared to 127 new sales taxes enacted within the same time frame in 2021.

No Relief in Sight

Over the past couple of years, a great deal of funding from the federal government has bolstered state and local revenues. That may seem like a time when those jurisdictions could ease off the gas when it comes to raising taxes or implementing new ones.

But budget directors at those levels understand that it is unlikely they’ll get meaningful federal assistance over the next several years. The level of incoming assistance will likely be dictated by the outcome of the 2022 midterm elections and those drafting and approving budgets prior to the election won’t want to take a chance.

To that end, sales tax revenues will continue to play a key component in funding local governments, largely because they can be implemented and administered much more quickly than income and property taxes.

Despite the decrease in new district taxes, these long-term trends will affect the total revenue state and local governments can collect through sales taxes. That means businesses have to stay alert as state and local governments continue to change tax rates and extend their tax base.

Partnering with a tax technology provider who catalogs and analyzes all of those changes in real time can make an overwhelming task of tax compliance a lot easier and allow a company’s tax department to focus on more important tasks like growing the businesses.

Michael Bernard is the VP of Tax Content and Chief Tax Officer at Vertex