A just-released report on sales taxes has found that while the total number of transaction tax changes across the U.S. declined, most jurisdiction categories actually continued to see rate increases.
The overall number of sales tax rates and rules changes appears to have reached the lowest level in eight years, according to Vertex's "End-of-Year Sales Tax Rates and Rules" report.
"There were 542 changes at the state, county, city and district levels," the report found. "But that total is skewed by a decline in only one category: new district taxes. After a five-year stretch during which an average of 180 new district-level taxes were created each year, that number declined to 115 this year."
Although there were fewer new districts created in 2022, the increases to existing district tax rates outnumbered decreases by a ratio of three to one. In addition, rate changes at other levels of government, including city, state and local, remained at record highs. The county level was at a three-year high in 2022, and city rate changes remained near all-time highs.
"During the last two to three years, cities, counties and districts have been on a pretty good run as far as creating a number of sales tax increases," said Mike Bernard, vice president of tax content and chief tax officer at Vertex. "This year it leveled off because any district that wanted to institute sales tax has already done that, so there are fewer new ones coming on board. But the rate remains high for a number of reasons."
"Jurisdictions need to raise their revenue just to continue to provide services to their constituents," he explained. "The amount of revenue is moving up with inflation, but they can't buy as much with that revenue. They're paying more, particularly for labor. Moreover, debt levels have reached the limit for a lot of jurisdictions. They can't raise any more debt without paying a huge increase."
He predicted that sales tax rates will continue to increase as governments move to close budget gaps, COVID-related funding begins to run dry, and borrowing becomes more expensive. Likewise, inflationary pressures on labor, services and consumables will continue.
"Income tax and property tax revenues decline during recessionary times, which is what we're in now," Bernard remarked. "Post-Wayfair, a lot of states realized income-because sellers that had not withheld and remitted started doing so based on economic nexus. But even though that created a big bump in revenue, these increases have already been baked into state budgets. On top of these economic factors, sales tax is generally more efficient to impose and administer relative to property and income taxes, making it a more resilient revenue source for governments, particularly in times of economic distress."
Tax policy, economic conditions and fiscal conditions remain intertwined, the report concluded.
"Although inflation tends to be headed downward, it remains high and unlikely to return to pre-2022 levels any time soon. And the decline in sales tax revenue also drives sales tax changes," it said. "State legislature activity and 2022 ballot initiatives showed a growing desire to limit income tax rate increases, in some cases lowering income tax rates and reducing property taxes. Home values in many markets have leveled off or declined since mid-2022, with commercial office space values also declining due to permanent, hybrid work models. This will result in lower property tax receipts in 2023 and beyond."
"Since property taxes, income taxes and sales and use taxes represent the top three funding sources for state and local governments," the report concluded, "more sales tax rate changes loom."
