WASHINGTON — Birmingham and Montgomery, Ala., have the highest combined state and local tax rates, at 10%, among major U.S. cities, a new report found.
The Tax Foundation, a tax research group, released the study on Wednesday and ranked cities with a population of 200,000 or higher according to combined state and local sales tax rates.
Chicago, Glendale, Ariz., and Seattle each have a combined tax rate of 9.5% and are ranked next highest after the two cities in Alabama.
There were only two cities that had no state or local sales tax: Portland, Ore., and Anchorage, Alaska.
The next lowest combined tax rate was Honolulu, Hawaii, with 4.5%. Tied for fourth-lowest were five Virginia cities with a combined 5% tax rate: Arlington, Chesapeake, Norfolk, Richmond and Virginia Beach.
The study noted that it does not take into account differences in tax bases or the definition of what is taxable versus non-taxable and said these can vary from state to state.
For example, most states exempt groceries from sales tax, others tax groceries at a limited rate, and still others tax groceries at the same rate as all other products. Clothing and business-to-business transactions also vary widely from state to state, the report said.
Sales tax evasions most likely occurs in areas where there is a significant difference in rates, according to the study.
"Research indicates that consumers can and do leave high-tax areas to make major purchases in low-tax areas, such as from cities to the suburbs. Strong evidence exists that Chicago-area consumers make major purchases in surrounding suburbs or online to avoid Chicago's high sales tax rates," co-authors Scott Drenkard, Alex Raut and Kevin Duncan wrote.
It's not just consumers who travel from one jurisdiction to another shopping for the lowest sales tax. Businesses locate outside of the borders of high sales-tax areas to avoid being subject to 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 said.
Retailers and state and local governments have been aggressively lobbying Congress to pass legislation to help states collect sales taxes from online purchases in an effort to boost revenue.