Explaining Interjurisdictional Variations in Local Sales Tax Yield

Abstract

As substate policy makers design economic development strategies and respond to structural changes in their economic base, it is important to understand effects on the local sales tax. Local sales taxes are modeled here as arising from three sources: resident demand, taxable business-to-business transactions, and visitor/commuter spending. Careful attention is paid to how sales tax payments are actually made and distributed to local governments. The results indicate clearly positive effects from tourism and incommuting, whereas out-commuting yields a revenue drain. Construction provides a significant boost to local sales tax revenue, but the effects of manufacturing and services are surprising. Manufacturers, through a combination of exempt inputs and exported final products, provide no clear sales tax impact. The service sector, however, produces notable revenue gains. The findings provide general guidance on the way in which shifts in economic structure can influence local sales tax revenue and call into question revenue effects from traditional smokestack-chasing economic development policies of local governments.