Maxing Out: An Analysis of Local Option Sales Tax Rate Increases

Abstract

We examine why and when some local governments choose to reach a legal sales tax rate maximum while others do not. We employ a duration model to study Tennessee local option sales taxes between 1975 and 1999. Our results show that between 1975 and 1984, counties with lower sales tax capacity were more likely to raise their sales tax rates to the maximum allowed by state law. However, between 1985 and 1999, counties with lower property tax capacity or a larger share of Republican voters were more likely to reach the maximum sales tax rate.