Sales Tax Collections in Nonmetropolitan Communities

Abstract

Small communities sometimes increase their local sales tax rate in order to maintain or expand public services. The question addressed here is what is the net effect of changing sales tax rates on revenues from sales taxes? Using both semiparametric and nonparametric regression, we find retail sales to be mostly unaffected by sales tax rates as long as the local rate is less than 4 percent. At rates higher than 4 percent, however, there is a severe reduction in sales, yet not enough that sales tax revenues would decrease with increased rates. For a penny increase in sales tax rates from 4 cents, a city can expect their revenues to go up 0.86 cents according to the semiparametric model and 0.74 cents according to the parametric model.