Do Higher Sales Tax Rates Encourage Local Governments to Court Retailers?

Since manufacturing generates lower sales tax revenue than retailing, local officials may encourage retailing at the expense of manufacturing.

In many U.S. states, local governments can levy and keep revenue from sales taxes. These taxes give local government officials an incentive to encourage land use that will increase retail sales and increase retail employment. Since manufacturing generates lower sales tax revenue than retailing, local officials may encourage retailing at the expense of manufacturing, so that the number of manufacturing jobs may fall.

In Fiscal Zoning and Sales Taxes: Do Higher Sales Taxes Lead to More Retailing and Less Manufacturing? (NBER Working Paper No. 16932) Daria Burnes, David Neumark, and Michelle J. White find that an increase in the sales tax rate of one percentage point was associated with a decrease in manufacturing employment by 7 to 9 percent in Florida counties during 1992 to 2006. Overall retail employment was not related to changes in the sales tax rate, which ranged from 6 to 7.5 percent over the sample period, but an increase in employment in big box and mall anchor stores of between 15 and 17 percent was associated with each percentage point increase in the local sales tax. The authors interpret these changes, at least in part, as the result of zoning policy. Between 1992 and 2008, Florida's inflation-adjusted local sales tax revenue increased by 380 percent while property tax revenues increased by just 8 percent.

The extent to which local government officials encourage retailing also appears to vary within counties. Because shoppers have an incentive to shop where sales taxes are lower, they are more likely to cross county borders in search of good deals if they live closer to them, implying that an increase in a county's sales tax should lead to more retailing and retail jobs in interior regions, but less retailing and retail jobs in border regions. The authors define areas within one mile of a county border as a border region and the rest of the county as an interior region, and they find that a one percent increase in the sales tax rate is associated with an increase in big box and anchor store employment of 40 to 48 percent in interior regions, compared with a decline of between 15 to 17 percent in border regions. The opposite effects are observed for manufacturing: an increase in the sales tax is associated with a negative effect on manufacturing in interior regions and a positive effect in border regions.

--Linda Gorman