A new report from the Tax Foundation reveals that two Alabama cities – Birmingham and Montgomery – have the second highest effective sales tax rates in the country for cities with over 200,000 people. Perhaps unsurprisingly, the liberal city of Chicago, Illinois, President Obama’s hometown, has the top rate at 10.25 percent.
High sales taxes can be a deterrent to commerce in a given region both on the supply and demand side. The Tax Foundation notes, “While many factors influence business location and investment decisions, sales taxes are something within policymakers’ control that can have immediate impacts.”
The Tax Foundation also noted the high sales tax burden on Alabama as a whole. According to a study released back in May, the Yellowhammer State has the fourth highest combined sales tax rate in the country. The five states with the highest average combined state and local sales tax rates are Tennessee (9.46 percent), Arkansas (9.30 percent), Louisiana (9.0 percent), Alabama (8.97 percent), and Washington (8.90 percent).
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Alabama only has a 4 percent statewide rate, good enough for twelfth lowest in the country. However, the state tax code allows for localities to tack on an additional 7 percent, which they do at an average of 4.97 percent. That is how the Tax Foundation calculated the average combined rate of 8.97 percent.
Additionally, Alabama is one of only 14 states that levies a sales tax on groceries, and one of only seven states that taxes such items at the normal sales tax rate.
Alabama’s budgetary structure relies heavily on sales taxes and therefore is largely dependent on consumer spending. The sales tax, along with other so-called “growth taxes” — revenues that grow as the economy grows — all flow into the Education Trust Fund Budget while the state’s General Fund is fueled by a hodge-podge of over 40 miscellaneous revenue streams.
Many who support a reliance on sales taxes tout it as superior to other alternatives, especially an income tax increase. Additionally, advocates for such a system believe that a sales tax-heavy formula will keep taxes low, as the people would feel the bite much more if everything they bought came with a double-digit sales tax.
However, opponents of the sales tax-heavy system note that it is much tougher to keep track of the total amount of money each taxpayer contributes to the government. Unlike an income tax, sales taxes do not come with a year-end summary. Citizens can never truly know how much they paid in without keeping track of an endless sea of receipts.
