The Jobs and Wage Effects of a Corporate Rate Cut

The Jobs and Wage Effects of a Corporate Rate Cut

The Jobs and Wage Effects of a Corporate Rate Cut

Congressional tax writers will soon reveal their plans to reform the federal tax code. The most important thing that Congress and the Trump administration can do to boost economic growth, lift workers’ wages, create jobs, and make the U.S. economy more competitive globally, is reform the business-half of our tax system. And one of the most critical elements of that reform is cutting the corporate tax rate.

There has been a great deal of debate recently over how much a corporate rate cut can create jobs and boost wages and living standards. The Tax Foundation’s extensive economic research and tax modeling experience suggests that cutting the corporate tax rate to a globally competitive 20 percent would substantially lower the cost of capital which, in turn, would boost capital investment, leading to higher wages and more jobs.

Our research also shows that these economic benefits would be enhanced if lawmakers coupled a corporate rate cut with an allowance for full expensing of capital investments.

The GDP, Investment, and Jobs Effect of the Rate Cut

We used our Taxes and Growth (TAG) Macroeconomic Tax Model[1] to simulate the long-term economic effects of these policies separately and combined to give tax writers an idea of how the policies work together. The table below summarizes the long-term results of this exercise.

Here we can see that cutting the corporate tax rate to 20 percent would boost the long-term level of GDP by 3 percent and increase the capital stock by more than 8 percent. This has the effect of lifting wages by more than 2.5 percent and creating more than 587,000 full-time equivalent jobs.

The results are very similar for allowing corporations full expensing for their capital investments. In this example, long term is generally about ten years, once the policies have worked their way through the economy.[2]

Combining the two policies does not double the results because of their interactive effects. However, we can see that the two policies together would increase the level of GDP by 4.5 percent and the capital stock by nearly 13 percent. These economic forces act to lift wages by an average of 3.8 percent and create 861,000 full-time equivalent jobs.

Some might question how a corporate rate cut could create that many jobs while the economy is inching toward full employment. The TAG model is actually estimating the increase in the total amount of hours worked in the economy as a result of the policy change. Thus, some of those full-time equivalent hours could be filled by new workers, while others would be filled by part-time workers moving to full-time, or some idle people coming back into the workforce. 

It should also be noted that in performing these estimates, we have not factored in any increase in profit-shifting into the United States, either by U.S. firms repatriating foreign earnings or foreign-based firms increasing their investments into the U.S. We believe that a lower corporate tax rate would encourage such activity, but estimating those effects were outside the scope of this exercise. 

Long-Term Economic Effects of Expensing and a 20% Corporate Tax Rate
  20% Corporate Tax Rate Full Expensing Only (limited to C-Corps) 20% Rate and Full Expensing Combined
Tax Foundation, Taxes and Growth Model, March 2017 Version

GDP, long-run change in annual level (percent)

3.1% 3.0% 4.5%

GDP, long-run change in annual level (billions of 2016 $)

$587 $571 $867

Private business stocks (equipment, structures, etc.)

8.5% 8.3% 12.8%

Wage Rate

2.6% 2.5% 3.8%

Full-time Equivalent Jobs (in thousands)

592 575 861

The Effect on After-Tax Incomes Could Boost Support for Corporate Rate Cuts

There is typically little public support for corporate tax reform because most people don’t see how it will benefit their lives. Corporate tax reform may not “put cash in people’s pockets” in the same way as a cut in individual tax rates, but it can have a powerful effect on lifting after-tax incomes and living standards.

As we saw in the modeling results above, both expensing and a corporate rate cut can boost wages because of the increased productivity generated by the growth in capital investment. Better tools make workers more productive. Workers who are more productive earn more over time. When these gains are combined with the overall growth in the economy, after-tax incomes and living standards will rise. 

Tax Foundation’s TAG model factors these macroeconomic effects into our estimates of the change in after-tax incomes for taxpayers at different income levels. The nearby table shows that a 20 percent corporate tax rate would lift after-tax incomes by an average of more than $1,800. Every income group would see at least a 3.3 percent increase in their after-tax incomes because of the corporate rate cut.

The TAG model estimates that the combination of the 20 percent corporate tax rate and full expensing would boost after-tax incomes by an average of $2,664. Again, these gains represent the combination of wage growth, economic growth, and the distributed dollar value of the tax cuts.

Long-Term Effects on After-Tax Incomes
Income Group Average After-tax AGI 20% Corporate Tax Rate Full Expensing Only (limited to C-Corps) 20% Rate and Full Expensing Combined
Tax Foundation, Taxes and Growth Model, March 2017 Version
0% to 20% $7,171 $253 $246 $373
20% to 40% $20,138 $659 $641 $972
40% to 60% $33,391 $1,140 $1,109 $1,685
60% to 80% $54,968 $1,876 $1,825 $2,772
80% to 100% $142,539 $5,108 $4,968 $7,555
Average $51,485 $1,802 $1,753 $2,664


Corporate tax reform done right is key to growing the economy, boosting real family incomes, and making the U.S. a better place to do business in, and do business from. Tax Foundation modeling of a cut in the corporate tax rate to 20 percent estimates that the policy would lift the long-term level of GDP by over 3.0 percent, boost capital investment by 8.5 percent, and create more than 592,000 jobs, while increasing after-tax incomes of working Americans by an average of $1,800.

[1] For a full description of the TAG model, see We are also happy to give live demonstrations of the model upon request.

[2] Over the long term, a 20 percent corporate rate is a bigger tax cut than expensing. That is why we are seeing comparable results from the policies.

Source: Tax Policy – The Jobs and Wage Effects of a Corporate Rate Cut

There Is More Than Meets the Eye When Analyzing the UK’s Corporate Tax Cut

There Is More Than Meets the Eye When Analyzing the UK’s Corporate Tax Cut

There Is More Than Meets the Eye When Analyzing the UK’s Corporate Tax Cut

A little over a week ago the President’s Council of Economic Advisers (CEA) released a report on the relationship between corporate tax reform and wage growth. Later that week, Kimberly Clausing and Edward Kleinbard from Vox wrote a response in which they criticized the report’s key findings by drawing on the United Kingdom’s recent experience with corporate tax reform. However, Clausing and Kleinbard are incorrect to claim that the experience of the UK shows that corporate tax rate reductions do not affect wage growth.

In their argument, Clausing and Kleinbard contrast the CEA’s predictions that a corporate rate cut would lead to wage growth to the results of the UK’s recent experiment with corporate tax reform. Surprisingly, as the UK cut its corporate income tax rate, the country’s inflation-adjusted median wage also dropped. This counterintuitive result would imply that reducing corporate tax rates might lead to lower wages, a notion at odds with most conventional literature on corporate incidence.

However, Clausing and Kleinbard’s argument relied heavily on the assumption that the only meaningful change to the UK’s corporate tax structure in recent years was the reduction of the corporate income tax rate. In fact, there is reason to believe that other structural changes to the UK’s corporate tax could have been responsible for the fall in wages.

Over the past 10 years, the UK has lowered its corporate income tax rate from a high of 30 percent in 2007 to 19 percent in 2017. In addition, the UK moved to a territorial tax system which exempts foreign corporate income from domestic taxation, and enacted a “patent box,” which provides a special lower rate on profits attributable to intellectual property.

Despite this, the UK’s corporate tax revenue as a percent of GDP from 2000 to 2015 remained roughly consistent between 3.5 percent and 2.5 percent. This has led some analysts to incorrectly believe that the UK’s corporate tax cut paid for itself, whereas the UK actually paid for its corporate rate cut by broadening its corporate tax base. The UK paired its rate cut with lengthened asset lives for capital investments and anti-base erosion rules. These changes ultimately helped pay for the corporate rate reduction.

The most notable change to the UK’s corporate tax base was in its treatment of capital expenditures. Corporations that make capital expenditures are required to deduct the costs of these investments over time, through a provision known as depreciation deductions. Depreciable asset lives vary by asset type, and countries allow different lengths of time to write off such investments. Generally, when asset lives become longer, corporations end up paying more tax on their additional investments — the value of depreciation deductions are reduced over time, due to inflation and the time value of money.

Between 2008 and 2013, the United Kingdom reduced the value of depreciation deductions for machines and industrial buildings. The present value deduction (the percent of the cost of an investment a company can deduct over its life) for machines fell from 83 percent to 76 percent between 2008 and 2013. Over the same period, the value deduction for industrial buildings fell from 48 percent to zero. This means that corporations in the UK cannot write off the cost of investing in buildings at all!

While these changes to the UK’s corporate tax base help offset the revenue impact of cutting its corporate tax rate, they also potentially offset the economic benefits of a lower statutory rate. The length of time an asset can be written off has a large impact on the tax burden on marginal investments. Lengthening asset lives can increase the marginal tax rate on investment, even as the statutory tax rate falls. According to the Oxford University Centre for Business Taxation, the UK’s effective marginal tax rate (EMTR) on new investment climbed from around 20 percent in 2007 to 23 percent in 2010, even as the statutory corporate rate declined by five percentage points. Overall, the EMTR only fell by three percentage points from 2007 and 2017, from 20 percent to 17 percent, while the statutory corporate tax fell by 10 percentage points.

When taking a closer look at the UK’s recent corporate tax reform experiment, it becomes clear that there was significantly more at work than just a simple rate cut. Increasing the effective marginal tax rate on new investments could have had a negative effect on wages, potentially offsetting the positive effects from the corporate rate cut.

Since corporate rate cuts are rarely ever self-financing, finding effective pay-fors are among the most important policy considerations. With policymakers in the United States and abroad seeking to lower overall corporate income tax rates, they should take extra care to ensure that their base broadening strategies are neither distortive nor anti-growth.

Source: Tax Policy – There Is More Than Meets the Eye When Analyzing the UK’s Corporate Tax Cut

Labor Bears Much of the Cost of the Corporate Tax

Labor Bears Much of the Cost of the Corporate Tax

Labor Bears Much of the Cost of the Corporate Tax

Key Findings

  • Early analysis of the distribution of the corporate income tax relied on theoretical models and thought experiments. These hypothetical models assumed certain quantities of capital, market conditions, and investor behavior. The most important assumption in these models is how open the U.S. economy is to trade and the movement of capital. Open economy models concluded that nearly all the burden of the corporate tax falls on labor.
  • Over the last few decades, economists have used empirical studies to estimate the degree to which the corporate tax falls on labor and capital, in part by noting an inverse correlation between corporate taxes and wages and employment. These studies appear to show that labor bears between 50 percent and 100 percent of the burden of the corporate income tax, with 70 percent or higher the most likely outcome.
  • More recently, some analysts have suggested that “super-normal” returns due to monopoly rents or successful risk-taking impact the distribution of the corporate tax burden. Activity associated with rents is assumed to be insensitive to tax, limiting the amount of the tax that may be shifted to labor. U.S. Treasury and Tax Policy Center tax models adopt this approach, and assign most of the corporate tax to capital rather than labor (roughly an 80-20 split toward capital).
  • There appear to be serious errors in both theory and measurement in the super-normal returns work. Replicating Treasury’s methodology, we find it overstates the amount of super-normal returns being earned by businesses by two or three times. Correcting for the overstatement, and assuming such returns determine incidence, implies a business tax incidence that is roughly split 50-50 between capital and labor, more in line with the empirical literature.
  • More importantly, we take issue with the use of super-normal returns as a guide to incidence. Pure economic (monopoly) rent is unaffected by taxes, but is uncommon. The super-normal methodology also includes returns to business activity outside the monopoly area, such as quasi-rents and other transitory earnings due to imperfect competition or risk premiums. These earnings in non-monopoly sectors of the economy are clearly sensitive to tax, and taxes on returns in these sectors fall heavily on labor, and not, as asserted, only on capital.


President Donald J. Trump (R) and congressional tax writers are working on a major overhaul of the federal tax code. If they adhere to the proposals outlined in the jointly produced Unified “Framework,” one of the central elements of the plan will be a reduction in the federal corporate income tax rate from the current level of 35 percent—the highest[1] federally imposed corporate tax rate in the industrialized world—to 20 percent, which would put the U.S. rate below the global average.

U.S. Treasury Secretary Steven Mnuchin and Kevin Hassett, Chairman of the President’s Council of Economic Advisers, have asserted that cutting the corporate income tax will largely benefit American workers in the form of higher wages and employment. Indeed, Mnuchin has said that as much as 70 percent of the economic cost of the corporate tax is borne by workers. Critics have challenged these statements, arguing that a majority of any corporate tax cut would simply end up being a windfall for shareholders or the owners of capital.  

“Who bears the burden of corporate tax?” is therefore a question that will play a large part in the design and acceptance of any tax reform proposal. If the burden of the tax is assumed to be shouldered mainly by rich shareholders, Congress and the public may be disinclined to support a large cut in the tax rate. If the corporate tax is viewed as largely hurting wage growth and employment by denying workers the tools they need, it may be viewed more favorably.

This question of who bears the corporate tax has bedeviled economists for many decades. Early efforts to think the issue through were largely thought experiments, which reached different conclusions based on their assumptions about certain key factors related to the openness of the economy to trade and the movement of capital. Open economy models concluded that nearly all the burden of the corporate tax falls on labor. In recent decades, economists have become more adept at teasing out the real-world consequences of the tax by turning to real-world data. These studies appear to show that labor bears between 50 percent and 100 percent of the burden of the corporate income tax, with 70 percent or higher the most likely outcome.

More recently, some tax analysts have started considering how super-normal returns, or returns from rents or market power of companies, impact the distribution of the corporate income tax. Treasury and Tax Policy Center tax models adopt this approach, and assign most of the corporate tax to capital rather than labor (roughly an 80-20 split toward capital). There appear to be serious errors in both theory and measurement in the super-normal returns work. Measurement issues appear to overstate the amount of super-normal returns by two or three times. Correcting the overstatement implies a business tax incidence split roughly 50-50 between capital and labor, more in line with the empirical literature.

More importantly, we reject the whole theory of the use of super-normal returns as a guide to incidence. The method wrongly assumes that taxes on quasi-rents and other transitory earnings due to imperfect competition or risk premiums cannot be shifted to labor. Earnings in these sectors are clearly sensitive to tax. Taxes on returns in these sectors alter output, prices, and wages, and thus fall heavily on labor, and not, as asserted, only on capital. We conclude that the method and the findings based on it should be discarded.

The Old Thought Experiments: Some History of the Debate

Early analysis to determine the distribution of the corporate income tax relied on theoretical models and thought experiments. These hypothetical models assumed certain quantities of capital, market conditions, and investor behavior. The most important assumption in these models is how open the U.S. economy is. Differing assumptions about the U.S. economy’s openness suggested two general outcomes.

These models suggested that labor will bear the bulk of the corporate tax if:

  • The economy is “small” and “open,” allowing capital, savings, goods, and services to flow freely across national borders;
  • Capital and associated production can easily move abroad;
  • Savers are willing to own foreign stocks and bonds to help fund the expatriate capital;
  • consumers are willing to buy goods and services from abroad instead of insisting on local output;
  • Industries are competitive, lacking monopoly pricing power, and must take world prices for traded goods without the ability to raise prices and pass the tax on to consumers;
  • The amount of capital that flows abroad is not large enough to depress rates of return to capital in the world. Even if capital is fixed in quantity (the world total is not depressed by lower returns to saving), these conditions are sufficient to force most of the tax onto labor in the form of lower wages. If saving is responsive to its rate of return, and falls due to the tax, and world capital formation declines, the burden on labor is even greater.

By contrast, capital will bear some of the corporate tax if:

  • Domestic capital is fixed in quantity (no reduction in saving due to the tax);
  • A sufficient amount is unable or unwilling to move abroad for any of several reasons—such as that savers will not purchase foreign securities, or consumers have a strong preference for domestic goods and services;
  • The quantity of capital moving abroad is large enough relative to the world stock that it depresses return on foreign-sited capital;
  • The businesses cannot raise prices to pass large amounts of the tax forward to consumers. In these conditions, some of the tax is borne by capital due to lower rates of return.

However, it is not immediately obvious which view is realistic, or the extent to which one or both frameworks apply. Empirical work has helped to better answer these questions. Some of the historical debate leading to these two views of the world is reflected in the papers reviewed below.

The leading modern expert in the tax incidence field is Professor Arnold Harberger. Sixty-five years ago, he noted that the corporate tax could force capital from the corporate sector to the no-corporate sector, reducing returns to noncorporate businesses, which would suffer some of the burden of the corporate tax.[2] He assumed a closed economy, where the capital remained in the country, but shifted sectors.

Harberger subsequently expanded his analysis to include the likelihood that a corporate income tax would drive some U.S. capital out of the country (an open economy model), and that enough capital would leave to boost after-tax returns on remaining U.S. capital to pretax levels.[3] Some firms would choose to shift production abroad for sale to the United States or foreign markets. U.S. workers would have less capital to work with, and labor productivity and wages would decline. The increased availability of capital abroad would increase the wages of foreign workers. Assuming the capital shift is too small to depress worldwide capital earnings, U.S. workers would bear all, or more than all, the burden of the corporate income tax. Why more than all? Because some sectors of the economy could gain from the corporate tax increase. For example, if wages fall, earnings of capital-owners (including land owners) in the no-corporate agricultural sector would increase. Workers would lose more than the net loss to the whole economy.

Harberger noted that if the capital flight were very large, it could depress returns on capital in the rest of the world, meaning that owners of capital abroad, including U.S. capital that had fled, would also lose income. To that extent, and only to that extent, would the tax fall on U.S. capital-owners. In that case, he estimates that labor’s share of the tax burden might be reduced to 96 percent of the total, with about 4 percent falling on U.S. capital-owners (including landowners, and after allocation of price increases on consumers to labor and capital).

Harberger and many other thought experimenters do not allow for any reduction in total world saving due to the tax, due to skepticism that savers respond strongly to reductions in the rate of return. They assume that total world capital formation remains constant, and the only effect of the tax is on where the capital is located. More recent work on saving responses suggests that saving would shrink if after-tax returns fall, and total world capital formation could be negatively affected by the tax, at least to some degree.[4] Martin Feldstein has pointed out that the effect of the tax on saving would increase the amount of damage due to taxing capital.[5] A portion of the added damage would fall on labor, including workers’ pension funds and retirement savings. If world saving were to shrink enough in response to the U.S. tax and capital flight, such that U.S. capital fleeing abroad replaced foreign capital without adding to the total, global returns on capital and saving would be maintained, and capital-owners would not be injured by the tax. They would earn the same income from the capital abroad as they would have at home before the tax increase.

William Randolph estimates that, in an open economy with mobile capital in fixed supply and immobile labor, domestic labor loses income equal to 74 percent of the corporate tax revenue while domestic capital income falls by 33 percent of the tax (with additional effects on foreign labor and capital).[6] He finds the labor effect would be less as the economy is assumed to be less open, or capital less mobile.

Jane Gravelle and Kent Smetters sought to challenge the open economy results.[7] They calculated a range of hypothetical outcomes, depending on whether the U.S. acts like a small open economy, with limited effect on world returns to capital and global interest rates, and with a high degree of willingness to substitute imports for domestic products and services. If so, Gravelle and Smetters find that labor bears 79 percent of the corporate tax, while capital-owners bear approximately 11 percent, close to the Harberger results.

However, Gravelle and Smetters raise two concerns. One is that the public may so prefer home-produced goods that it becomes difficult to shift capital and production abroad and then sell the output back to consumers in the home country. The capital that would otherwise migrate abroad would have to remain at home, and bear more of the burden of the tax, to retain the domestic market. Their second objection is that savers may so strongly prefer to hold domestic stocks and bonds that it would be difficult to tap domestic saving to finance capital investment abroad. Again, capital might have to stay home and bear more of the corporate tax. These cases lead to an alternative burden pattern of 25 percent of the corporate tax borne by labor, and 75 percent borne by owners of capital.

Harberger (2006), responding to these concerns, dismisses the reluctance to import, pointing to the increased reliance of global production chains in recent years. For example, since North American Free Trade Agreement (NAFTA), the automobile industry’s parts and assembly operations are well-integrated throughout North America. Most vehicles now contain parts and labor input from more than one country. Consumer electronics are another area in which technology, chips, parts, and assembly are multinational.

As for savers’ willingness to fund capital abroad, Harberger points out that not every saver need be involved in foreign exchange or trading in global securities to equalize financial returns and borrowing costs around the world. It takes only a few large financial institutions with sufficient resources to transfer large amounts of saving around the globe. The access to global credit is clearly sufficient to make the United States a fully integrated part of the world capital pool.[8] American and foreign firms routinely tap global credit markets at interest rates determined by the creditworthiness of the company, not by national credit market conditions. Recall that, at the height of the credit crisis afflicting Greece, Italy, Spain, Portugal, and Ireland, healthy private sector borrowers obtained credit at lower interest rates than their national governments. Harberger concludes that the larger responses that Gravelle and Smetters calculate for the open economy case are closer to the truth, and not far below his own estimates.

The empirical work cited above suggests that the open economy view of the world, with free movement of capital, goods, and services, is more nearly correct. Wages do appear to be negatively affected by the taxation of capital. Workers do appear to be harmed by the corporate income tax.

Recent Empirical Studies Using Real-World Data

While thought experiments create useful frameworks for thinking about the potential distribution of the corporate tax, they do not directly answer the question of how much of the tax is borne by labor and how much is borne by capital. Thus, in recent years, economists have begun to estimate the incidence of the corporate income tax with empirical studies.

Empirical research attempts to estimate the impact of tax changes by using real-world data. The challenge, however, is no data exists that simply tells us that this much of the corporate tax falls on labor and that much falls on capital. Empirical researchers must ask related questions, such as: are there variations in wages across countries or regions with different corporate tax rates and related tax elements, such as depreciation rules? Is there evidence of “sticky” saving behavior that makes returns on capital vary across national borders, suggesting that it is hard to move capital abroad to avoid a tax? Are after-tax returns similar for countries with similar levels of capital per worker and similar risk factors such as adherence to the rule of law and political stability?

Empirical studies conducted over the last several years have shed new light on questions concerning capital mobility and the link between higher corporate taxes and reduced earnings of labor. A literature review on this topic by    

Cross-country Studies

Some of these studies seek to relate observed differences in taxes on capital to differences in wages across countries. For example, Kevin Hassett and Aparna Mathur, in a study of cross-country data, report: “[O]ur results indicate that corporate taxes are significantly related to wage rates across countries. Our…estimates suggest that a 1 percent increase in corporate tax rates leads to a 0.5 percent decrease in wage rates.”[10] Hassett and Mathur note that the results hold for statutory tax rates, effective marginal tax rates, and average tax rates. They also find that tax rates in other countries affect tax rates in the country in question; higher corporate taxes in a country’s trading partners raise wage rates at home, as there is less advantage to moving capital to the other countries. Wage reductions of the magnitude described by Hassett and Mathur would cost the workforce more money than is raised by the corporate tax, because labor compensation is several times larger than total profits.  

Within-country Studies

The central group of studies in the table compares differences in wages in different states, provinces, or counties within countries to differences in those regional tax rates on corporations. Such studies have the advantage that, within a single country, there is generally more uniformity in nontax factors such as regulation, political stability, property rights, and rule of law than one sees across countries. The results suggest a range of possible effects of the burden on labor, from roughly a third of the tax to more than the total revenue raised.

Alison Felix reports on a cross-country study of open economies. She states: “The empirical results presented here suggest that the incidence of corporate taxation is more than fully borne by labor. I estimate that a one percentage point increase in the marginal corporate tax rate decreases annual wages by 0.7 percent. The magnitude of the results predicts that the decrease in wages is more than four times the amount of the corporate tax revenue collected.

Table 4. Empirical Evidence on the Economic Incidence of CIT on Labour
Source: Results from papers cited by the author. 
Research Design Citation Country Period Industry Economic Incidence on Labour
Exploiting cross-country variation in tax rates  Hasset & Mathur (2010)  65 developed and developing countries  1981-2005  Manufacturing  2 200% 
Desai, Foley & Hines (2007)  50 countries (excluding the U.S.)  1989; 1994; 1999; 2004  Cross-industry  45-75% 
Felix (2007)  19 developed countries  1979-2002  Cross-industry  400% 
Exploiting sub-national variation in tax rates  Ebrahimi & Vaillancourt (2016)  Canada (variation across provinces)  1998-2013  Cross-industry  75% 
Suárez Serrato & Zidar (2014)  U.S. (variation across counties)  1980-1990; 1990-2000; 2000-2010  Cross-industry  30-35% 
Liu & Altshuler (2013)  U.S.  1982; 1992; 1997  Cross-industry  40-80% 
Carroll (2009)  U.S. (variation across states)  1970-2007  Cross-industry  250% 
Felix (2009)  U.S. (variation across states)  1977-2005  Cross-industry  360% 
Wage bargaining models  Arulampalam, Devereux & Maffini (2012)  9 European countries  1996-2003  Manufacturing  49% 
Felix & Hines (2009)  U.S. (variation across states)  2000  Cross-industry  54% 
Fuest, Peichl & Siegloch (2015)  Germany (variation across municipalities)  1993-2012  Cross-industry  40% 

Wage Bargaining Models

Other studies focus on the extent to which labor has sufficient bargaining power to capture some of the returns accruing to capital. This is most common when returns to capital are higher than normal due to some form of pricing power, and when unions are strong. Insofar as the tax lowers returns available to be shared with labor, labor bears some cost of the tax. The lower level of unionization in the United States would make this phenomenon less pronounced here. However, not all profit capture or profit sharing by labor is due to union activity. Significant profit sharing arises in many nonunionized industries, such as the technology sector, and is common in vibrant start-up businesses.

In a working paper at the University of Warwick, Wiji Arulampalam, Michael P. Devereux, and Giorgia Maffini assess the impact of the corporate tax on wages: “Our central estimate is that 61 percent of any additional tax is passed on in lower wages in the short run and around 100 percent in the long run.”[12] In another paper, the same authors investigate the incidence of the corporate tax on “quasi-rents,” which are unusually high returns on capital in protected situations.[13] Arulampalam, Devereux, and Maffini find that even in these circumstances, 49 percent of the tax falls on labor, because labor bargains away about half of the returns in question.

A study by Clemens Fuest, Andreas Peichl, and Sebastian Siegloch, using microeconomic data from 11,500 German municipalities (which impose different local taxes) found that a 1 percent increase in the effective marginal corporate tax rate leads to a 0.18 percent decrease in the wages of current workers, which results in a significant portion of the burden falling on low-income labor.[14] Firms in the sample that are not restricted by collective bargaining agreements display nearly twice this average elasticity. Because total wages in an economy are several times corporate profits, and many times corporate taxes, these elasticities are large enough to place most of the tax burden on labor income.

How Can Labor Bear More Than 100 Percent of the Corporate Tax?

Some empirical studies, and much of the earlier thought experiment analysis, conclude that labor may bear more than 100 percent of the corporate tax. The Council of Economic Advisers (CEA) has just estimated the amount borne by labor at 250 percent of the tax. This many seem perplexing, but it is perfectly possible, even likely.

The burden of a tax on people’s income is more than the revenue the government takes in. The burden of a tax includes any additional damage to the economy, in the form of reduced output and income, caused by the tax. The added damage is called the “dead-weight loss” of the tax. Therefore, the tax revenue is only a lower bound on the total cost to the population. For example, a study by Romer and Romer found that, on average, GDP falls by roughly $3 for every $1 of tax raised.[15] Labor routinely receives between 60 and 70 percent of the GDP, and would suffer a loss of roughly $2 in income per dollar of tax revenue. Romer and Romer did not distinguish the type of tax. The damage would be higher for taxes that impede capital formation, such as a corporate tax, than for taxes on consumption.

If a study is measuring the total loss of income from the tax, not just the revenue it collects, the portion of the income lost by labor can easily exceed the total revenue collection. This does not mean that only labor is harmed. There may be some income loss for capital-owners too (although that share may be low if capital is in highly elastic supply—that is, if it withdraws from the market unless it is paid its minimum demanded return). Labor’s share of the total loss may not be 100 percent or more, but the amount of its loss may exceed the total revenue from the tax, showing a ratio of 200 percent, 300 percent, or more. How the percentages appear depends on whether the analyst is looking at the size of the loss relative to the tax revenue or the shares of the loss borne by labor versus capital.

A recent blog by Casey B. Mulligan, professor of economics at the University of Chicago, addresses these issues. He reviews the basics of tax revenues and dead-weight losses, with excellent graphics, neatly summarizing standard microeconomic textbook discussions of the concepts. Mulligan confirms the CEA calculations, and rebuts critics of the CEA release who have ignored the additional economic losses from the tax.

Super-Normal Returns and the Incidence of the Corporate Income Tax

A recent approach to describing the incidence of the corporate income tax focuses on “super-normal returns.” The super-normal returns approach is a new thought experiment that involves dividing profits into two categories: normal returns to capital in competitive markets, and super-normal returns in cases where the firm has pricing power and returns greatly exceed the normal.

The theory asserts that only the portion of the corporate tax that falls on normal returns may be shifted in part to labor by reducing output and wages. It assumes that activities generating super-normal returns are largely insensitive to tax; taxing that income is assumed not to discourage investment, productivity, wages, or employment, not to reduce production, and not to result in price increases. Therefore, the portion of the tax that falls on super-normal profits cannot be shifted to labor via lower wages or layoffs, or to consumers via higher prices. The extent of super-normal returns is assumed to place an upper bound on the normal returns on which the tax might be shifted in part to labor. 

Both the U.S. Treasury Department and the Tax Policy Center of the Urban Institute and the Brookings Institution (TPC) have used variants of this approach to allocate the burden of the corporate tax. Their method classifies a significant amount of corporate profits as super-normal, and they therefore assert that the bulk of the tax falls on shareholders. Unfortunately, their methods, and their estimates of the extent of the super-normal returns, are faulty.

The “super-normal profits” theory and the TPC method of calculation is discussed in detail in a 2012 TPC paper: “How TPC Distributes the Corporate Income Tax.” It states: “One key finding is that a substantial share of the returns to corporate capital is from “supernormal” returns to successful risk taking, infra-marginal returns, and economic rents in excess of the “normal” return (the riskless return to waiting).” The TPC views 60 percent of profits as super-normal, and 40 percent as normal. The tax on the 60 percent is attributed entirely to capital. The tax on the 40 percent is split equally between labor and capital. The result is assignment of 80 percent of the corporate tax to capital, and 20 percent to labor.

These results are close to those of a 2012 report issued by the U.S. Treasury Department that also relies on a “super-normal returns” theory of tax allocation, and describes how Treasury defines and measures the returns.[18] The Treasury paper finds an even greater share of profits to be super-normal, and allocates 89 percent of the burden of the tax to capital, and only 11 percent to labor.

These figures are substantially at odds with findings of the empirical studies and predictions of earlier thought experiments.[19] There are several reasons why the approach may overstate the amount of income tax borne by capital. Even if one trusts the concept, measurement errors appear to exaggerate the amount of super-normal returns. If corrected, the method would suggest a 50-50 split of the tax burden between labor and capital. (We describe details of the approach, and associated measurement issues, in the Appendix.)  

More importantly, the basic concept is flawed. First, not all super-normal returns are generated by activities that are insensitive to tax; much more tax shifting is possible than the approach assumes, especially in areas involving risk-taking. Second, inframarginal returns have nothing to do with decisions to expand or contract activity at the margin, and do not indicate that taxes do not matter. As a result, the statistics calculated by the super-normal returns approach give no useful information about the relative tax burdens on capital and labor.

The Concept of Economic Rent and Super-Normal Returns

Normal returns to an investment are bare bones returns that businesses must earn to compensate investors for the time value of money; that is, the minimum returns necessary to make it worthwhile to delay consumption. They predominate in competitive markets. Super-normal returns are any returns that exceed what are considered normal, and can be the result of either permanent or transitory pricing power. They include economic or monopoly rents, quasi-rents, and other returns resulting from successful risk-taking or other advantages over the competition.

Pure “economic rent” is a higher-than-normal payment for the services of a piece of land with an unusually valuable location. The term “rent” may also be extended to permanent higher-than-normal returns on property other than land, and may be associated with monopoly. Permanent non-land rents are sometimes referred to as quasi-rents, to distinguish them from the land-related returns.

More commonly, however, the term “quasi-rent” is reserved for any above-normal return that is temporary in nature. Quasi-rents arise in situations of imperfect competition, where barriers to entry, such as patents, regulatory hurdles, or other protections of incumbent producers by governments delay production of similar goods and services by other potential suppliers. Above-normal profits may also result from access to scarce or specialized resources, a reputation for quality, or successful risk-taking and innovation that lead to a particularly attractive new design, discovering a new oil field, or being the first to offer a new product, where it takes time for the competition to catch up.

Firms in these non-monopoly sectors may display transitory pricing power, but it lasts only until the entry of other firms into the market, or even the emergence of potential entrants that the existing firms must try to block with a price reduction. In time, patents expire, other production methods or substitute products or resources are found, or firms take the risks required to find a new design or product that captures the consumer’s eye. As the original quasi-rents disappear, new ones are created by innovation or exploration in other areas. Creating new quasi-rents requires new investment and risk-taking.

The key distinction between rents and quasi-rents is in their permanence, whether the conditions that create them are due to location or monopoly power, or due to some transitory factor that vanishes over time or must be constantly renewed. Thus, it is true that all pure economic rents are super-normal returns, but not all super-normal returns are pure economic rents. This distinction is crucial in determining whether the tax on such profits alters the behavior of a business, and whether the burden of the tax falls on capital or labor.

Pure Rent and Monopoly—Why Some Super-normal Returns Must Bear the Corporate Tax

The basic observation in the Treasury and TPC papers—that some businesses are insensitive to the corporate tax and do not react in a manner that would shift the tax to labor—could hold for the case of pure economic rent or a natural monopoly. True economic rent is the return to a unique piece of property that is not easily replicated. An acre of land in Manhattan, New York, is going to earn a higher rent than an acre in Manhattan, Kansas, due to its location. The owner is assumed to charge the revenue-maximizing rent, all that the market will bear. The land cannot not flee a high tax rate, and it will remain employed. Its super-normal returns bear the burden of a tax.

Likewise, a natural monopoly, an industry that has large economies of scale and high barriers to entry, will best be served by only one firm, which can produce all that is demanded at the lowest cost. If unregulated, the monopoly will receive a higher-than-competitive return on its assets. Its returns to capital will bear the burden of a tax, because it will not pay for the monopoly to take the steps necessary to shift the tax to labor or consumers.

A monopoly can choose how much to produce, and its decision will affect the market price. The monopoly sets output to maximize net revenue. That amount of output depends entirely on how consumers react to price changes. At higher prices, consumers demand less of the product, but the firm gets more revenue per unit. The monopolist will reduce production and raise prices if the price rise adds more to revenue than is lost due to the decline in unit sales. When the rise in the market price no longer compensates for the cut in sales, due to consumer resistance, it will stop. There is only one level of output that maximizes the revenue.

This revenue-maximizing amount of a monopoly’s production is fixed. No matter whether the government takes 10 percent, 35 percent, or 50 percent of the resulting revenue in tax, the after-tax amount left to the firm is always highest at that level of output. The firm will not change its level of investment, output, or prices even if the tax changes, so the tax will not affect labor or consumers.

These examples of monopoly power or pure economic rent due to unique location are the grain of truth in the approach to determining tax incidence by examining super-normal profits. These profits are associated with high returns, unchanging output, and inability to shift a corporate tax to labor or consumers. However, these returns constitute a small portion of the economy, and the tax on this income is a small portion of the total corporate tax. Monopoly rent does not significantly affect the degree of tax shifting economy-wide.[20]

Not All Super-Normal Returns Should Be Treated as Insensitive to Taxation

The TPC paper lists two major sources (other than monopoly rents) of super-normal returns: quasi-rents on investments by successful innovators and risk-takers, who have developed a remarkably successful product ahead of the competition, and inframarginal production facilities, which have lower costs than the average for some reason. These sources should not be lumped together with the cases of true economic rent or natural monopoly power. High returns in these two areas do not mean that the firms are insensitive to tax or that imposing or increasing a tax on them is harmless to labor or consumers.

Lumping these types of earnings in with monopoly profits involves a logical fallacy akin to the syllogism: If it is raining, it must be cloudy. Therefore, if it is cloudy, it must be raining. The super-normal returns papers make a similar error: Monopolies, which are insensitive to tax, have super-normal returns. Therefore, all industries that have super-normal returns must act like monopolies and be insensitive to tax. The argument is false.

Risk-takers Are Sensitive to Tax

In many cases, quasi-rents are the reward to businesses’ incurring costs and taking risks. Risks involve losses as well as gains. Risk premiums in successful ventures are vital compensation for the money-losing efforts, and are clearly sensitive to taxation. The Treasury and TPC papers look only at money-making businesses. Ignoring losers by looking only at tax returns of profitable firms that won the risk lottery is defective analysis.

Treasury argues that taxes on high profits from successful risk-taking do not alter output and fall entirely on the capital. On the contrary, risky sectors of the economy are among the most sensitive to taxation, looking ahead to new activity. It is only looking backward that they appear to be immune. The argument may be true for a firm with a high return on an existing discovery, but not for firms researching future discoveries.

Consider a pharmaceutical firm with a blockbuster drug. It has a patent that gives it a monopoly for a few years, or until a competitor finds a different cure for the same illness,[21] and it is presumably charging what the market will bear. Even if the government increased the corporate tax rate, the firm would continue to produce and sell the drug, because it is in a use-it-or-lose-it situation with a product already developed. Sunk costs are sunk; one cannot go back in time, recover the expenditures, and undiscover the drug. The cost of the discovery has been incurred, and it would be pointless not to produce the product for whatever positive after-tax profit can be had, even if the tax on the income is raised. The tax on the earnings of the existing drug cannot be shifted.[22]

What the papers fail to consider, however, is the effect of the tax on future activity and risk-taking. Super-normal returns do not last. They must be replenished by new discoveries requiring significant investment and risk. These efforts to create future super-normal returns may or may not pay off.

For example, for each successful new medicine, firms spend billions of dollars on hundreds of experimental drugs that never come to market. A successful blockbuster drug may yield super-normal returns to the lucky company. Many other efforts lose money, sometimes for years, with no payoff. Returns to the whole industry are far lower than returns to a successful drug.

In deciding how much to invest, the firms in the industry weigh the probable costs of the failures against the probability of success and the amount of after-tax return that a successful drug is expected to generate. Raising a tax on the firm’s earnings not only diminishes the returns to an existing drug, it diminishes the expected payoff from future research. The risk-reward ratio will shift against such efforts, and diminish the amount investors are willing to commit. Less R&D will be undertaken, and fewer new drugs will be developed.

The same principles apply to any industry with risk-related super-normal returns. The two papers wrongly assume that the quantity of super-normal returns in the economy is invariant with respect to the corporate tax. This is an assumption that does not take account of the effort required to maintain the returns. A higher tax rate will reduce investment. Less output and profit will occur in the future. Current labor engaged in developing new products, and future labor and consumers producing and using the new products, will suffer the consequences if the activity is discouraged.

Inframarginal Super-Normal Returns Do Not Mean a Tax Cannot Harm Labor

Some firms can produce at a lower average cost than others. Perhaps one turnip farm’s fields are more fertile, better-watered, or flatter and more rock-free than another’s. At a given world price for turnips, the efficient turnip farm will earn more than the less efficient farm. If this advantage were to cover the entire crop, any cutback in turnip production due to higher taxes might be assumed to occur at the less efficient farm, not the more efficient one. Advocates of the super-normal return theory assert that the portion of the industry’s returns earned by the more efficient firms can be viewed as “inframarginal,” and therefore insensitive to higher taxes, and thus the tax on them must accrue mainly to capital.

This distinction is not relevant to the issue. The harm to labor comes from the reduction in output by the whole industry. It does not matter for the impact on labor which firms cut back the most and which the least. Workers laid off in one corner of an industry become intensified competition for workers in another. The depressing effect on wages occurs regardless where the reductions in hiring began.

Furthermore, it is wrong to assume that the calculation can be done on average cost. Nearly all firms face costs that rise with output. The first units of output are more profitable (more inframarginal) than the last. Each producer will push its output to the point where additional production just covers additional costs. Each entity will proceed with new investment opportunities until it does not pay to do more. In other words, all (non-monopoly) firms have normal returns at the margin. If the tax is raised, each firm will reduce output, not just the less efficient firms. If the tax is raised high enough, the less efficient firms may go out of business entirely, leaving the more efficient firms to carry on, but both types are normally affected by any tax increase, and so is their labor.

Nearly all significant economic decisions are made at the margin. At the margin, the inframarginal return is irrelevant. The assertion that taxes do not affect industries with low average costs is not correct. The inclusion of their profits in a “non-shiftable” monopoly tabulation is a mistake.


Recent empirical evidence seems to support earlier theoretical analysis that domestic U.S. labor bears the largest portion of the burden of the U.S. corporate income tax. The share of the burden falling on labor is routinely found to be between 50 percent and 100 percent, with 70 percent or higher the most likely outcome. As the tax reduces investment, productivity, and wages, the dollar amount of the cost to labor may exceed the revenue raised by the tax by a wide margin.

This evidence squares with the bulk of the theoretical discussions of earlier decades predicting that capital flight would shift the burden of the corporate income tax to labor. The increasing integration of the world economy in the production of traded goods and services and in the integration of financial markets reinforces the assumptions of these early analysts.

According to the empirical work, capital is a highly mobile and sensitive input; it can be located in the United States or overseas, or it might not be formed at all. Labor is less free to move from one country to another than is capital, and workers have limited freedom to set their own hours, or skip work entirely, if they want to earn income. Capital can and will flee high-tax jurisdictions, leaving labor behind to suffer the consequences. Capital can and will grow in jurisdictions that lower the tax burden, benefiting labor more than any other group.

An alternative Treasury and TPC approach to assigning the tax incidence is based on speculation that most capital income consists of super-normal returns due to pricing power and successful risk-taking, that the underlying economic activities are insensitive to tax, and that taxes on such activities cannot be shifted to labor. This suggests that a huge portion of the corporate tax falls on capital. Their method of calculating super-normal returns drags into the total entire sectors of the economy and large amounts of economic activity that are clearly sensitive to tax, and ought to be excluded. The approach appears to be invalid.

Even if one were to credit the concept behind the super-normal returns limitation on the amount of tax that could fall on labor, it appears that the result is very sensitive to which business costs are allowed as deductions. We tried to replicate their numbers using national income account data, and found a much lower level of “excess” returns. This suggests that even on their own terms, the result should have allowed for a 50-50 split between labor and capital. This would have brought the results more into line with the empirical work, although we still doubt that the resulting statistic measures anything truly related to the question.

Technical Appendix

How Treasury and TPC Estimate Super-normal Returns

Treasury and TPC determine the extent of normal and super-normal profits by comparing tax liabilities based on current law depreciation (gradual write-off of the cost of investment over time) against tax liabilities in alternative regime of immediate expensing (immediate deduction of the full cost of investment in the year the investment is made).

In theory, firms expand until new investment is barely earning enough to cover its cost and generates a normal return reflecting the riskless time value of money. That is, firms keep investing until the current cost of investment and the future returns from investment are equal in present value. In that case, immediately deducting the full expense of investment would reduce the current tax owed by the same present value as the amount of tax that would be collected on the future revenue. In other words, expensing shelters the normal return to investment from tax.

It follows that, under a tax regime that includes expensing, any tax that remains, and only that amount, would be on super-normal profits, which would indicate the existence of some monopoly or other source of pricing power. As described above, there is no incentive to cut output in monopoly situations, and that portion of the tax would not be subject to tax shifting. To the extent that the current income tax imposes a higher tax than would be collected under expensing, the additional tax should theoretically fall on the normal profits, and could be shifted to labor.

For example, suppose a business’s pretax revenue is $100, and using current depreciation rules, its federal income tax is $30. Suppose, using expensing, the tax would be $0. That would imply that 100 percent of the firm’s income is a bare-bones normal return, and the current tax of $30 is on a normal profit. Taxes on normal profits may lead a firm to reduce output, which would shift a portion of the tax burden to labor. Alternatively, suppose, using expensing, the firm’s tax would fall to $10. If there is still a tax owed under expensing, it must be on some super-normal element in the profits. In this case, one-third (10/30) of the income (or $33.33) must be super-normal profit, and two-thirds (20/30) of the income (or $66.67) must be normal profit. The $10 tax on the super-normal profit does not lead to reductions in output, and it falls only on capital.

Why the Estimation Method May Overstate Super-normal Returns

The method used by Treasury and Tax Policy Center certainly measures the difference between tax systems with current-law depreciation and expensing, but it is not clear that is the appropriate measure of super-normal profits or how a firm reacts to taxation. Both papers have some serious logical and methodological flaws. The theoretical flaws are discussed above in the body of this paper. Some issues of measurement are reviewed here.

The Treasury and TPC methodology is based on corporate tax returns for firms with positive taxable income. Returns with losses are not included. Beginning with corporate tax returns keeps the focus entirely on the corporate sector. However, it requires reconstructing the gross (pretax) income of the businesses by adding back in deprecation, income and property taxes at the state and local level, interest deductions, and other elements of the tax calculation.[23] This grossing up procedure is difficult and prone to error. Once achieved, the tax is recalculated under the two depreciation systems.

Recalculating Super-normal Returns

We have attempted to determine what might be called super-normal returns economy-wide under several methods to show the sensitivity of the results to the underlying assumptions. Given our lack of privileged access to corporate tax returns, and shortcomings in publicly available data on business taxes from the IRS, we use the Federal Reserve Flow of Funds tables as our chief data sources. These incorporate the U.S. Commerce Department’s Bureau of Economic Analysis (BEA) National Income and Product Accounts (NIPA) data for GDP, investment, and tax accruals. However, the U.S. Bureau of Labor Statistics (BLS) provides a superior measure of labor compensation, including self-employment income and pass-through data often misclassified in IRS and BEA tax sources.

The combination of sources allows us to capture all investments and business revenues, regardless of a firm’s profitability. The data covers the full economy, including businesses in loss situations and earnings of individuals not required to file tax forms. Treasury and TPC omit money-losing firms from the analysis. This can distort the calculation of normal versus super-normal earnings. Even money-losing firms utilize capital in the hope of future profits, which will be taxed. Start-up businesses employ a lot of capital on which they hope to earn money in the future. Older firms temporarily losing money due to a recession or other factors also employ capital, and expect to return to profitability. Both types of firms use loss carry-forwards, which will be impacted by future tax rates. Their current economic decisions are affected by expected taxes on future earnings, and affect current employment and labor income.

 We must use the business sector, including noncorporate businesses, because capital returns data does not adequately separate C-corporations from S-corporations and other pass-through entities. Also, some noncorporate businesses may have super-normal returns. With this method, we find a much smaller share of super-normal returns in the economy than the Treasury and Tax Policy Center.

We begin by deriving gross returns to capital from the accounts by subtracting BLS labor compensation from national income. We then compare investment, representing expensing, to the capital returns to see how much of the returns are “sheltered” from tax and are to be considered “normal” and raise the share covered by investment. This gives a “normal” return equal to 60 percent of profits, and a “super-normal” share of 40 percent. This compares to the TPC finding of 40 percent normal returns, 60 percent super-normal. But gross returns is an inappropriate starting point.

These numbers use gross capital income before tax. The Treasury and TPC calculations also appear to be based on gross returns, including state and local taxes and interest expense. It is important to remove other taxes from the gross returns. These mandatory payments reduce net returns, and can throw firms into a money-losing situation. Taxes must be paid, and are not part of the net, after-tax returns to capital. One should also remove the returns to land, which is a non-depreciable asset, and for which there is no difference between expensing and depreciation.

Leaving other taxes in the calculation is equivalent to asserting that the affected businesses are indeed indifferent to taxes, and are acting like monopolies, and presupposes that one will find super-normal returns from the calculation. But that is what the calculation is supposed to be exploring. Assuming the result begets a statistic that ratifies the result. This is a form of circular reasoning. It proves nothing.

NIPA and the Federal Reserve consolidated income accounts show investment (other than in land) which would be immediately deductible under a corporate tax with expensing normally exceeds 55 percent of capital income net of state income taxes and local property taxes. This is the average ratio over the period 1968 through 2007, the last 30 years before the Great Recession distorted the picture.[24] Another 18 percent of the gross return constitutes a “normal” return to land. Therefore, about 74 percent of capital income should be regarded as having “normal” returns, and about 26 percent might be regarded as “super-normal.”

Even assuming the normal versus super-normal rationale holds as advertised, this data suggests that it should predict that 74 percent of a “pure” business income tax may be subject to some shifting from capital to labor. This is a far cry from the 40 percent normal return found using the TPC method.

Simply assigning 74 percent of the business taxes to labor and capital using their respective shares of GDP, one would estimate that about 50 percent of the tax falls on labor, and about 50 percent on capital, much more in line with what the empirical results suggest looking at real-world data. This method still overstates the lack of shifting of risk-related taxation described above, and might represent a lowest bound on the degree of shifting of the tax.

An Issue Relating to the Starting Point for Depreciation

This NIPA approach would deliver a different estimate of normal versus super-normal returns relative to a purer income tax utilizing “economic depreciation,” and might reflect the situation under the Asset Depreciation Range or Kennedy Guideline lives in the 1960s and 1970s. The lower bound for the shiftable portion of the tax would be modestly lower under the faster write-offs allowed under Modified Accelerated Cost Recovery System (MACRS), which shelters some normal profit from tax. However, the entire concept is dependent on whether the Commerce Department and Treasury estimates of real economic depreciation are correct. Treasury has periodically studied asset lives, and repegged them (or asked Congress to repeg them) to match obsolescence and replacement behavior in the real economy. Over time, these reviews have repeatedly led to a shortening of asset lives. If current estimates of the pace of economic depreciation are too low, economic income is overstated, and MACRS is doing less to offset the taxation of normal profit than currently supposed.

This discussion of the role of accelerated depreciation on the incidence of the corporate tax raises an interesting point. Expensing should result in a greater share of the corporate tax falling on capital, and less on labor, potentially making the corporate system more progressive. This runs counter to concerns that accelerated depreciation somehow favors the wealthy.

[1] Kari Jahnsen and Kyle Pomerleau, “Corporate Income Tax Rates around the World, 2017,” Tax Foundation, September 7, 2017,

[2] Arnold C. Harberger, “The Incidence of the Corporate Income Tax,” Journal of Political Economy 70, no. 3 (June 1962), 215-240.

[3] The evolution of Harberger’s thinking about this issue is laid out in Arnold C. Harberger, “Corporation Tax Incidence: Reflections on What is Known, Unknown and Unknowable,” a paper prepared for a conference “Is it Time For Fundamental Tax Reform: The Known, Unknown and Unknowable?” James A. Baker III Institute for Public Policy, Rice University, April 2006. Later published in: John W. Diamond and George R. Zodrow (eds.), Fundamental Tax Reform: Issues, Choices, and Implications (Cambridge, MA: MIT Press, 2008).

[4] Michael J. Boskin, “Taxation, Saving, and the Rate of Interest,” Journal of Political Economy 86, no. 2, pt. 2 (April 1978).

[5] Martin Feldstein, “Incidence of a Capital Income Tax in a Growing Economy with Variable Savings Rate,” The Review of Economic Studies 41, no. 4 (October 1974): 505-513.

[6] William C. Randolph, “International Burdens of the Corporate Income Tax,” Working Paper Series, Congressional Budget Office, August 2006.

[7] Jane G. Gravelle and Kent A. Smetters, “Does the Open Economy Assumption Really Mean That Labor Bears the Burden of a Capital Income Tax?” The B.E. Journal of Economic Analysis & Policy 6, issue 1 (December 2006).

[8] William Gentry concurs, writing: “The evidence suggests that capital is quite mobile across countries. Covered interest parity tends to hold across countries suggesting little need for increased capital flows as a way of eliminating arbitrage opportunities. Corporate investment decisions appear quite sensitive to international differences in after-tax rates of return. Thus, the empirical evidence supports the open economy assumption for modeling the incidence of the corporate income tax.” See William M. Gentry, “A Review of the Evidence on the Incidence of the Corporate Income Tax,” OTA Paper 101, Office of Tax Analysis, Department of the Treasury, December 2007, 30. This paper reviews a wide range of the literature on the topic.

[9] Anna Milanez, “Legal tax liability, legal remittance responsibility and tax incidence: Three dimensions of business taxation,” OECD Taxation Working Papers, no. 32, Table 4, September 18, 2017, available at The studies cited here are only a sample of the literature. Many factors influencing the distribution of the tax burden are still being researched. As always in economics, some researchers hold divergent views on the nature of the markets, the mobility of labor and capital, and the resulting estimates of the distribution of the tax. Most of the works cited below have numerous citations of articles worth reading.

[10] Kevin A. Hassett and Aparna Mathur, “A spatial model of corporate tax incidence,” Applied Economics 47, no. 13, (January 2, 2015): 1350-1365,

[11] Alison Felix, “Passing the burden: corporate tax incidence in open economies,” Regional Research Working Paper RRWP 07-01, Federal Reserve Bank of Kansas City, October 2007, 21.

[12] Wiji Arulampalam, Michael P. Devereux, and Giorgia Maffini, “The Incidence of Corporate Income Taxes on Wages,” Mimeo, University of Warwick, September 2007. Cited in William M. Gentry, “A Review of the Evidence on the Incidence of the Corporate Income Tax.”

[13] Wiji Arulampalam, Michael P. Devereux, and Giorgia Maffini, “The direct incidence of corporate income tax on wages,” European Economic Review 56, issue 6 (August 2012): 1038.

[14] Clemens Fuest, Andreas Peichl, and Sebastian Siegloch, “Which Workers Bear the Burden of Corporate Taxation and Which Firms Can Pass It On? Micro Evidence from Germany,” WP 12/16, Oxford University Centre for Business Taxation, July 2012.

[15] Christina D. Romer and David H. Romer, “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks,” American Economic Review 100, no. 3 (June 2010): 763–801  

[16] See

[17] Jim Nunns, “How TPC Distributes the Corporate Income Tax,” Tax Policy Center, September 13, 2012.

[18] Julie Anne Cronin, Emily Y. Lin, Laura Power, and Michael Cooper, “Distributing the Corporate Income Tax: Revised U.S. Treasury Methodology,” Department of the Treasury, Office of Tax Analysis Technical Paper 5, May 2012. In recent news interviews, Secretary Steven Mnuchin has stated that the Treasury technical paper is no longer the view of the Department. The paper has been withdrawn from the Treasury web site, but can be found on the National Tax Journal site at

[19] Although this new approach calculates a statistic based on Treasury tax return data, it remains a thought experiment because it merely asserts, without evidence, that the statistic is related as advertised to the economic behaviors that affect how the corporate tax alters output and labor and capital income.

[20] Note that the monopoly argument does not apply in the case of a regulated monopoly, such as a regulated utility. Regulated monopolies are sometimes said to be insensitive to the corporate tax, because they can request a rate hike from the state utilities commission, and pass the tax on to their customers. The rate of return on the company’s assets is thereby maintained. But in that case, the tax is passed on to consumers as higher prices. There is room for the price increase because the regulated utility was not permitted to go directly to the revenue-maximizing monopoly price to begin with. Some customers will reduce consumption because of the higher price. They may install solar panels, or utilize heat recycling power generation technology in a factory, or just cut back on heating or cooling in their homes. Output and capacity will be less than in the no-tax case, and employment in the industry will be lower. Consumers will find their income from working or saving does not buy as much power. Labor bears a large portion of the tax as workers or as consumers.

[21] For example, Viagra was followed quickly by Cialis. In fact, the profitability of Viagra acted as a spur to research into substitutes that did not infringe on the Viagra patent. The same pattern can be seen in drugs for cholesterol control, cancer treatment, and hundreds of other medical conditions.

[22] If the government has helped to create the monopoly, as with licensing arrangements that give sole rights to build cable services in a county, the imposition of the tax does not reduce the supply of the service or raise the cost to the consumer beyond the original quantity reduction and price increase due to the granting of the license. But the added tax collected by the government due to the abnormal profits derived from the restraint of competition due to the license would not have occurred without the government action in granting the license in the first place. That damage to the consumer is certainly the fault of the government.

[23] The OECD paper points out that other empirical research shows these other business taxes also appear to be shifted to labor, to much the same degree as the corporate income tax.

[24] Investment has been abnormally low since 2008. These recent years do not represent a normal economy. The depressed investment and resulting wage stagnation is what tax reform should be designed to correct. Papers which regard the current abnormal situation as the new normal do not contribute to the solution.

[25] Our calculation for land uses the land value series based on BLS numbers, rather than the series in the Flow of Funds table. The Flow of Funds formula gives a peculiar negative price for land during the Great Recession, and is obviously flawed. We have smoothed the BLS time series to avoid the extremes.

[26] Current law also includes partial or “bonus” expensing, which would worsen the disparity and increase the understatement of normal profits. The papers claim to have corrected for this “bonus expensing” provision.

Source: Tax Policy – Labor Bears Much of the Cost of the Corporate Tax

Sales Tax Base Broadening: Right-Sizing a State Sales Tax

Sales Tax Base Broadening: Right-Sizing a State Sales Tax

Sales Tax Base Broadening: Right-Sizing a State Sales Tax

Key Findings

  • Most state sales tax bases are smaller than ideal. The median state sales tax base only includes 23 percent of personal consumption. Sales taxes should tax all final personal consumption.
  • States frequently exempt consumer goods, such as clothing and groceries, but these blanket exemptions are ineffective ways to lessen the regressive nature of sales taxes.
  • Due to historical accident, most stattable es do not tax services in a notable way.
  • States should expand their state sales taxes to include consumer purchases of both goods and services. However, states should exempt business-to-business transactions.
  • Expanding sales tax bases improves neutrality. Newly generated revenues can then be used to finance general fund programs or other tax reforms, including paying down reductions in the sales tax rate.
  • If states are still concerned about the somewhat regressive nature of sales taxes, several policy options are more effective tools than blanket exemptions. Grocery tax credits, expanded Earned Income Tax Credits, or an increased standard deduction in an income tax would provide assistance without introducing the same degree of economic distortions.


Since the creation of the modern sales tax in 1930, state sales tax bases have been narrower than ideal.  Economic theory says that sales taxes should apply to all final personal consumption, yet partly due to historic accident and partly due to policy efforts to exempt some goods, the median state sales tax base covers only 23 percent of final personal consumption. The narrow tax bases undermine neutrality, favoring one product or industry over another.

States have experimented with broadening their sales taxes, but most efforts have been piecemeal and frequently involved additional taxation of business-to-business transactions. Meaningful base broadening, however, remains a worthwhile endeavor, as base expansion allows for greater tax neutrality and revenue stability, and can be paired with more targeted relief for low-income households.

State Adoption of Sales Taxes

In 1930, Mississippi became the first state to adopt a general sales tax.[2] In the decade that followed, 23 other states followed suit (see map below) as the Great Depression disrupted state and local economies. In 1927, property taxes made up 20 percent of state government revenue and 82 percent of local government revenue. In total, two-thirds of all state and local government revenue came from property taxes. However, from 1929 to 1936, property tax assessments fell substantially, approximately a 20 percent decline. The decline in property values, combined with deteriorating farm prices and high industrial unemployment, reduced property tax collections.[3] At the same time, individual and corporate income taxes became less productive. These revenue constraints were coupled with increased spending mandates from the federal government. Participation in new government programs required investments by states.[4]

States began to look for alternative sources of revenue to fund government services and began turning to the sales tax. “The sales tax,” as John Due and John Mikesell have noted, “with its low rate, large yield, and relatively painless collection, was especially attractive.”[5]

Sales Tax Adoption by State

State Sales Tax Bases are too Narrow

Currently, 45 states impose a sales tax. Only Alaska, Delaware, Montana, New Hampshire, and Oregon forgo a sales tax.[6] When states began to levy a sales tax in the 1930s, the tax applied to tangible personal property, items such as clothing, home appliances, and furniture, among other taxable goods.[7]

This made the tax relatively easy to administer. It also produced sufficient revenue, as the economy largely consisted of manufacturing and tangible goods. Over time, however, the U.S. economy has changed from a manufacturing-based economy to a service-based economy. Americans are purchasing more services than goods as a percentage of their consumption. In the first quarter of 2017, services accounted for approximately 68 percent of personal consumption expenditures in the United States.[8] Despite the transformation in the economy, states have responded slowly to updating their sales tax bases. 

Percent total personal consumption expenditures

The economic transition to a service-based economy is not the only reason sales tax bases are shrinking.   This trend has accelerated as states exempted a variety of household goods to mitigate the perceived regressivity of the sales tax. Together, these two long-term trends have led to improper sales tax bases. The median state’s sales tax base only includes 23 percent of a state’s personal income.[9]

Table 1. Sales Tax Breadth (Fiscal Year 2015)
Source: Professor Emeritus John Mikesell, Indiana University
(a) The sales tax in Hawaii, New Mexico, North Dakota, and South Dakota have broad bases that include many business-to-business transactions.
State Sales Tax Breadth Rank
U.S. Median 23%  
Ala. 35% 23
Ariz. 41% 11
Ark. 43% 8
Calif. 28% 35
Colo. 35% 26
Conn. 26% 37
Fla. 40% 12
Ga. 32% 32
Hawaii (a) 104% 1
Idaho 38% 14
Ill. 23% 43
Ind. 40% 13
Iowa 35% 22
Kan. 36% 19
Ky. 36% 20
La. 37% 18
Maine 41% 10
Md. 26% 39
Mass. 22% 45
Mich. 36% 20
Minn. 33% 31
Miss. 47% 7
Mo. 31% 34
Neb. 35% 24
Nev. 49% 6
N.J. 24% 42
N.M. (a) 59% 5
N.Y. 27% 36
N.C. 34% 29
N.D. (a) 73% 2
Ohio 35% 24
Okla. 34% 29
Pa. 26% 39
R.I. 26% 38
S.C. 32% 33
S.D. (a) 65% 3
Tenn. 34% 28
Texas 42% 9
Utah 34% 27
Vt. 25% 41
Va. 23% 44
Wash. 38% 15
W.Va. 37% 16
Wis. 37% 16
Wyo. 62% 4

Commonly Exempted Goods

Despite goods representing a declining share of the economy, they remain an important component of consumption, representing 32 percent of total personal consumption.[10] While services have in large part been exempt from taxation due to historic reasons, goods are frequently exempt from sales tax bases due to proactive exemptions issued by state legislatures. This is frequently due to perception of the regressive nature of the sales tax.

Proponents of exempting consumption goods point out that the sales tax is regressive. They argue that low-income households spend a larger portion of their income on these goods, and therefore, there is an inherent inequity in taxing necessities.[11] It is unfair to tax basic needs, per their argument. While it is true that such a tax would be regressive, that does not mean that exemptions are the correct policy choice. These arguments sometimes presuppose that sales taxes should only apply to luxury goods, not necessities, but again, this is a political argument, not one of economics.[12]

These arguments also tend to overestimate the extent to which sales taxes are regressive. In the short term, sales tax are regressive, but economic research shows that over a lifetime, the sales tax is “only slightly regressive.”[13] According to Laird Graeser, “… individuals adjust their spending patterns to approximate their long-term economic power and consumer proportionately to this long-term expectation of income.…Assuming that all consumption is taxed equally, lifetime consumption taxes are proportional to lifetime income.”[14] Even so, states frequently “address regressivity issues by modifying their sales tax base.”[15

The common exempted goods in the United States include: clothing, groceries, and prescription drugs.[16] Twenty-five states and the District of Columbia exempted two or more of these goods in 2017 (see Table 2). These goods represent a significant portion of a state tax base. Louisiana estimates that its sales tax exemption for groceries cost the state $424 million in fiscal year 2016, while its exemption for prescription drugs costed $358 million for the same fiscal year.[17] Arkansas, which still taxes groceries at 1.5 percent, lost an estimated $197 million in fiscal year 2012, the most recent year for which data are available.[18]

Table 2. Common Goods Exempted from State Sales Taxes
  Groceries Clothing Prescription Medication
Source: 2018 State Business Tax Climate Index
Alabama Taxable Taxable Exempt
Alaska No Sales Tax No Sales Tax No Sales Tax
Arizona Exempt Taxable Exempt
Arkansas 1.50%  Taxable Exempt
California Exempt Taxable Exempt
Colorado Exempt Taxable Exempt
Connecticut Exempt Taxable Exempt
Delaware No Sales Tax No Sales Tax No Sales Tax
Florida Exempt Taxable Exempt
Georgia Exempt Taxable Exempt
Hawaii Taxable Taxable Exempt
Idaho Taxable Taxable Exempt
Illinois 1.00%  Taxable 1.00% 
Indiana Exempt Taxable Exempt
Iowa Exempt Taxable Exempt
Kansas Taxable Taxable Exempt
Kentucky Exempt Taxable Exempt
Louisiana Exempt Taxable Exempt
Maine Exempt Taxable Exempt
Maryland Exempt Taxable Exempt
Massachusetts Exempt Exempt Exempt
Michigan Exempt Taxable Exempt
Minnesota Exempt Exempt Exempt
Mississippi Taxable Taxable Exempt
Missouri 1.225%  Taxable Exempt
Montana No Sales Tax No Sales Tax No Sales Tax
Nebraska Exempt Taxable Exempt
Nevada Exempt Taxable Exempt
New Hampshire No Sales Tax No Sales Tax No Sales Tax
New Jersey Exempt Exempt Exempt
New Mexico Exempt Taxable Exempt
New York Exempt Exempt Exempt
North Carolina Exempt Taxable Exempt
North Dakota Exempt Taxable Exempt
Ohio Exempt Taxable Exempt
Oklahoma Taxable Taxable Exempt
Oregon No Sales Tax No Sales Tax No Sales Tax
Pennsylvania Exempt Exempt Exempt
Rhode Island Exempt Exempt Exempt
South Carolina Exempt Taxable Exempt
South Dakota Taxable Taxable Exempt
Tennessee 5.00%  Taxable Exempt
Texas Exempt Taxable Exempt
Utah 1.75%  Taxable Exempt
Vermont Exempt Exempt Exempt
Virginia 2.50%  Taxable Exempt
Washington Exempt Taxable Exempt
West Virginia Exempt Taxable Exempt
Wisconsin Exempt Taxable Exempt
Wyoming Exempt Taxable Exempt
District of Columbia Exempt Taxable Exempt

Exemptions can force odd choices for consumers. New York’s clothing exemption only applies to clothing or footwear costing less than $110. This creates an incentive to purchase an item that is slightly less than $110 rather than one that is slightly above $110, regardless of the consumer’s preference for one item or the other.[19]

But sales tax exemptions can extend far behind clothing, groceries, and prescription drugs. Many states exempt flags, newspapers, and magazines from the sales tax, items that are far from being considered necessities. Pennsylvania even exempts youth sports programs.[20] A number of states in recent years have moved to exempt feminine hygiene products from sales taxes.[21] States can also engage in short-term sales tax exemptions, known as sales tax holidays. In 2017, 16 states held sales tax holidays, [22] ranging from back to school holidays to ones for hurricane preparedness in Florida. Sales tax holidays involve political gimmicks, and favor one industry or product over another.[23]

States also tend to exempt items which are subject to additional excise taxes, such as gasoline or cigarettes. Only four states, Hawaii, Illinois, Indiana, and Michigan, completely include gasoline in their sales tax base.[24] It is often stated that these products are exempt from the sales tax base because of concerns over double taxation; however, this argument falls flat. These taxes have two separate purposes. Gasoline, along with other items, is indeed final personal consumption, and it should be taxed accordingly. It can also then be true that gasoline is a good proxy for road usage, and an excise tax to fund general transportation expenditures is necessary. But the presence of an excise tax does not negate that gasoline should be subject to a general sales tax. If the total tax burden is deemed too high, the preferred approach is to lower the excise tax, not to exempt the item from the general sales tax.[25]


While several states have made forays in this direction, such as Florida’s brief attempt in 1986,[26] most states do not broadly tax personal services in their sales tax base. The lack of sales tax on services is one of “historical accident, not logic.”[27] As John Due described, “Acquisition of services by households constitute consumption expenditure in the same fashion as the purchase of commodities; there is no basic difference between the two that warrants different tax treatment.”[28]

Not taxing services, similar to exempting goods, introduces distortions into consumer decisions. Imagine that a state taxes the purchase of appliances, but does not tax repair services.[29] This encourages the consumer to repair the current appliance, rather than purchase a new one. There are obviously many reasons why someone could decide that repairing an appliance is preferable to purchasing new, but now the sales tax treatment has given repair companies a competitive advantage over appliance retailers.[30] The tax code should not favor the repair industry over the retailing industry.

Table 3 shows four selected personal services and whether they are taxable in each state.

Table 3. Taxation of Personal Services, Selected Services
Source: 2018 State Business Tax Climate Index
  Dry Cleaning Fitness Barber Veterinary
Alabama Exempt Exempt Exempt Exempt
Alaska No Sales Tax No Sales Tax No Sales Tax No Sales Tax
Arizona Exempt Taxable Exempt Exempt
Arkansas Taxable Taxable Exempt Exempt
California Exempt Exempt Exempt Exempt
Colorado Exempt Exempt Exempt Exempt
Connecticut Exempt Taxable Exempt Exempt
Delaware No Sales Tax No Sales Tax No Sales Tax No Sales Tax
Florida Exempt Taxable Exempt Exempt
Georgia Exempt Exempt Exempt Exempt
Hawaii Taxable Taxable Taxable Taxable
Idaho Exempt Taxable Exempt Exempt
Illinois Exempt Exempt Exempt Exempt
Indiana Exempt Exempt Exempt Exempt
Iowa Taxable Taxable Taxable Exempt
Kansas Taxable Taxable Exempt Exempt
Kentucky Exempt Taxable Exempt Exempt
Louisiana Taxable Taxable Exempt Exempt
Maine Taxable Exempt Exempt Exempt
Maryland Taxable Exempt Exempt Exempt
Massachusetts Exempt Exempt Exempt Exempt
Michigan Taxable Exempt Exempt Exempt
Minnesota Taxable Taxable Exempt Exempt
Mississippi Taxable Exempt Exempt Exempt
Missouri Exempt Taxable Exempt Exempt
Montana No Sales Tax No Sales Tax No Sales Tax No Sales Tax
Nebraska Exempt Exempt Exempt Exempt
Nevada Exempt Exempt Exempt Exempt
New Hampshire No Sales Tax No Sales Tax No Sales Tax No Sales Tax
New Jersey Exempt Taxable Exempt Exempt
New Mexico Taxable Taxable Taxable Taxable
New York Exempt Exempt Exempt Exempt
North Carolina Taxable Exempt Exempt Exempt
North Dakota Exempt Exempt Exempt Exempt
Ohio Taxable Taxable Exempt Exempt
Oklahoma Exempt Taxable Exempt Exempt
Oregon No Sales Tax No Sales Tax No Sales Tax No Sales Tax
Pennsylvania Exempt Exempt Exempt Exempt
Rhode Island Exempt Exempt Exempt Exempt
South Carolina Taxable Exempt Exempt Exempt
South Dakota Taxable Taxable Taxable Taxable
Tennessee Taxable Exempt Exempt Exempt
Texas Taxable Exempt Exempt Exempt
Utah Taxable Exempt Exempt Exempt
Vermont Exempt Exempt Exempt Exempt
Virginia Exempt Exempt Exempt Exempt
Washington Taxable Taxable Exempt Exempt
West Virginia Taxable Exempt Exempt Exempt
Wisconsin Taxable Exempt Exempt Exempt
Wyoming Taxable Exempt Exempt Exempt
District of Columbia Taxable Taxable Exempt Taxable

Benefits of Broadening the Base

An overly narrow sales tax base introduces a number of problems. Sales taxes are not neutral across consumer purchases, and they are not as effective at raising revenue as they could be. Furthermore, exempting items is also not an ideal way to address regressivity. Base broadening fixes these issues, and also reduces tax administration costs. However, all base broadening must provide exemptions for business-to-business transactions.

The presence of exemptions creates demand for further exemptions as political interests organize to demand more exemptions. Broadening the tax base sends a strong signal in the opposite direction.

Improved Neutrality

The overall goal of expanding the sales tax base is increased neutrality within the tax code. Consumers are likely to shift towards untaxed purchases, regardless of their actual preferences. Ideally, the sales tax would apply to all consumer transactions, as to not bias consumer behavior.[31]

Investment can also be misappropriated due to sales tax exemptions. Firms or industries might see increased demand, encouraging further expansion through capital expenditures.

Lower Rates and Greater Revenue Stability

Narrower bases also limit the ability to collect necessary revenues. A broader sales tax base provides the opportunity for additional revenue, because there is a larger basket of goods and services to tax. In contrast, exempting items from the sales tax base means that the tax rate on taxable items must be higher than it would otherwise be. Pennsylvania’s sales tax exemptions on groceries, prescription drugs, and clothing totaled $3.2 billion in fiscal year 2016, compared to the $10 billion in total sales tax collections for the state. The sales tax on all the remaining taxable items must be significantly higher to offset the $3.2 billion in exempted purchases. These are obviously not the only sales tax exemptions in Pennsylvania; adding all of Pennsylvania’s exemptions would result in an even greater imbalance. Tax rates in Pennsylvania are notably higher to generate the $10 billion in revenue than they could be if the base was expanded to include these previously exempted transactions.

Additionally, narrow sales tax bases hinder a key feature of consumption taxes: revenue stability. Sales tax revenue collections are currently dominated by large purchases, such as appliances, furniture, or motor vehicles, all types of items where purchases slow during times of economic weakness. Expanding the sales tax base to include items deemed to be essential, such as food and clothing, limits the volatility of collections. Even during recessions, these basic necessities would be purchased, though the items purchased might vary slightly, for instance, away from expensive cuts of meat like steak to less expensive like ground beef. Carving away the base introduces more volatility to revenue collections.

Not the Ideal Way to Offset Regressivity

Blanket exemptions are also blunt instruments for ameliorating regressivity, which as discussed previously is often overstated. Exempting all grocery items, while sold as a help to low-income taxpayers, benefits all consumers, regardless of their income level. Arguably, the exemption actually benefits higher-income individuals more than lower-income individuals as their total grocery spending will be higher. These families might “spend substantial amounts on expensive cuts of meat, fresh fruit out of season, exotic seafoods, and other items.”[32] Households that shop at more expensive grocery chains or buy more expensive items benefit disproportionately from the exemption.[33]

Additional research has found that broadening sales tax bases and using the new revenues to reduce rates is actually less regressive than the status quo. For instance, a study by the Minnesota Department of Revenue found that an expanded base and lower rate of 5 percent (down from 6.5 percent) would be less regressive than their current structure.[34]

Funding Other Tax Reforms

Additionally, sales tax base broadening can be used to fund other tax reforms. Expanding the sales tax base increases revenue, providing the funds necessary to offset tax changes in other areas. For instance, North Carolina’s tax reform in 2013 lowered and flattened its individual income tax, and lowered corporate income tax. The changes were in part financed with a broadened sales tax base that included admissions charges to live entertainment, movies, and certain attractions.

The District of Columbia followed a similar path. Its tax reform package in 2014 included an expansion of the sales tax to include gym memberships, among other items.[35] These sales tax base expansions helped finance cuts to the individual and corporate income tax and an expanded Earned Income Tax Credit (EITC).

Simplifying Tax Administration

Broadening the sales tax base also eases tax administration.[36] Much time and effort is spent trying to distinguish between taxable and nontaxable items, leading to complex and complicated questions on how to define various items.

Many states, for example, do not tax groceries, but do tax candy and soda. But what are the defining features of candy?[37] This quickly becomes a difficult question. In many states, the inclusion of flour makes an item food and therefore exempt, while candy without flour would be taxable. The presence of sweeteners could make something candy too. New Jersey includes sweetened chocolate chips in its tax base, but excludes unsweetened chocolate chips.[38]

The Wisconsin Department of Revenue released a guidance document in 2010 discussing the various tests for determining whether an ice cream cake was subject to the sales tax.[39] Taxability hinges on several key questions, such as whether the retailer provides utensils and if there are multiple food items, like fudge and a cake layer, in the ice cream cake. These kinds of tax structures create unnecessary compliance costs for businesses and for the state.

Now, all of this is not to say that expanding the sales tax base is without challenge. Questions regarding situsing[40], particularly around services, are important, but broader bases reduce the costs of tax administration.[41]

Business-to-Business Transactions

While all final consumption, both goods and services, should be taxed within a sales tax, it is crucial that consumption by businesses should be exempted.[42] This is not due to a preference for businesses over the general public, but rather an attempt to avoid “tax pyramiding.”[43]

By taxing inputs, goods or services, the price of the final product becomes more expensive; taxes are assessed multiple times as the goods or services come to market, increasing costs and yielding higher prices for consumers. Firms would pass the burden of the tax forward to their customers to manage their profit margins, and the multiple layers of sales taxes on inputs would turn the state sales tax into a gross receipts tax.

Differences between sales taxes and gross receipts taxes

But passing the tax forward isn’t always possible. In firms or industries with strong price competition, firms would be hesitant to pass costs directly to consumers. In some cases, such as products with suggested manufacturers’ retailing pricing and national pricing strategies, the retailer is strictly prohibited from passing the costs forward.[44] In those instances, the firm instead might shift the increased costs to labor, perhaps by cutting hour and benefits or limiting overall hiring.

It also introduces a number of biases. Items with longer production cycles bear a disproportionate share of the tax. Firms may choose to streamline the production process so that everything is made in-house. In this way, they would not be subject to the sales tax on business purchases, creating an incentive for vertical integration.

At its most extreme, taxing all business inputs converts a sales tax into a gross receipts tax.[45] However, most states exist somewhere in between a purely personal consumption-based sales tax and a gross receipts tax. According to data from the Council on State Taxation, firms paid $150 billion in general sales taxes on inputs in fiscal year 2015.[46] Care must be given to ensure that any base broadening does not unintentionally include business-to-business transactions.

Addressing Equity Concerns

As discussed, sales tax exemptions are frequently rooted in concerns over the regressive nature of sales taxes. However, limiting tax bases through blanket exemption is a problematic approach in terms of both neutrality and administration. There are several preferred ways to ameliorate regressivity without providing broad exemptions in a sales tax code.

Expanding to Services

Expanding sales tax bases to services is one way to broaden the tax base in a relatively progressive fashion.[47] Consumption of many personal services, such as cosmetic and beauty services, fitness, pet grooming and veterinary services, and landscaping, among others, skews towards the higher end of the income scale. Including personal services would increase tax neutrality, while providing for increased revenue, allowing the state to reduce the overall tax rate.

Earned Income Tax Credit

Tax credits could protect low-income households without preventing a broad base sales tax structure. One option for states is to increase the Earned Income Tax Credit (EITC) for low-income households. Currently, 26 states and the District of Columbia have their own EITC, in addition to the federal one. Twenty-two of these states make the credits fully refundable if the amount exceeds taxes owed.[48] Providing an EITC would also eliminate nonneutralities introduced by exemptions, while providing an offset to any regressive effects of the sales tax.

Grocery Tax Credit

Another option is to apply a grocery tax credit to offset the sales tax paid on food purchases, similar to those instituted in Oklahoma and Idaho. Residents in Idaho receive a tax credit of $100 to offset sales tax paid on groceries.[49] Oklahoma’s credit is $40 per year if the household income is below $20,000, or below $50,000 for those who have at least one dependent.[50] In both states the credit is refundable for those without income tax liability.

As noted previously, blanket food exemptions actually provide substantial tax cuts to high-income households as all their grocery purchases are also exempt. Food purchases would no longer be exempt from taxation, as they currently are in most states, which disproportionately benefits those with high food expenditures. A grocery tax credit is a more targeted approach.[51]

Increased Standard Deduction

Finally, states can always increase the standard deduction for their income taxes, for those filing single, married filing jointly, or head of households. An increase in the standard deduction has been a part of the successful tax reform packages North Carolina has enacted in the last few years, as a means to protect low-income households.

Impact of E-Commerce on Sales Taxes

The proliferation of internet retailing provides a challenge to states. As more individuals purchase items via online retailers, state sales tax collections have fallen as many retailers do not have sufficient nexus, traditionally defined as property or payroll, in a state to require the retailer to collect and remit sales taxes. Many online retailers fail to meet this standard, putting strain on state sales taxes.

The scope of the issue, however, is not immediately clear. Americans spent almost $400 billion online in 2016, or approximately 8 percent of all retail sales.[52] However, given narrow state sales tax bases, it’s not obvious that all these transactions would be taxable if they had been purchased in-person via a brick-and-mortar location. A 2009 study[53] estimated that state revenue collections would fall by $11 billion in 2012 due to internet purchases; however, their estimates seem too large based on state experiences.[54]

In 2017, Amazon, the largest online retailer, announced that it would start collecting sales tax on its purchases (excluding items sold via its Marketplace feature) in all states with a sales tax, likely increasing state sales tax collections, and limiting the amount of lost revenue.[55]


Partly due to historic accident and partly due to proactively carving up their tax base, state sales tax bases are exceedingly small, with the median state only taxing 23 percent of its personal income. The lack of a broad tax base introduces a number of distortions to the marketplace, influencing consumer behavior. Expanding state sales tax bases improves neutrality.

Frequently, sales tax base exemptions are presented as a way to make the tax code more progressive, but broad sales tax exemptions can actually benefit high-income households more than low-income households. States concerned about regressivity should consider other options than broad exemptions for entire classes of goods.

Sales taxes are key in a state revenue toolkit for numerous reasons, such as revenue yield and stability, and ease of administration, but if states continue to erode the base through exemptions, the effectiveness of sales taxes will be lessened. Expanding sales tax bases to services and removing previously-passed exemptions would allow states to improve the revenue collections and stability from their taxes, while improving neutrality. States should confront this challenge if they hope to retain this important feature in their revenue toolkits.

[1] The author thanks Isai Chavez for his research assistance and analysis.

[2] John F. Due and John L. Mikesell, Sales Taxation: State and Local Structure and Administration (Baltimore: The John Hopkins University Press, 1983), 2.

[3] Ronald Snell, “State Finance in the Great Depression,” National Conference of State Legislatures, March 2009,, 3.

[4] Robert D. Ebel and Christopher Zimmerman, “Sales Tax Trends and Issues,” in Sales Taxation: Critical Issues in Policy and Administration (Westport, CT: Praeger Publishers, 1992), 7-9.

[5] Due and Mikesell, Sales Taxation: State and Local Structure and Administration, 2.

[6] Morgan Scarboro, “Table 19. State and Local Sales Tax Rates” in Facts and Figures 2017, Tax Foundation Alaska has local sales taxes with average local rates of 1.76 percent, while Montana allows local sales taxes in resort areas.

[7] Ebel and Zimmerman, “Sales Tax Trends and Issues,” 16-17.

[8] Bureau of Economic Analysis, “Table 2.3.5. Personal Consumption Expenditures by Major Type of Product,” July 28, 2017.

[9] Morgan Scarboro, “Table 22. State Sales Tax Breadth,” in Facts & Figures 2017, Tax Foundation,

[10] Bureau of Economic Analysis, “Table 2.3.5. Personal Consumption Expenditures by Major Type of Product,” July 28, 2017.

[11] John F. Due and John L. Mikesell, Sales Taxation: State and Local Structure and Administration (Washington, D.C.: Urban Institute Press, 1994), 9.

[12] Economic theory actually goes even further. If true efficiency is the goal, necessities should be taxed at an even higher rate as their elasticities are higher, meaning higher costs are less likely to decrease consumption.

[13] Laird Graeser and Allen Murray, “Sales Tax on Services: State Trends,” in Sales Taxation: Critical Issues in Tax Policy and Administration (Westport, CT: Praeger Publishers, 1992), 101.

[14] Ibid.

[15] Graeser and Murray, in Sales Taxation: Critical Issues in Tax Policy and Administration, 81.

[16] Scott Drenkard, “Three Big Problems with Sales Taxes Today – and How to Fix Them,” Tax Foundation, February 10, 2017,

[17] Louisiana Department of Revenue, “State of Louisiana Tax Exemption Budget, 2016-2017,” March 2017,

[18] Arkansas Department of Finance and Administration, “Exemptions from the 6% Arkansas Gross Receipts Tax and Compensating Use Tax,” April 2012,

[19] New York State Department of Taxation and Finance, “Clothing and Footwear Exemption,” Tax Bulletin ST-122, March 10, 2014,

[20] Governor Tom Wolf, “2017-2018 Governor’s Executive Budget,” February 7, 2017, D-69,

[21] Nicole Kaeding, “Tampon Taxes: Do Feminine Hygiene Products Deserve a Sales Tax Exemption?” Tax Foundation, April 26, 2017,

[22] Joseph Bishop-Henchman and Scott Drenkard, “Sales Tax Holidays: Politically Expedient but Poor Tax Policy, 2017,” Tax Foundation, July 25, 2017,

[23] Ibid.

[24] Jared Walczak, Scott Drenkard, and Joseph Bishop-Henchman, 2018 State Business Tax Climate Index, Tax Foundation.

[25] Due and Mikesell, Sales Taxation, 1983, 77.

[26] James Francis, “The Florida Sales Tax on Services: What Really Went Wrong,” in The Unfinished Agenda for State Tax Reform, (Denver: National Conference of State Legislatures, 1988), 129-149.

[27] John F. Due, “Proposed Application of the Illinois Sales Tax to Services,” Illinois Business Review 44, no.3. (June 1987), 3.

[28] Due, “Proposed Application of the Illinois Sales Tax to Services,” 3.

[29] William F. Fox, “Sales Taxation of Services: Has its Time Come,” in Sales Taxation: Critical Issues in Tax Policy and Administration (Westport, CT: Praeger Publishers, 1992), 52.

[30] Ibid.

[31] Kaeding, “Tampon Taxes: Do Feminine Hygiene Products Deserve a Sales Tax Exemption.”

[32] Due and Mikesell, Sales Taxation, 1983, 68.

[33] The federal government also prohibits sales taxation of food items purchased with Supplemental Nutrition Assistance Program (food stamp) funds, meaning that truly low-income individuals are already exempted without broader grocery exemptions.

[34] John P. James, “Sales Tax on Services: A Tax Administrator’s Perspective,” in Sales Taxation: Critical Issues in Tax Policy and Administration (Westport, CT: Praeger Publishers, 1992), 69-70.

[35] Joseph Bishop-Henchman, “D.C. Council to Vote on Tax Reform Package Today,” Tax Foundation Blog, June 24, 2014,

[36] Due and Mikesell, Sales Taxation, 1983, 67.

[37] Scott Drenkard, “Overreaching on Obesity: Governments Consider New Taxes on Soda and Candy,” Tax Foundation, October 31, 2011,

[38] New Jersey Division of Taxation, “New Jersey Sales Tax Guide: Bulletin S&U-4,” July 2017, 6,

[39] Wisconsin Department of Revenue “Sales of Ice Cream Cakes and Similar Items,” November 8, 2010,

[40] Situsing is the process for determining whether a transaction is taxable under a sales and use tax.

[41] Walter Hellerstein, “Sales Taxation of Services: An Overview of the Critical Issues,” in Sales Taxation: Critical Issues in Tax Policy and Administration (Westport, CT: Praeger Publishers, 1992), 45-46.

[42] Billy Hamilton and John L. Mikesell, “Sales Tax Policy During the Next Decade,” in Sales Taxation: Critical Issues in Tax Policy and Administration (Westport, CT: Praeger Publishers, 1992), 30.

[43] Patrick Fleenor and Andrew Chamberlain, “Tax Pyramiding: The Economic Consequences of Gross Receipts Taxes,” Tax Foundation, December 4, 2006,

[44] Nicole Kaeding, “Yes, Really. Measure 97 Would Raise Prices,” Tax Foundation, July 28, 2016,

[45] For more reading on gross receipts taxes, see

[46] Council on State Taxation and EY, “Total State and Local Business Taxes: State-by-State Estimates for Fiscal Year 2015,” Council on State Taxation, December 2016,

[47] Due and Mikesell, Sales Taxation, 1983, 89.

[48] Jessica Hathaway, “Tax Credits for Working Families: Earned Income Tax Credit (EITC),” National Council of State Legislatures (NCSL), April 5, 2017,

[49] Idaho Code, 63-3024A.

[50] Oklahoma Tax Commission, State of Oklahoma, “Tax Expenditure Report 2015-2016,” 18, The $50,000 income level also applies to those over the age of 65 or with a disability.

[51] Hamilton and Mikesell, “Sales Tax Policy During the Next Decade,” 34.

[52] Rebecca DeNale and Deanna Weidenhamer, “Quarterly Retail E-Commerce Sales 4th Quarter 2016,” U.S. Census Bureau News, February 17, 2017,

[53] Donald Bruce, William F. Fox, and LeAnn Luna, “State and Local Government Tax Revenue Losses from Electronic Commerce,” The University of Tennessee, April 13, 2009,

[54] Nicole Kaeding, Scott Drenkard, Jeremy Horpedahl, Joseph Bishop-Henchman, and Jared Walczak, “Arkansas: The Road Map to Tax Reform,” Tax Foundation, November 2016, 74-77,

[55] Chris Isidore, “Amazon to start collecting state sales taxes everywhere,”, March 29, 2017,

Source: Tax Policy – Sales Tax Base Broadening: Right-Sizing a State Sales Tax

Sales Tax Rates in Major Cities, Midyear 2017

Sales Tax Rates in Major Cities, Midyear 2017

Sales Tax Rates in Major Cities, Midyear 2017

Key Findings

  • There are roughly 10,000 sales tax jurisdictions in the United States, with widely varying rates.
  • Among major cities, Long Beach, California, and Chicago, Illinois, impose the highest combined state and local sales tax rates, at 10.25 percent. Four other cities—Birmingham and Montgomery, Alabama, and Memphis and Nashville, Tennessee, rank next highest with 10.0 percent combined rates.
  • Neither Anchorage, Alaska, nor Portland, Oregon, impose any state or local sales taxes. Honolulu, Hawaii, has a low rate of 4.5 percent and several other major cities, including Richmond, Virginia, keep overall rates modest.
  • A 1 percentage point increase in the Louisiana state sales tax, and ballot issues in California and Georgia, drove up rates in several large cities.
  • Research demonstrates a rise in cross-border shopping and other avoidance efforts as sales tax rates increase.

Sales taxes in the United States are levied not only by state governments but also by city, county, tribal, and special district governments. In many cases these local sales taxes can have a profound impact on the total rate that consumers pay.

Several private firms maintain databases of the sales tax rates in the roughly 10,000 local jurisdictions in the United States that levy them. Here, we list the combined state and local sales tax rates in major U.S. cities, defined as U.S. Census-designated incorporated places with a population over 200,000. This report complements our semiannual calculation of the average of all local sales taxes in each state.[1]

Highest and Lowest Sales Taxes in Major Cities

Last year, Chicago, Illinois, vaulted to the top of the list of cities imposing the highest combined state and local sales tax in the nation when a county tax increase brought the total rate to 10.25 percent,[2] a dubious distinction it now shares with Long Beach, California, which reached 10.25 percent on July 1, 2017, following the implementation of both city and county sales tax rate increases.[3] Four cities trail closely behind at 10 percent: Birmingham and Montgomery, Alabama, and Baton Rouge and New Orleans, Louisiana.

The two cities in Louisiana are relatively new inclusions at the very top, driven by a 1 percentage point increase in the Louisiana state sales tax effective April 1, 2016.[4] They are followed by Seattle and Tacoma, Washington, at 9.6 percent; Freemont and Oakland, California, and Memphis and Nashville, Tennessee, at 9.25 percent; and Glendale, Arizona, at 9.2 percent.

Portland, Oregon, and Anchorage, Alaska, have neither a state nor a local sales tax. Honolulu, Hawaii, has the third lowest sales tax among major cities with a rate of 4.5 percent. However, Hawaii’s overly broad sales tax makes this not strictly comparable with other states. Richmond, Virginia (5.3 percent), Madison, Wisconsin (5.5 percent), and Tulsa, Oklahoma (5.5 percent), also impose low combined state and local sales tax rates.

Sales Tax Rate Changes in Major Cities

This year’s expiration of the sales tax component of Proposition 30 (2012) reduced California’s mandatory state-collected local sales tax by 0.25 percent,[5] reducing overall rates for seventeen California cities on the list, though local rate increases in Los Angeles and Long Beach more than offset the statewide reduction in those jurisdictions.[6] Transportation referenda in the city of Atlanta and Fulton County, Georgia, yielded an 0.9 percentage point rate increase, implemented in two phases, in Atlanta.[7] Meanwhile, Jersey City and Newark, New Jersey, saw modest rate reductions under the first phase of a transportation funding package which increased the state’s gas tax, phases out the estate tax, and reduced the state sales tax rate from 7.0 to 6.875 percent, with a further reduction scheduled for next year.[8]

The Role of Competition in Sales Tax

Sales tax avoidance is most likely to occur in areas where there is a significant difference between two jurisdictions’ sales tax rates. Research indicates that consumers can and do leave high-tax areas to make major purchases in low-tax areas, such as from cities to suburbs.[9] For example, strong evidence exists that Chicago-area consumers make major purchases in surrounding suburbs or online to avoid Chicago’s high sales tax rates.[10] At the statewide level, businesses sometimes locate just outside the borders of high sales tax areas to avoid being subjected to their rates. Delaware actually uses its state border welcome sign to remind motorists that Delaware is the “Home of Tax-Free Shopping.”[11] State and local governments should be cautious about raising rates too high relative to their neighbors because doing so may lead to revenue losses despite the higher tax rate.

Sales Tax Bases: The Other Half of the Equation

This report ranks states and cities based on tax rates and does not account for differences in tax bases (the structure of sales taxes, defining what is taxable and nontaxable). States can vary greatly in this regard. For instance, most states exempt groceries from the sales tax, others tax groceries at a limited rate, and still others tax groceries at the same rate as all other products.[12] Some states exempt clothing or tax it at a reduced rate.[13] The taxation of services and business-to-business transactions also varies widely by state.[14]

Tax experts generally recommend that sales taxes apply to all final retail sales of goods and services but not intermediate business-to-business transactions in the production chain.[15] These recommendations would result in a tax system that is not only broad-based but also “right-sized,” applying once and only once to each product the market produces. Despite agreement in theory, the application of most state sales taxes is far from this ideal.[16]

Hawaii has the broadest sales tax in the United States, taxing many products multiple times and, by one estimate, ultimately taxing more than 100 percent of the state’s personal income. This base is far wider than the national median, where the sales tax base applies to 36.3 percent of personal income.[17]


Sales taxes are just one part of the overall tax structure and should be considered in context. For example, Washington State has high sales taxes but no income tax, whereas Oregon has no sales tax but high income taxes. While many factors influence business location and investment decisions, sales taxes are something within policymakers’ control that can have immediate impacts.

Table 1. State and Local Sales Tax Rates in Cities with Populations above 200,000, as of July 1, 2017
City State State Local Total Rank
(a) California and Virginia levy mandatory 1 percent statewide add-on sales taxes at the local level; these are included in their state sales tax rates. Northern Virginia and Hampton Roads have an additional 0.7 percent rate, which is treated here as a local tax.
(b) Most of Birmingham is located within Jefferson County and is subject to a 10 percent sales tax. However, part of the city lies in Shelby County and is subject to a total rate of 9 percent.
(c) Most of New Orleans is located within Orleans Parish and is subject to a 10 percent sales tax. However, part of the city lies in Jefferson Parish  and is subject to a total rate of 9.75 percent.
(d) Most of Atlanta is located in Fulton and Dekalb counties and is subject to an 8 percent sales tax. However, part of the city lies in Cobb County and is subject to a total rate of 7 percent.
(e) Most of Aurora is located within Adams County and is subject to an 8.5 percent sales tax. However, part of the city lies in Arapahoe County and is subject to a total rate of 8.0 percent.
(f) Most of Kansas City is located within Jackson County and is subject to a 8.35 percent sales tax. However, the city’s top rate is in Platte County, at 8.475 percent, while another part of the city lies in Clay County, where it is subject to a total rate of 8.1 percent.
(g) Most of Austin is located within Travis and Williamson counties and is subject to an 8.25 percent sales tax. However, part of the city lies in Hays County and is subject to a total rate of 7 percent.
(h) Most of Minneapolis is within Hennepin County and is subject to a 7.775 percent sales tax. However, part of the city lies in Anoka County and is subject to a total rate of 7.625 percent.
(i) Most of St. Paul is located within Ramsey, Washington, and Dakota Counties and is subject to a 7.625 percent sales tax. However, part of the city lies in Hennepin County and is subject to a total rate of 7.775 percent.
(j) The sales taxes in Hawaii and New Mexico have broad bases that include many services.
(k) Most of Omaha is located within Douglas County and is subject to a 7 percent sale tax. However, part of the city lies in Sarpy County and is subject to a total rate of 5.5 percent.
(l) Most of Cincinnati is located within Hamilton County and is subject to a 7.0 percent sales tax. However, part of the city lies in Claremont County and is subject to a total rate of 6.75 percent.
(m) Arlington is a county without any incorporated municipalities. However, we treat it as a city here because it is included in the Census Bureau’s annual list of incorporated places.
(n) In the table, “Honolulu” refers to the incorporated portion of the larger City and County of Honolulu.
Source: Sales Tax Clearinghouse; city ordinances; state revenue and auditing departments
Long Beach (a) California 7.250% 3.000% 10.250% 1
Chicago Illinois 6.250% 4.000% 10.250% 1
Birmingham (b) Alabama 4.000% 6.000% 10.000% 3
Montgomery Alabama 4.000% 6.000% 10.000% 3
Baton Rouge Louisiana 5.000% 5.000% 10.000% 3
New Orleans (c)  Louisiana 5.000% 5.000% 10.000% 3
Seattle Washington 6.500% 3.100% 9.600% 7
Tacoma Washington 6.500% 3.100% 9.600% 7
Fremont (a) California 7.250% 2.000% 9.250% 9
Los Angeles (a) California 7.250% 2.000% 9.250% 9
Oakland (a) California 7.250% 2.000% 9.250% 9
Memphis Tennessee 7.000% 2.250% 9.250% 9
Nashville-Davidson Tennessee 7.000% 2.250% 9.250% 9
Glendale Arizona 5.600% 3.600% 9.200% 14
Atlanta (d) Georgia 4.000% 4.900% 8.900% 15
New York New York 4.000% 4.875% 8.875% 16
Yonkers New York 4.000% 4.875% 8.875% 16
Glendale (a) California 7.250% 1.500% 8.750% 18
San Jose (a) California 7.250% 1.500% 8.750% 18
Stockton (a) California 7.250% 1.500% 8.750% 18
Buffalo New York 4.000% 4.750% 8.750% 18
Spokane Washington 6.500% 2.200% 8.700% 22
St. Louis Missouri 4.225% 4.454% 8.679% 23
Phoenix Arizona 5.600% 3.000% 8.600% 24
Tulsa Oklahoma 4.500% 4.017% 8.517% 25
San Francisco (a) California 7.250% 1.250% 8.500% 26
Aurora (e)  Colorado 2.900% 5.600% 8.500% 26
Oklahoma City Oklahoma 4.500% 3.875% 8.375% 28
Kansas City (f)  Missouri 4.225% 4.125% 8.350% 29
Sacramento (a) California 7.250% 1.000% 8.250% 30
Aurora Illinois 6.250% 2.000% 8.250% 30
Corpus Christi Texas 6.250% 2.000% 8.250% 30
Laredo Texas 6.250% 2.000% 8.250% 30
Lubbock Texas 6.250% 2.000% 8.250% 30
San Antonio Texas 6.250% 2.000% 8.250% 30
Colorado Springs Colorado 2.900% 5.350% 8.250% 36
Austin (g) Texas 6.250% 2.000% 8.250% 36
Dallas Texas 6.250% 2.000% 8.250% 36
El Paso Texas 6.250% 2.000% 8.250% 36
Fort Worth Texas 6.250% 2.000% 8.250% 36
Garland Texas 6.250% 2.000% 8.250% 36
Houston Texas 6.250% 2.000% 8.250% 36
Irving Texas 6.250% 2.000% 8.250% 36
Plano Texas 6.250% 2.000% 8.250% 36
Henderson Nevada 6.850% 1.300% 8.150% 45
Las Vegas Nevada 6.850% 1.300% 8.150% 45
North Las Vegas Nevada 6.850% 1.300% 8.150% 45
Tucson Arizona 5.600% 2.500% 8.100% 48
Mesa Arizona 5.600% 2.450% 8.050% 49
San Bernardino (a) California 7.250% 0.750% 8.000% 50
Rochester New York 4.000% 4.000% 8.000% 50
Cleveland Ohio 5.750% 2.250% 8.000% 50
Philadelphia Pennsylvania 6.000% 2.000% 8.000% 50
Arlington Texas 6.250% 1.750% 8.000% 50
Fresno (a) California 7.250% 0.725% 7.975% 55
Scottsdale Arizona 5.600% 2.350% 7.950% 56
Chandler Arizona 5.600% 2.200% 7.800% 57
Gilbert Arizona 5.600% 2.200% 7.800% 57
Minneapolis (h) Minnesota 6.875% 0.900% 7.775% 59
Anaheim (a) California 7.250% 0.500% 7.750% 60
Chula Vista (a) California 7.250% 0.500% 7.750% 60
Fontana (a) California 7.250% 0.500% 7.750% 60
Huntington Beach (a) California 7.250% 0.500% 7.750% 60
Irvine (a) California 7.250% 0.500% 7.750% 60
Moreno Valley (a) California 7.250% 0.500% 7.750% 60
Oxnard (a) California 7.250% 0.500% 7.750% 60
Riverside (a) California 7.250% 0.500% 7.750% 60
San Diego (a) California 7.250% 0.500% 7.750% 60
Santa Ana (a) California 7.250% 0.500% 7.750% 60
Reno Nevada 6.850% 0.875% 7.725% 70
Denver Colorado 2.900% 4.750% 7.650% 71
St. Paul (i) Minnesota 6.875% 0.750% 7.625% 72
Columbus Ohio 5.750% 1.750% 7.500% 73
Wichita Kansas 6.500% 1.000% 7.500% 74
Durham North Carolina 4.750% 2.750% 7.500% 74
Modesto (a) California 7.250% 0.125% 7.375% 76
Albuquerque (j) New Mexico 5.125% 2.188% 7.313% 77
Lincoln Nebraska 5.500% 1.750% 7.250% 78
Charlotte North Carolina 4.750% 2.500% 7.250% 78
Toledo Ohio 5.750% 1.500% 7.250% 78
Bakersfield (a) California 7.250% 0.000% 7.250% 81
Fort Wayne Indiana 7.000% 0.000% 7.000% 82
Indianapolis Indiana 7.000% 0.000% 7.000% 82
Omaha (k) Nebraska 5.500% 1.500% 7.000% 82
Fayetteville North Carolina 4.750% 2.250% 7.000% 82
Cincinnati (l) Ohio 5.750% 1.250% 7.000% 82
Hialeah Florida 6.000% 1.000% 7.000% 87
Jacksonville Florida 6.000% 1.000% 7.000% 87
Miami Florida 6.000% 1.000% 7.000% 87
St. Petersburg Florida 6.000% 1.000% 7.000% 87
Tampa Florida 6.000% 1.000% 7.000% 87
Pittsburgh Pennsylvania 6.000% 1.000% 7.000% 87
Jersey City New Jersey 6.875% 0.000% 6.875% 93
Newark New Jersey 6.875% 0.000% 6.875% 93
Greensboro North Carolina 4.750% 2.000% 6.750% 95
Raleigh North Carolina 4.750% 2.000% 6.750% 95
Winston-Salem North Carolina 4.750% 2.000% 6.750% 95
Orlando Florida 6.000% 0.500% 6.500% 98
Boston Massachusetts 6.250% 0.000% 6.250% 99
Chesapeake (a) Virginia 5.300% 0.700% 6.000% 100
Norfolk (a) Virginia 5.300% 0.700% 6.000% 100
Virginia Beach (a) Virginia 5.300% 0.700% 6.000% 100
Boise City Idaho 6.000% 0.000% 6.000% 103
Des Moines Iowa 6.000% 0.000% 6.000% 103
Lexington-Fayette Kentucky 6.000% 0.000% 6.000% 103
Louisville Kentucky 6.000% 0.000% 6.000% 103
Baltimore Maryland 6.000% 0.000% 6.000% 103
Detroit Michigan 6.000% 0.000% 6.000% 103
Arlington (a, m) Virginia 5.300% 0.700% 6.000% 103
Washington District of Columbia 5.750% 0.000% 5.750% 110
Milwaukee Wisconsin 5.000% 0.600% 5.600% 111
Madison Wisconsin 5.000% 0.500% 5.500% 112
Richmond (a) Virginia 5.300% 0.000% 5.300% 113
Honolulu (j, n) Hawaii 4.000% 0.500% 4.500% 114
Anchorage Alaska 0.000% 0.000% 0.000% 115
Portland Oregon 0.000% 0.000% 0.000% 115

[1] Jared Walczak and Scott Drenkard, “State and Local Sales Tax Rates, Midyear 2017,” Tax Foundation Fiscal Fact No. 553, July 5, 2017,

[2] Jared Walczak, “Chicago Adopts Highest Sales Tax Among Major Cities,” Tax Foundation Tax Policy Blog, July 16, 2015,

[3] California Board of Equalization, “New Sales and Use Tax Rate for Los Angeles County Operative July 1, 2017,”

[4] Tyler Bridges, “Louisiana Sales Tax System Now Ranks Worse Than Last Place,” The Advocate, Mar. 31, 2016,

[5] Joseph Henchman, “California Prop 55: Extending Higher State Income Taxes for Education and Health,” Tax Foundation Tax Policy Blog, Oct. 24, 2016,

[6] California Board of Equalization.

[7] Georgia Department of Revenue, “New Atlanta and Fulton County Local Sales Taxes,” Policy Bulletin SUT-2017-01, Jan. 19, 2017,

[8] Jared Walczak, “New Jersey’s Gas Tax Increase is Just One Part of the Story,” Tax Foundation Tax Policy Blog, Oct. 24, 2016,

[9] Mehmet Serkan Tosun and Mark Skidmore, “Cross-Border Shopping and the Sales Tax: A Reexamination of Food Purchases in West Virginia” (Research Paper), Sept., 2005, See also Randolph T. Beard, Paula A. Gant, and Richard P. Saba, “Border-Crossing Sales, Tax Avoidance, and State Tax Policies: An Application to Alcohol,” Southern Economic Journal 64, no. 1, (1997): 293-306.

[10] Susan Chandler, “The Sales Tax Sidestep,” Chicago Tribune, July 20, 2008,

[11] Len Lazarick, “Raise taxes, and they’ll move, constituents tell one delegate,”, Aug. 3, 2011,

[12] For a list, see Jared Walczak, Scott Drenkard, and Joseph Henchman, 2017 State Business Tax Climate Index, Tax Foundation,

[13] Liz Malm and Richard Borean, “How Does Your State Sales Tax See That Blue and Black (or White and Gold) Dress?” Tax Foundation, Feb. 27, 2015,

[14] For a representative list, see Jared Walczak, Scott Drenkard, and Joseph Henchman, 2017 State Business Tax Climate Index.

[15] Justin Ross, “A Primer on State and Local Tax Policy: Trade-Offs Among Tax Instruments,” Mercatus Center at George Mason University, Feb. 25, 2014,

[16] For a representative list, see Jared Walczak, Scott Drenkard, and Joseph Henchman, 2017 State Business Tax Climate Index.

[17] John Mikesell, “State Retail Taxes in 2012: The Recovery Continues,” State Tax Notes, June 2013, 1001-1006.

Source: Tax Policy – Sales Tax Rates in Major Cities, Midyear 2017

Pin It on Pinterest