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1 Andrey Yushkov, Local Income vs. Sales Taxes: Which Is the Better Source of Local Revenue 1 (2024)

handle is hein.taxfoundation/incomvssale0001 and id is 1 raw text is: *%TAX FOUNDATION Local Income vs. Sales Taxes: Which Is the Better Source of Local Revenue Andrey Yushkov Senior Policy Analyst June 2024 Key Findings • Local sales and income taxes generate 13 percent and 5 percent of local tax revenue, respectively, making them the two main supplements to property taxes. • Local income taxes are authorized in 16 states and the District of Columbia. In Kentucky, Maryland, and Ohio, they account for more than 20 percent of local tax collections. Local sales taxes are im- posed by 36 states and the District of Columbia. They constitute more than 40 percent of local tax collections in Alabama, Arkansas, Louisiana, and New Mexico. Localities in only seven states, mostly in New England, do not impose either local income taxes or local sales taxes. • In many states, local income and sales taxes lack uniformity, making the tax system nonneutral and potentially incentivizing residents to make costly or economically inefficient relocation or cross-border shopping decisions. Furthermore, local tax rates for both taxes tend to increase over time, contributing to the overall tax burden in their respective states and benefitting a small subset of wealthy jurisdic- tions. • This paper analyzes the current local tax landscape, presents several case studies and recent state-specific trends, and provides several ideas for tax design that states and localities may use to improve their tax competitiveness. • While sales taxes may generally be less distortive and volatile than income taxes, state and local policymakers need to consider their institutional environment and the tax climates in their neighboring states when choosing between these two taxes. The Tax Foundation is the world's leading nonpartisan tax policy 501 (c)(3) nonprofit. For over 80 years, our mission has remained the same: to improve lives through tax policies that lead to greater economic growth and opportunity. TAX FOUNDATION 1325 G STREET, NW, SUITE 950, WASHINGTON, DC 20005 202-464-6200 1 laxfoundation.org

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