State sales taxes continue to rise

If you flip on the news or thumb through a newspaper these days, it's no secret that the federal government is facing a mounting deficit. Spending has outstripped revenues for years now, and the current recession has cut deeply into the biggest source of income: taxpayers.

What hasn't been touted as much is how the same financial crisis is affecting states. As the federal government cuts back on funding state projects (although many, such as those related to education and homeland security, are mandated by the feds), states are scrambling to make up the difference.

Unfortunately, like the federal government, states are facing a similar dilemma: too much spending compared to revenue. The result? In the current fiscal year, at least 41 states are facing budget shortfalls in the current fiscal year. Even worse? Unlike the federal government, many state governments have laws on the books requiring that states operate in the black. Those "shutdowns" you keep hearing about? It's often because the state isn't allowed to spend money it doesn't have (apparently, a novel concept in government).

As states scramble to plug holes in the budget, many are focusing on a quick fix: increase the sales tax. Forty-five states currently have a state sales tax, with Alaska, Delaware, Montana, New Hampshire, and Oregon being the exceptions.

Last year, seven states (and the District of Columbia) increased their sales tax rate. Those states included the notoriously high-tax state of California, as well as the state of North Carolina, which felt so strongly about increasing the sales tax that it did it twice. The sheer number of increases is a record-breaker, according to Vertex Inc., a Berwyn, Pennsylvania company that has been tracking sales tax data in 1982. You can read its entire report here.

As of the end of last year, sitting atop the pack with respect to overall state sales tax rates is Tennessee, followed by California, Washington, Oklahoma and Louisiana. Of those states imposing a sales tax, Maine, Wisconsin, Wyoming, and South Dakota round out the bottom.

If you combine state and local tax rates, the city of Chicago leads the pack with a whopping 10.25% rate. Los Angeles isn't far behind with a 9.75% rate. Memphis taxpayers shell out 9.25% in sales tax. New York City checks in at 8.875%, while its neighboring Philadelphia recently boosted its rate to 8.0%, 2% above the rest of the state.

Of course, it's not just about the rate of tax -- it's also about what goods and services are taxed. Pennsylvania recently introduced legislation to lower the sales tax rate from 6% to 4%. Sounds good, right? Except that in return, the plan is to broaden the sales tax base, adding items like coal, candy and professional services such as legal services, accounting and engineering.

Expect to see similar maneuvering across the country as states grapple with how best to impose -- and in many cases "sneak in" -- additional taxes on already overburdened taxpayers. Sales tax increases are easy to implement and not generally barred by statute (many states prohibit localities from imposition or changes in personal income taxes).

Even better for legislators? Most sales tax increases are considered "invisible" by taxpayers, since there's no line item on a tax return emphasizing the rate. Since you pay at the register, a penny or two per dollar might, legislators hope, go unnoticed when you make it to the polls.

What do you think? Do you notice your state and local sales taxes when you shop? Tell us what you think:

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