This is one more set of facts showing that New Jersey is not a high tax state as assumed by many:
- New Jersey’s sales tax is the state’s second largest revenue source, raising over $8 billion a year.
- New Jersey is 32nd nationwide for sales tax collections per capita.
- New Jersey’s 7 percent state sales tax rate is 31st in the nation. New Jersey’s local governments are not allowed by law to levy local sales taxes.
- New Jersey is 42nd in sales tax collections as a percent of personal income.
COLLECTION AND USES
While income tax revenues are dedicated to property tax relief, most of the $8 billion collected in sales taxes are available for general state purposes with three exceptions-all written into the state constitution. These voter-approved amendments dedicate approximately $1 billion of the $8 billon collected to open space preservation, transportation and property tax relief. The 1998 and 2000 amendments annually dedicate $98 million for open space preservation and $200 million for the state’s transportation system from existing tax revenues. In 2006, New Jersey raised its sales tax rate to 7 percent from 6 percent and now requires that approximately $650 million (1/2 of the 1 percent increase) in sales tax revenues be used for property tax relief.
SALES TAX COLLECTIONS PER CAPITA
The average New Jersey resident each year buys approximately $10,800 in goods and services that are subject to the sales tax and pays just over $750 in sales taxes on those items. While some might view that as a lot of money, the residents of 31 states pay more-either because the state where they live allows local governments to levy their own sales taxes, their state has a higher tax rate or it taxes a broader range of goods and services.
TAX RATES-STATE AND LOCAL
Forty six states (all but Alaska, Delaware, Montana and Oregon) and the District of Columbia have state-level sales taxes with rates ranging from 2.9 percent in Colorado to 7.25 percent in California. Thirty eight of those states (not including New Jersey) allow local governments to levy local sales taxes at rates ranging from .125 percent in New Mexico to 8 percent in Alabama. Total state and local sales tax rates range from 4.5 percent in Hawaii to 12 percent in Alabama. According to the Sales Tax Institute, 31 states have combined sales tax rates greater than New Jersey’s 7 percent rate; 12 have tax rates lower than New Jersey’s; and 2 are equal to New Jersey’s. Most of the states with lower tax rates do not allow local governments to collect their own sales taxes.
LOCAL SALES TAXES
In the 38 states where local sales taxes are allowed, state and local governments collect nearly $300 billion in sales taxes – approximately 80 percent of that is collected by states; 20 percent by local governments. As a share of total sales taxes collected in the state, New York, Louisiana and Colorado collect more than 50 percent of the sales tax revenue from local sales taxes. In 2007, California local sales taxes brought in over $9 billion; New York collected just over $11 billion in local sales taxes.
New York City and all 57 counties in New York State levy local sales taxes. The majority of them have some form of tax sharing arrangement with other local governments (including school districts and the Metropolitan Transportation Authority) within their boundaries. Sales tax revenues are a significant component of revenues for local governments in New York State. In 2004 they were 8.6 percent of local revenues. In part, this is how New York State reduces property taxes paid by homeowners.
EXPANDING THE BASE – TAXING SERVICES
Knowing the sales tax rate is not enough to compare the amount of tax people pay from place to place because wide variations exist in what good and services states tax. For example, New Jersey does not tax clothes (42 states do) or food purchased in a grocery store (20 states do). A state that taxes a broader range of goods and services can have a lower tax rate and still collect the same amount of revenue.
In 2006, New Jersey Policy Perspective analyzed possible expansions to the sales tax base including many services not taxed by most states. It found that if the state chose to enact every base-broadening suggestion, New Jersey would expand its sales tax base by 85 percent, and, by doing so, could raise an additional $5.6 billion. Alternatively, by broadening the tax base it could lower the tax rate from the 6 percent rate at that time to 3.2 percent and still collect the same amount of revenue. The analysis includes some unlikely scenarios-for instance it is unlikely that New Jersey will ever consider taxing food sold in grocery stores. It also includes things the state should consider-such as imposing a sales tax on motor fuel sales which would raise approximately $900 million. The point of the analysis is to show the impact of change and begin a discussion.
The sales tax is an important source of revenue to all states and many local governments in the U.S. For more information about it, please see NJPP’s 2006 report You’re 40; Now Get to Work, Making the State Sales Tax Pull its Weight.