Sales Tax Avoidance
Sales tax avoidance is especially common in areas where the rates of different jurisdictions are significantly different. Consumers can and do leave high-tax areas to make significant purchases in low-tax areas, such as from cities to suburbs, according to research. Consumers in the Chicago area, for example, are said to make significant purchases in the suburbs or online to avoid the city’s 10.25 percent sales tax.
Businesses may locate just beyond the borders of high-sales-tax jurisdictions to avoid being subjected to their rates on a statewide level. In New England, despite the fact that I-91 travels up the Vermont side of the Connecticut River, many more retail establishments chose to locate on the New Hampshire side in order to escape sales taxes. According to one study, per capita sales in sales tax-free New Hampshire have increased since the late 1950s, while per capita sales in Vermont’s border counties have remained flat. Delaware used to advertise on its highway welcome sign that it was the “Home of Tax-Free Shopping.”
State and municipal governments should be wary of raising rates too high in comparison to their neighbors because this will result in lower revenue or, in extreme circumstances, revenue losses despite the higher tax rate.