As the pandemic continues to create instability at all levels of global governments, jurisdictions are feeling the pressure to mitigate the financial impact to their budgets and economy. One way they are doing this is through raising existing sales tax rates, as well as creating new ones, particularly at local levels.
This year, sales tax rates at the city and district levels are on pace to reach their highest number of changes in more than a decade. Through September, there have been more than 400 sales tax rate changes at these levels.
Although the cities and districts have been active, all remain quiet at the state level. As of Sept. 30, there were zero state sales tax rate changes. Yet, we anticipate there will be a wave or successive waves of sales tax changes in the coming months and even years, especially as states begin to address their large budget deficits, some of the largest ever. Although the precise nature and magnitude of these changes remain uncertain for the time being, they will most likely be used for one of two things: a way to stimulate the economy or to cover budget deficits. Jurisdictions could increase sales tax as a "pay for" to generate revenue given the historic decline in tax revenues, as well as offset debt and cover the high costs of COVID-19-response activities.