Five Sales Tax Trends to Track in 2023

Legislative Trends: 2022 U.S. Sales Tax

While the total number of U.S. sales tax rate changes declined in 2022, that figure is a bit deceptive. As I reported in my highlights of Vertex’s 2022 Sales Tax Rates and Rules Report, rate changes at the county level posted a three-year high in 2022. District tax rate increases outnumbered decreases by a ratio of three to one. And city rate changes remained near all-time highs, matching their most recent five-year average.
 
Many of the numbers in our report require closer, more nuanced considerations. So, too, do the following trends that we expect to shape sales tax rates and rules changes in 2023 and beyond:

  1. Tax policy, economic conditions and fiscal conditions remain intertwined: Although inflation tends to be headed downward, it remains high and unlikely to return to pre-2022 levels any time soon. Many economists also assign a high probability to a U.S. recession, even a moderate one, occurring this year. Those conditions combined with high interest rates help explain why Moody’s Analytics and the National Association of State Budget Officers project that annual state tax revenue growth will decrease substantially in 2023. As high debt-servicing costs sustain or increase, state and sub-state jurisdictions will need to pull other levers to satisfy revenue needs amid higher prices and labor costs.
  2. Income tax and property tax revenue declines also drive sales tax changes: State legislature activity and ballot initiatives in 2022 indicated a growing desire to: 1) limit income tax rate increases (and, in some cases, lower income tax rates); and 2) reduce property taxes. Last year, for example, 85% of Texas voters approved a measure to increase the state’s homestead exemption on school district-targeted property taxes from $25,000 to $40,00. This reduces the amount of property tax the state will collect moving forward. While property taxes have soared in cities and states that enjoyed the recent real estate boom, home values in many markets have levelled off or declined since mid-2022. This will result in lower property tax receipts in 2023 and beyond. Since property taxes, income taxes, and sale and use taxes represent the top three funding sources for state and local governments, it’s a safe bet that more sales tax rate changes loom. 
  3. If a recession arrives, mind the lag: If and when a recession (and/or a more pronounced decline in real estate values) materializes, tax leaders should be aware of the lag between economic conditions and city fiscal conditions. This delay can last 18 months to several years, according to the National League of Cities (NLC), which has examined the differences in year-to-year changes in city revenues and expenditures following recessions that have occurred since 1986. The NLC research “suggests that it takes 18-24 months for the effects of changing economic conditions to become evident in city budgets.”
  4. The shrinking sales tax base may spark new legislative approaches: As I’ve mentioned before, the sales tax base has shrunk significantly in the past two decades. State sales tax bases “are narrowing,” according to the Tax Foundation, “forcing states to either raise rates or shift to other sources of tax revenue in response to this continuous erosion.” These sources already include a growing number of digital taxes, and could soon extend to professional services, such as accounting and other business-to-business offerings. 
  5. Post-Wayfair sales taxes are attracting federal attention: Two months ago, the General Accounting Office (GAO) encouraged Congress to work with states “to establish nationwide parameters for state taxation of remote sales” for several reasons, including the headaches remote sellers experience while trying to comply with “a complex patchwork of requirements… governing the taxation of remote sales.” In June of last year, the U.S. Senate Finance committee hosted a committee hearing to examine the impact of the South Dakota v. Wayfair decision on small business and remote sellers.

It's also a safe bet that states and sub-state jurisdictions will respond with more rates and rules changes given the economic challenges ahead.
 

Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.

Blog Author

Michael J. Bernard, Chief Tax Officer – Transaction Tax at Vertex Inc. Vertex's Chief Tax Office (CTO) provides insight regarding the impact of tax regulations, policy, enforcement, and emerging technology trends on global tax department operations.

Michael J. Bernard

Vice President of Tax Content and Chief Tax Officer

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Michael Bernard is the Chief Tax Officer of Transaction Tax. In his role, he provides insight and thought leadership around tax department operations, U.S. indirect tax, tax risk management, and tax policy, as well as emerging tax trends. He is an executive-level tax attorney with a diverse portfolio of experience in corporate tax, administration, and finance, including a substantive knowledge of U.S. and international tax laws.

Prior to joining Vertex, Michael was in various tax leadership roles at Microsoft Corporation for 28 years, the most recent being Senior Director – Tax Counsel. Michael led teams in the following functional areas: direct and indirect tax controversy, sales and use, business license, property, tax IT, SOX, and telecommunications. He also co-led a corporate taxpayer advocacy group with the Washington Department of Revenue and was a Director on the Board of the Washington Research Council. Michael has also testified before administrative and lawmakers at both the federal and state level.

Michael earned both a J.D. and a Bachelor of Science in Business Administration from Creighton University. He is a part-time lecturer of Law in the LLM program at the University of Washington School of Law. Michael also served on the board of directors, executive committee, and chaired committees for The Tax Executives Institute (TEI) for nearly 25 years.

End-of-Year Sales Tax Rates and Rules Report for 2022

Dive into the standard sales tax rate changes, as well as notable trends and statistics, that stood out in the Vertex End-of-Year Sales Tax Rates and Rules Report for 2022.

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