Needing new sources of revenue, local governments across the country are raising sales tax rates or introducing new taxes, Accounting Today reported, citing a new study by sales tax solution provider Vertex.

The study reports on increases in both local and new tax rates in cities across the country, indicating a critical need for revenue at the municipal level. 

During the first half of calendar year 2024, 12 times as many cities increased their sales tax rates compared to the number that decreased theirs, Michael Bernard, chief tax officer at Vertex, told Accounting Today. Specifically, 147 cities raised their sales tax, and 12 decreased theirs, the Vertex study revealed. "And the number of districts is near a 10-year high," Bernard said. Police, fire and sewage districts are separate entities from cities. 

There are several  of reasons for this rise in rates, Bernard said. "First, issuing debt continues to be subpar," he said. "Locals just don't want to do it, because administratively it's a hassle. They [also] need more funding just to deal with inflation, which has run 15 percent to 30 percent across the board."

Another reason is the dwindling amount of funds available under the American Rescue Plan Act (ARPA), the largest amount of direct federal aid ever for local governments. "The funds were allocated to cities and counties, but will be paid out by the end of the year,” he explained, so cities and counties “will need to increase the sales tax to make up for it."

Bernard also pointed out that ability to raise the sales tax is administratively efficient: "There is normally no debate—they just pass it at a council meeting, and collections are normally done by the state auditor. ARPA funds will not be paid starting in 2025, and administratively it's easy to pass and increase, so locals can rely on it."

The sales tax is the most resilient source of funding compared to property and income taxes, he observed. 

Bernard also noted that states are increasingly implementing various fees, including airport, environmental, special district and retail delivery fees. "Two years ago, Vertex solutions supported roughly 400 fee impositions; today, that number is approximately 1,400."

Puerto Rico currently has the highest state sales tax rate at 10.5 percent, the report found. Indiana, Mississippi, Rhode Island, and Tennessee have the second-highest state sales tax rates at 7 percent. The study also found that, since 2014, there have been 2,308 new sales and use taxes, an average 231 per year, and there have been 3,788 sales and use tax changes, an average of 379 per year.

"On the global front, while most nations are refraining from increasing [value-added tax] rates to avoid anti-competitive effects and inflationary pressures, VAT remains a crucial funding source for governments,” said Bernard. “Additionally, the EU is expected to see a rise in environmental taxes, particularly carbon-related fees. These trends underscore the evolving nature of indirect taxation globally with a focus on real and near-time reporting,"