Disparities Among Cities’ Sales Tax Revenues

Under what is known as the situs rule, a 1 percent locally levied sales tax is collected by the state but returned to the jurisdiction where the sale occurred. Thus, the situs rule gives cities an incentive to promote the location of retail businesses within their boundaries—an incentive that does not exist for residential or industrial development. Although sales taxes are a modest share of total city revenues, cities regard them highly because they represent a major share of their discretionary income—most of the other revenues they receive are earmarked or restricted for specific uses. Moreover, many local policymakers believe that the income they receive from sales taxes has the potential to grow significantly during good economic times—if they encourage retail development.