On February 20, City Council will consider an increase to the Home Rule Sales Tax. It would raise the sales tax rate from the current combined rate of 7.5% to 7.75%. You might ask yourself is that really that big of deal? Well, yes it is.
Let’s tumble down the rabbit hole a bit.
Research published in the National Tax Journal by Walsh and Jones outlines a concept known as the border tax effect. That theory states that customers will travel to jurisdictions with lower tax rates to pay a lower price.
The Walsh and Jones paper studied the effect on a tax decrease and later increase in West Virginia and concluded that each one percent decrease in the tax rate increased purchases by 5.9% in that jurisdiction. They go on to state that “sales tax differentials are an effective incentive for consumers to cross state borders to take advantage of lower after tax prices.”
Other researchers show different ranges. One percentage of sales tax increase leads to a 3.73% decrease in William Fox’s article published in the National Tax Journal. In contrast, Ronald Fisher argues that previous models underestimate the border tax effect and that the effect should be calculated somewhere between one and ten percent.
On the other side, Kimberly Key and Lisa Scribner argue that the type of sales method affects the border effect significantly. While, Tosun and Skidmore confirm the border tax effect but argue that the change in behavior is on the lower end of the range provided by Fisher.
William Fox sums up the research well in 2002 when he writes:
A general conclusion of the research is a tendency for the location of some purchases to be altered to evade the sales tax. The result is lost tax revenues and reductions in economic activity in states with higher sales taxes. Future research is expected to uncover a rapidly growing pattern of tax evasion because widespread access to the Internet and mail order sales allow a dramatic expansion in the ability to purchase remotely and evade sales taxes.
So, there’s no doubt that customers will shop on price and that tax is included in that analysis. Does it influence every customer’s behavior? Clearly it does not, but if Naperville loses 1%, 2.5%, or even 5% of our retail sales because customers will choose to shop in other jurisdictions then we are not reaching our economic potential as a community.
I’ve heard it argued that the home rule sales tax is an effective way to raise revenue for the city because a significant percentage of out of town shoppers pay the tax. Well, as I outlined above that’s precisely the point.
We want to encourage shoppers to visit Naperville and shop in our stores and the border tax effect could encourage them to do just that. Without the home rule sales tax, Naperville could have a sales tax rate of 7.0%. In comparison to Bolingbrook’s combined rate of 8.5% or Aurora’s sales tax rate of 8.25% we could be positioned well to benefit from the border tax effect. Instead, we are eroding our competitive advantage.
Naperville has huge advantages, but it is our firm belief that added price pressure will negatively affect our opportunity for growth and will add to the burdens that retailers face. Our stores have been extremely effective in combating the tremendous challenges that retailers face across the country, but increasing pressure from state and local taxes make that struggle much more difficult.