State Sales Tax Breadth and Reliance, FY 2021

Key Findings

• Gross sales taxes account for 29.52 p.c of state tax income, however most gross sales taxes are imposed on slender—and still-narrowing—bases, with common gross sales tax breadth of solely 29.71 p.c and a median of 35.72 p.c.
• Gross sales tax bases vary from 19.32 p.c of non-public earnings in Massachusetts to 93.89 p.c in Hawaii; the Massachusetts base is extraordinarily slender, whereas the Hawaii base options important tax pyramiding.
• Inside states with a gross sales tax, the imply taxpayer value of gross sales taxes is $1,131, or about $199 per proportion level on the tax charge.
• A great gross sales tax is imposed on all closing consumption, each items and providers, however excludes intermediate transactions to keep away from tax pyramiding.
• Gross sales tax breadth has declined from a imply of 98 p.c in 2000 to the present 29.52 p.c, reflecting continued erosion that has largely been offset by a rise within the imply state charge from 5.16 to six.00 p.c over the interval.
• The pandemic has yielded short-term fluctuations as the quantity and composition of shopper expenditures has modified, although long-term gross sales tax developments stay extremely seen within the knowledge.

Introduction

Gross sales taxes account for 29.5 p.c of all state tax income, second solely to particular person earnings taxes (40 p.c) of their contribution to state receipts. Reliance on gross sales taxes, nevertheless, varies dramatically, from 13.4 p.c within the District of Columbia to 65.4 p.c in South Dakota. State reliance on gross sales tax relies on its mixture of different taxes (South Dakota, as an example, forgoes earnings taxes, whereas the District of Columbia has high-rate earnings taxes); its gross sales tax charge; and, importantly, the breadth of its gross sales tax base.

The narrowest base, in California, is simply 19 p.c of non-public earnings, whereas the broadest base, in Hawaii, is nearly 5 instances that at 94 p.c of non-public earnings. (Hawaii’s gross sales tax base has traditionally exceeded 100% of non-public earnings however took a success because the island’s financial profile modified in the course of the pandemic.) The best gross sales tax base consists of all closing consumption, each items and providers, whereas exempting intermediate items to keep away from tax pyramiding, the place the tax is imposed a number of instances on the identical closing product. The California base is woefully slender, riddled with exemptions and excluding huge swaths of non-public consumption. Hawaii’s base, in contrast, whereas together with sure economically inefficient inclusions, has components of gross receipts taxation and often double-taxes transactions. (It additionally advantages considerably from spending by vacationers.) Each states miss the mark—in reverse instructions.

Consumption taxes are among the many extra economically environment friendly types of taxation and are a serious part of tax techniques internationally. Nonetheless, consumption taxes play a a lot smaller position in america than they do in most different extremely developed international locations, which frequently impose value-added taxes (VATs) on the nationwide degree. In reality, the U.S. is the one nation within the Organisation for Financial Co-operation and Growth (OECD) which doesn’t levy a VAT, and general American reliance (in any respect ranges of presidency) on consumption taxes is scarcely greater than one-third the OECD common.[1] Whereas the federal authorities does impose excise taxes on sure items and providers, like motor gasoline, tobacco, alcohol, airfare, and sure well being expenditures, most consumption tax income in america is generated on the state and native ranges—primarily by way of retail gross sales taxes.

Regardless of the significance of gross sales taxes to state coffers, and however the financial arguments for reliance on a broad-based, low-rate gross sales tax regime (for which the case is made under), state gross sales tax bases are narrowing, forcing states to both increase charges or shift to different sources of tax income in response to this steady erosion. These developments will proceed till states undertake significant gross sales tax modernization.[2]

Standardized Collections and Burdens

In fiscal yr 2021, state retail gross sales taxes yielded $375.3 billion in income and accounted for 29.52 p.c of state tax collections at a tax value of $1,131 per particular person. 5 states—Alaska, Delaware, Montana, New Hampshire, and Oregon—forgo a state-level gross sales tax. Among the many 45 states and the District of Columbia which levy state-level gross sales taxes, reliance is 30.26 p.c, and the per capita burden is $1,160, with a weighted common state gross sales tax charge of 6.00 p.c (excluding native gross sales taxes).

All tax knowledge for FY 2021 are considerably anomalous because of the pandemic. Gross sales tax collections rose as disposable earnings elevated and shopper expenditures have been channeled into extra purchases that are typically included in gross sales tax bases. This helped scale back the measured erosion of gross sales tax bases with out indicating any underlying change in coverage. Sure states noticed important swings because the composition of consumption modified, Hawaii being a notable—and sure short-term—instance. Gross sales tax reliance, nevertheless, contracted on the identical time that gross sales tax receipts elevated, since a mixture of federal pandemic responses and a booming inventory market triggered earnings tax receipts to soar greater nonetheless.

For functions of those calculations, states’ reported gross sales tax collections are adjusted to replicate the alternative ways states report their gross sales tax revenues to the U.S. Census Bureau. In most states, as an example, the sale of an car—a big-ticket merchandise that generates substantial gross sales tax income—is topic to state gross sales tax (generally with a greenback cap) and the ensuing income is reported as gross sales tax income. In 10 states, nevertheless, the tax on vehicles is imposed on the identical charge as the overall gross sales tax, and revenues are deposited into the overall fund, however the state studies this income as selective somewhat than common gross sales tax income. Because the tax therapy is functionally equivalent whatever the title or reporting requirements utilized, we alter to “normalize” the therapy. Equally, some state-collected shares of native gross sales taxes are included in Census knowledge, together with revenues which might be correctly attributable to separate excise or gross receipts taxes. We account for these and different disparities in income reporting.[3]

Accordingly, the adjusted retail gross sales tax figures used right here differ from these reported by the U.S. Census Bureau, that are often cited, together with by the Tax Basis, in different contexts. In these changes, and in our broader methodology and strategy, we proceed the work of the late Professor John Mikesell, the previous Chancellor’s Professor of Public and Environmental Affairs Emeritus at Indiana College, who developed this system and maintained these datasets for a few years.[4]

Desk 1 presents knowledge on complete state tax revenues, adjusted gross sales tax revenues, per capita gross sales tax burdens general and per proportion level of the state gross sales tax charge, and gross sales tax revenues as a proportion of non-public earnings. Notably, states which generate low gross sales tax income per proportion of the speed, indicative of a narrower gross sales tax base (see Desk 2), have a tendency to not make up the distinction by way of greater charges, although charges are inversely correlated with each per capita collections per proportion of charge and gross sales tax breadth, with coefficients of -0.21 and -0.23 respectively. These correlations are smaller than in prior years, presumably a brief artifact of modified spending patterns in the course of the pandemic.

Gross sales Tax Breadth and Reliance

Public finance students and tax coverage researchers have their justifiable share of disagreements on taxation, however the gross sales tax is an space of unusual consensus. Many years in the past, scholar John Due wrote that “gross sales tax construction ought to produce a uniform distribution in consumption, needs to be impartial concerning strategies of manufacturing and distribution, and needs to be collected at an affordable value.”[5] One other main tax scholar, Charles McLure, recognized the perfect gross sales tax as a destination-based tax on all closing consumption (however solely closing consumption).[6] These requirements are broadly accepted, as are a number of associated precepts and observations:

1. A great gross sales tax is imposed on all closing consumption, each items and providers;
2. A great gross sales tax exempts all intermediate transactions (enterprise inputs) to keep away from tax pyramiding;
3. Gross sales taxes needs to be destination-based, that means that tax is owed within the state and jurisdiction the place the nice or service is consumed;
4. The gross sales tax is extra economically environment friendly than many competing types of taxation, together with the earnings tax, as a result of it solely falls on current consumption, not saving or funding;
5. As a result of lower-income people have decrease financial savings charges and devour a larger share of their earnings, the gross sales tax could be regressive, although broadening the bottom to incorporate extra shopper providers (way more closely consumed by higher-income people) represents a progressive change;
6. The gross sales tax scales nicely with potential to pay, as a result of it grows with consumption and is subsequently extra discretionary than many different types of taxation; and
7. Consumption is a extra secure tax base than earnings, although the failure to tax most shopper providers is resulting in a gradual erosion of gross sales tax revenues as providers turn into an ever-larger share of consumption.

Taxes ought to apply to all closing consumption in service of financial neutrality, the concept taxes shouldn’t intrude with financial decision-making any greater than is strictly crucial, nor ought to they choose winners and losers. It’s not the position of the tax code to favor piano classes over baseball bats or e-books over hardcovers. It makes little sense to tax the acquisition of a garden mower however not tax the acquisition of garden care providers that obviate the necessity to personal a mower.

The gross sales tax also needs to be broad-based in service of tax fairness.[7] Gross sales taxes have two potential sources of regressivity: one, the propensity of lower-income people to devour a larger share of their earnings, and two, a scope of taxable consumption that’s extra more likely to fall on the kinds of transactions which dominate the consumption of lower- and middle-income people.

Policymakers usually exempt or decrease charges on sure lessons of consumption as a progressive reform. Utah’s decreased charge on groceries is one such instance—although there’s motive to imagine it might not be terribly efficient. Ready meals are taxed at the usual charge and many of the progressivity of taxing unprepared meals is addressed by the exemption for SNAP (meals stamps) and WIC purchases, whereas the exemption is loved by high-income earners as nicely—who usually spend significantly extra on groceries.

In reality, lower-income taxpayers would really be higher off if groceries have been absolutely included in gross sales tax bases (whereas retaining the federally-indicated exemption of SNAP and WIC purchases) and revenue-neutral changes made to the tax charge.[8] The decrease grocery charge is designed to create progressivity however largely fails to take action. But, on the identical time, policymakers have largely uncared for a way more easy technique to promote fairness throughout the gross sales tax.

Consumption of non-public providers tends to be extra discretionary than consumption of products. Consequently, higher-income people are inclined to spend a larger share of earnings on providers, that are often untaxed. Increasing the gross sales tax base to extra providers rights an unintentional improper within the gross sales tax as at the moment formulated, one which presently favors wealthier people.

Whereas ideally suited gross sales tax bases are broad, nevertheless, they shouldn’t be so broad as to cowl intermediate transactions, usually referred to as enterprise inputs. To various levels, these business-to-business transactions are taxed in each state with a gross sales tax, that means that the gross sales tax is commonly embedded within the closing value of a superb or service a number of instances over. This isn’t an ineluctable legislation of consumption taxes, nevertheless it has, sadly, been the truth in america.

In Europe, VATs are structurally designed to keep away from such double taxation; whereas every stage of manufacturing is taxed, the tax solely falls on the incremental improve in worth, such that, when the product is lastly offered to a shopper, the VAT is imposed on 100% of its worth—no extra, no much less. Theoretically, a retail gross sales tax might additionally exempt enterprise inputs altogether, both by adopting a sufficiently sturdy set of exemptions or by tying the exemption to the identification of the purchaser somewhat than the character of the product. In follow, although, no state has succeeded in eliminating all enterprise inputs from the gross sales tax base, although state income workplaces often cite it as an essential precept of gross sales taxation.

A well-structured gross sales tax is imposed on all closing shopper items and providers whereas exempting all purchases made by companies that shall be used as inputs within the manufacturing course of. This isn’t as a result of companies deserve particular therapy beneath the tax code, however as a result of making use of the gross sales tax to enterprise inputs ends in a number of layers of taxation embedded within the value of products as soon as they attain closing shoppers, a course of generally known as “tax pyramiding.” The result’s greater and inequitable efficient tax charges for various industries and merchandise, which is each nonneutral and nontransparent, hiding precise tax prices from shoppers.

Basically, the gross sales tax is designed as a tax on family consumption, and it really works poorly when utilized to some other base. As Professor Mikesell, who created and lengthy maintained this collection on gross sales tax breadth, as soon as defined:

What tax coverage is a retail gross sales tax anticipated to be finishing up? Its important logic is to distribute the price of authorities based on family consumption expenditure. It’s not an efficient deal with on some other elementary base. It’s not an earnings tax as a result of it makes no allowance for prices related to producing receipts from gross sales. It’s not a punitive excise on use of assets in methods which might be luxurious or dangerous to ourselves or others. It’s not a enterprise exercise tax with intent to distribute the price of authorities based on enterprise utilization of public providers. It’s the U.S. strategy, albeit an imperfect one, to impose a common levy on consumption expenditure, collected on an oblique or transaction foundation just like the value-added tax, however utilized solely on the final transaction within the chain of manufacturing and distribution resulting in the family shopper. If the intent is to distribute governmental value on a foundation aside from family consumption, some tax format aside from the retail gross sales tax needs to be utilized.[9]

Desk 2 offers knowledge on gross sales tax breadth and reliance, together with every state’s statutory state-level charge as of 2020. Reliance is outlined as retail gross sales tax collections as a proportion of complete state tax income, and breadth represents the share of the state’s economic system, as measured by state private earnings, included within the gross sales tax base.

The median gross sales tax charge in 2021 was 6.00 p.c, and imply reliance on state gross sales taxes within the 45 states (plus the District of Columbia) which impose them was 30.26 p.c (median of 31.00 p.c). The District of Columbia (13.38 p.c), Vermont (14.40 p.c), and New York (14.98 p.c) all generate lower than 15 p.c of state tax income from gross sales taxes, whereas one other three states derive greater than 60 p.c of income from it: South Dakota (65.39 p.c), Texas (62.35 p.c), and Florida (60.58 p.c).

Equally, gross sales tax breadth is under 30 p.c in 15 states, led by California (19.32 p.c), Massachusetts (21.62 p.c), New York (23.10 p.c), and Virginia (23.61 p.c), and is above 50 p.c in 4 states: Washington (52.70 p.c), South Dakota (53.90 p.c), New Mexico (58.24 p.c), and Hawaii (93.89 p.c). The states which have traditionally seen the best gross sales tax breadth took a success in the course of the pandemic. Final yr, as an example, Hawaii exceeded 119 p.c, whereas New Mexico and South Dakota have been each above 60 p.c. For FY 2021, imply gross sales tax breadth is 29.52 p.c, whereas the median is barely greater at 31.00 p.c. Within the overwhelming majority of states, gross sales taxes proceed to be imposed on artificially slender bases.

Gross sales tax breadth has narrowed lately, as private providers (largely exempted) have grown as a share of ultimate consumption and lawmakers have continued to carve out present tax bases. Professor Mikesell calculated a imply gross sales tax breadth of 49.98 p.c in 2000,[10] which has plummeted to 29.52 p.c in 2020. Unsurprisingly, charges have risen: the imply state charge was 5.16 p.c in 2000 in comparison with 6.00 p.c right this moment (medians of 5.0 and 6.0 p.c, respectively) at the same time as reliance has declined, from a imply of 35.29 p.c to right this moment’s 29.52 p.c (medians of 33.54 and 31.00 p.c, respectively).

Conclusion

Gross sales taxes increase about the identical quantity as a proportion of state tax income as they did twenty years in the past, however this relative stability belies an essential shift, with greater charges compensating for steady base erosion. By failing to maintain tempo with trendy consumption patterns, gross sales taxes have turn into much less impartial, much less equitable, and fewer economically environment friendly over time. States differ dramatically in gross sales tax breadth, however practically all are under what most economists and public finance students would suggest, at the same time as every state contains some share of intermediate transactions, which ought to appropriately be exempted to keep away from tax pyramiding. The gross sales tax is simply too essential part of states’ income toolkits to be permitted additional erosion, making gross sales tax modernization an important undertaking of the 2020s.

[1] David Bradbury and Stéphane Buydens, “Consumption Tax Traits 2019 – america,” OECD Centre for Tax Coverage and Administration, 2019, https://www.oecd.org/tax/consumption/consumption-tax-trends-united-states.pdf.

[2] For a dialogue of what gross sales tax modernization might seem like, and why it’s price pursuing, see Jared Walczak, “Modernizing Utah’s Gross sales Tax: A Information for Policymakers,” Tax Basis, June 4, 2019, https://www.taxfoundation.org/modernizing-utah-sales-tax/.

[3] Additions to Census-reported figures embrace gross sales taxes on lodging in Alabama and Illinois; taxes on motorized vehicle leases in Illinois, Minnesota, New Mexico, and Texas; taxes on motorized vehicle gross sales in Illinois, Kentucky, Maryland, Minnesota, New Mexico, North Dakota, Texas, Vermont, Virginia, and West Virginia; watercraft taxes in New Mexico and Virginia; plane taxes in Oklahoma and Virginia; the Indiana gasoline utilization tax; the Illinois in-lieu cigarette tax; and the South Dakota contractors excise tax. Subtractions embrace gross receipts taxes in Texas and Washington; state-collected native gross sales and transportation taxes in Arizona, Nebraska, New York, and Virginia; Arizona severance tax elements of the transaction privilege tax; and parts of the Hawaii common excise tax with nonstandard charges.

[4] For a dialogue of his methodology, see John L. Mikesell, “State Retail Gross sales Taxes: Income Efficiency for Fiscal 2015,” Tax Notes State, Mar. 8, 2017, https://www.taxnotes.com/tax-notes-today-state/budgets/state-retail-sales-taxes-revenue-performance-fiscal-2015/2017/03/08/ckzp. For his most up-to-date dataset, see John L. Mikesell, “State Retail Gross sales Taxes in 2018,” Tax Notes State, Aug. 6, 2019, https://www.taxnotes.com/tax-notes-today-state/individual-income-taxation/state-retail-sales-taxes-2018/2019/08/06/29nr3. We’ve sought to copy his methodology as carefully as doable to allow comparability along with his prior revealed figures.

[5] Quoted in John L. Mikesell, “A High quality Index for State Gross sales Tax Construction – Measuring the States In opposition to an Excellent Customary,” Tax Notes, Jan. 26, 2005, https://www.taxnotes.com/state-tax-today/sales-and-use-taxation/corrected-full-text-states-mind-quality-index-state-sales-tax-structure-measuring-states-against/2005/01/26/4c5r.

[6] Charles E. McLure Jr., “Rethinking State and Native Reliance on the Retail Gross sales Tax: Ought to We Repair the Gross sales Tax or Discard It?” BYU Legislation Evaluation 2000:1 (Mar. 1, 2000), 77,  https://digitalcommons.law.byu.edu/cgi/viewcontent.cgi?article=2052&context=lawreview.

[7] See typically, Nicole Kaeding, “Gross sales Tax Base Broadening: Proper-Sizing a State Gross sales Tax,” Tax Basis, Oct. 24, 2017, https://www.taxfoundation.org/sales-tax-base-broadening/.

[8] Jared Walczak, “The Stunning Regressivity of Grocery Tax Exemptions,” Tax Basis, Apr. 13, 2022, https://www.taxfoundation.org/sales-tax-grocery-tax-exemptions/. See additionally, Steven M. Sheffrin and Anna L. Johnson, “Rethinking the Gross sales Tax Meals Exclusion with SNAP Advantages,” State Tax Notes, Jan. 11, 2016, 157, https://pdfs.semanticscholar.org/6f18/cca38dfaa9591be264e4bff539573dae6d7c.pdf.

[9] John L. Mikesell, “High quality Index for State Gross sales Tax Construction – Measuring the States In opposition to an Excellent Customary.”

[10] John L. Mikesell, “State Retail Gross sales Taxes in 2018.”