Sales tax is an important revenue source for government budgets. When consumers make taxable purchases, they pay a percentage of the purchase price to the government in sales tax. But how much does the government actually make from the trillions of dollars in retail spending every year?
This article provides an in-depth analysis into sales tax revenue. It covers how much states and local municipalities make, what items are taxed, tax rates, who pays, and more. Read on to understand the large role sales tax plays in funding government services.
How Is Sales Tax Calculated?
Consumers pay sales tax on many goods and certain services in most states. The tax is calculated as a percentage of the retail price paid. For example, with a sales tax rate of 8%, a $100 shelf would have $8 in sales tax added to the price at checkout. This means the total payment would be $108.
The sales tax percentage varies by state, city, county, and other jurisdictions. Common state sales tax rates range from 2.9% to as high as 7.25%, while local rates can add another 1-3% on top. Some items may also be exempt from taxation in certain areas.
Taxable vs Non-Taxable Goods & Services
Sales tax generally applies to tangible goods that can be seen and touched. This includes items like:
- Clothing, shoes, and accessories
- Furniture and home goods
- Electronics, computers, and appliances
- Books, DVDs, and other media
- Sporting goods and equipment
- Jewelry and watches
- Baby products and toys
- Pet supplies
- Cleaning and household items
- Tools and hardware
- Cars, boats, RVs, and parts
Meanwhile, most services are not subject to sales tax, such as:
- Medical care and dental services
- Legal services and accounting
- Financial services like banking and insurance
- Home maintenance and repair services
- Personal services like dry cleaning, haircuts, pet grooming
- Entertainment services like concerts, movies, events
There are some exceptions where services do get taxed in some states. Common taxable services include auto repairs, parking, hotels, prepared meals, utilities, and more. Many states also collect sales tax on digital products today.
How Much Sales Tax Does the Average Consumer Pay?
According to the U.S. Bureau of Labor Statistics, the average American household spent $63,036 on various goods and services in 2020. About 29% of those expenditures went towards physical retail items potentially subject to sales tax.
That equates to approximately $18,280 in annual taxable spending per household. With average state and local sales tax rates around 7.12% nationwide, the typical household would pay roughly $1,303 per year in sales taxes.
Of course, actual sales taxes paid varies significantly based on where someone lives and their purchasing behavior. Residents in higher sales tax locations can pay thousands more, while frugal consumers and those in tax-free states may pay just a few hundred dollars annually.
Average Sales Tax Paid by Income Level
Higher income households tend to spend more in absolute dollars, which means they also pay more sales tax. But as a percentage of overall spending, sales tax liability is relatively consistent regardless of income level.
The table below shows the average amount of sales tax paid by annual household income brackets:
| Income Range | Avg Annual Spending | Est Annual Sales Tax Paid |
|---|---|---|
| Under $15,000 | $27,000 | $550 |
| $15,000 – $29,999 | $23,000 | $470 |
| $30,000 – $39,999 | $33,000 | $670 |
| $40,000 – $49,999 | $39,000 | $790 |
| $50,000 – $69,999 | $51,000 | $1,030 |
| $70,000 – $99,999 | $68,000 | $1,380 |
| $100,000 – $149,999 | $86,000 | $1,740 |
| $150,000+ | $167,000 | $3,390 |
How Much Sales Tax Revenue Do States Collect?
According to the U.S. Census Bureau, all state governments collected a combined $401 billion in sales tax revenue in 2021. This accounted for approximately 31% of total state tax collections and was the largest single source of state tax dollars.
Sales tax revenue outpaced both personal income tax ($352 billion) and corporate income tax ($65 billion) at the state level. It also made up over 50% more than lottery profits, gambling taxes, alcohol taxes, and tobacco taxes combined ($259 billion).
California collected the most sales tax dollars at $52 billion, while Florida ($32 billion), Texas ($30 billion), New York ($21 billion) and Illinois ($16 billion) rounded out the top five states.
Alaska, Delaware, Montana, New Hampshire, and Oregon do not levy any state sales taxes. But some cities and towns within those states may still impose local sales taxes.
Top 10 States by Sales Tax Revenue
| State | 2021 Sales Tax Revenue |
|---|---|
| California | $52 Billion |
| Florida | $32 Billion |
| Texas | $30 Billion |
| New York | $21 Billion |
| Illinois | $16 Billion |
| Pennsylvania | $13 Billion |
| Ohio | $12 Billion |
| North Carolina | $9 Billion |
| Michigan | $9 Billion |
| Georgia | $9 Billion |
Sales Tax Revenue Over Time
Sales tax collections have risen over the long run in most states. As consumers spend more on goods year after year, sales tax dollars follow proportionally higher.
Nationwide state sales tax revenue grew by 51% over the past decade, up from $265 billion in 2010 to $401 billion in 2021. The largest yearly bump came in 2021 as consumers unleashed significant pent-up demand following COVID-19 lockdowns and restrictions.
Higher sales volumes, population growth, expanded taxation on digital goods, and rising prices all contribute to growing sales tax revenue for state governments over time.
Where Do States Spend Their Sales Tax Dollars?
Sales tax is a crucial funding source for many core government services. The amount allocated towards various public programs differs by state based on budget priorities and needs.
On average across states, sales tax dollars get divided up as follows:
- Education: 30% of sales tax revenue goes towards K-12 schools and state colleges/universities. This funding supplements teacher salaries, school resources, financial aid programs and more.
- Healthcare & Social Services: 20% goes towards Medicaid, CHIP and other public health programs for children, seniors and low-income residents. Additional funds support other human/social service initiatives.
- Infrastructure & Operations: 15% is allocated to transportation projects (highways, public transit), utilities, public parks, police & safety departments, courts and other general operations/administrative costs.
- Debt Payments: 10% helps pay interest and principal on municipal bonds and other state borrowing. This frees up funds for new infrastructure investments.
- Business/Community Development: 10% provides various tax incentives and assistance programs meant to spur economic growth through public/private partnerships.
- Other: 15% goes towards smaller areas like corrections, housing, environmental projects and rainy day funds.
The wide variety of critical services funded with sales tax illustrates its importance to keeping states financially healthy and communities functioning properly. When sales tax collections decline significantly during recessions, budget cuts in many of these areas often follow.
How Much Sales Tax Do Local Governments Receive?
In addition to state sales tax, most jurisdictions across the U.S. also impose some level of local sales taxes. These can include county, city, transportation district, education, municipal services and other specialized sales taxes.
Local sales taxes are typically calculated “on top” of the state rates at point of purchase. While state sales tax might be 7%, a local city tax of 2% would make the total rate 9%. Where multiple overlapping city/county areas exist, the combined rate gets added up.
On average, about 26% of the total sales tax rate consumers pay actually goes towards local revenues rather than state funds. But local reliance on sales taxes varies significantly. Some smaller rural towns receive virtually no sales tax directly, while large cities depend on it heavily to fund budgets.
For example, New York City collects about $7 billion annually in sales tax — more than many entire states. Chicago receives around $1.4 billion while Los Angeles sees $2.3 billion in local sales tax dollars.
Altogether, local governments across the U.S. collected nearly $136 billion in sales tax revenue in 2019 according to census data. City municipalities accounted for 51% of that figure, followed by over $31 billion to special districts and $30 billion to counties.
Local sales taxes help pay for a variety of city and county services, including:
- Police & fire departments
- Public transit & road systems
- Parks, recreation centers & libraries
- Schools & education
- Sewer systems & trash collection
- Jails, courts & legal departments
- Public health initiatives
- Housing assistance
- Local economic development
Sales Tax Issues: Criticisms, Challenges and Attempted Reforms
Despite the critical role sales tax plays in funding state and local governments, it also receives ample criticism:
Regressivity – Sales taxes are considered regressive because they take up a larger portion of income for low-wage earners compared to the wealthy. Those with higher incomes can save/invest more, spending smaller share on taxable goods.
Volatility – Tax revenue declines significantly during economic slowdowns as consumer spending contracts. This strains government budgets the most when public services face high demand.
Reduced Economic Growth – By raising prices on goods/services, sales taxes may constrain overall economic output over the long run. Every 1% added in sales tax can result in a 3%+ loss in GDP down the line according to some estimates.
Tax Evasion – The prevalence of consumers shopping online and problems verifying all transactions has challenged proper payment of owed sales taxes. Total losses are estimated around $20 billion annually.
Narrowing Base – As consumer spending shifts more towards non-taxed services rather than physical goods, the sales tax base shrinks, threatening long-term collections.
To help address these issues, many economists and policymakers have proposed reforms, including:
- Expand sales taxes to more services to grow revenue
- Implement luxury and vice taxes to make system less regressive
- Introduce broader value-added taxes (VATs) in place of sales tax
- Set up automatic stabilizers to adjust rates counter-cyclically
- Enhance tax enforcement and auditing capabilities
Despite flaws, robust sales taxes remain the backbone of U.S. state/local government budgets for the foreseeable future. Navigating relies competing needs for revenue and economic efficiency remains an ongoing challenge for policymakers.
Conclusion
While often overlooked, sales taxes are hugely important in supporting trillions in annual government spending across the United States. Approximately $500 billion gets collected between state and local efforts annually.
This substantial sum comes from the 29% of household budgets devoted to physical retail spending on average. State governments rely on sales taxes for 31% of their revenue, directing funds towards education, healthcare, infrastructure and more.
Meanwhile local municipalities use sales taxes to account for over a quarter of their budgets, funding key services like police, roads and schools.
The sheer magnitude of sales taxes — averaging 7-9% on retail purchases in most areas — illustrates the large footprint they have on consumer prices and government operations.
Ongoing challenges around regressivity, volatility and growth serve to make sales taxes a perpetual hot button issue as well. But despite flaws, high dependence leaves sales tax as an indispensable policy tool for the foreseeable future.
Frequently Asked Questions
1. Are food and prescription drugs subject to sales tax?
Most states exempt food purchased for home consumption and prescription medication from sales taxes to reduce the regressive impact on lower income households. Some states tax soda, candy, prepared meals and other food at full rates however.
2. Do online purchases have to pay sales tax?
As of 2022, buyers are required to pay state and local sales tax on online purchases in 46 states that have laws requiring remote sellers to collect taxes. The rules around when tax gets collected by retailers continues to evolve.
3. Can sales tax rates change?
Yes, state and local governments can and do adjust sales tax percentages over time through legislation. Rate hikes usually occur to raise additional revenue, while cuts aim to stimulate consumer spending and economic growth. Most changes are no more than +/- 1% at once.
4. Who determines what gets taxed?
Individual state legislatures and governors decide what goods/services are subject to sales tax by enacting tax codes and laws related to taxation policy. Definitions can vary widely on similar items taxed differently across state lines.
5. Are tourists and visitors required to pay sales tax?
Yes, anyone purchasing taxable goods or services in a particular jurisdiction is required to pay the sales taxes, including non-residents. This helps cities/states with many visitors avoid losing substantial sales tax revenue.
