General, Selective Sales Tax Bases Vary Widely Across States, Report Shows

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The range is 36% to 91%, according to the Tax Policy Center. It warned states that raising general sales taxes on businesses due to budget uncertainty might cause higher prices on goods and services.

States' potential sale tax bases covered by general and selective sales taxes range from 36% to 91% across the U.S., according to a new study from the Tax Policy Center. 

According to the report, 45 states and Washington, D.C. levy general sales taxes, and all states have separate excise taxes on specific things like tobacco, alcohol and gasoline. The research also shows that as a share of the potential tax base, covered by the state's general sales tax, Vermont has the lowest (19%) and Hawaii the highest (88%). 

The analysis is based on 2018 information from the U.S. Bureau of Economic Analysis National Income and Products Accounts. The data is derived from personal consumption expenditures, which is the purchase of goods and services by American households, and durable goods, nondurable goods and services were measured.

The Tax Policy Center says services are housing and utilities, transportation, health care, financial services and food services. Durable goods are defined as vehicles and parts, recreational goods and household items. Nondurable goods are categorized as clothing and footwear as well as food and drinks to be consumed “off premises.”

The analysis highlights that most states tax nearly all durable goods, and that in some states, vehicles are exempt from the general sales tax but subject to a separate tax. Though few states tax a significant portion of services, the report indicates that taxes on services account for a large share of the tax base in every state. 

The center also found that family spending on services is the largest component of household expenditures in every state. Residents in Washington, D.C. consumed the most services (76% of household spending) compared to North Dakota, which consumed the lowest (62%). (The report does note that residents of Washington, D.C. all live in an urban area and that urban dwellers tend to spend more on services, particularly rental housing.)

Across the country, housing and health care make up more than half of household spending, according to the report. These two services combined account for about 36% of total consumption expenditures on average and more than half of all spending on services. Financial services (8%) and spending on food services (7%) are where American households spend as well.

The report notes that although the extent of the pandemic’s impact on states has been less than expected and that the federal government is about to send states and localities huge sums of relief money, many states still face financial uncertainty and might want to expand their tax base to address the issue. The Tax Policy Center makes several observations:

  • It might not be beneficial to extend taxes on services such as health care, which accounts for a high percentage of household expenditures. States could provide target relief to families through income tax credits, which are more equitable to lower-income households. The report notes that some states already do this.
  • About 40% of general sales tax revenue comes from businesses, so raising sales taxes on businesses may cause higher prices on goods and services.

To get more information about these findings click here.

Brent Woodie is an associate editor at Route Fifty.

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