State Sales Tax Breadth and Reliance, Fiscal Year 2021

Tax Foundation, May 4, 2022 (excerpts)

• Sales tax bases range from 19.32 percent of personal income in Massachusetts to 93.89 percent in Hawaii; the Massachusetts base is extremely narrow, while the Hawaii base features significant tax pyramiding.
• Sales tax breadth has declined from a mean of 98 percent in 2000 to the current 29.52 percent, reflecting continued erosion that has largely been offset by an increase in the mean state rate from 5.16 to 6.00 percent over the period.
• The pandemic has yielded temporary fluctuations as the amount and composition of consumer expenditures has changed, though long-term sales tax trends remain highly visible in the data.

Introduction

Sales taxes account for 29.5 percent of all state tax revenue, second only to individual income taxes (40 percent) in their contribution to state receipts. Reliance on sales taxes, however, varies dramatically, from 13.4 percent in the District of Columbia to 65.4 percent in South Dakota. State reliance on sales tax depends on its mix of other taxes (South Dakota, for instance, forgoes income taxes, while the District of Columbia has high-rate income taxes); its sales tax rate; and, importantly, the breadth of its sales tax base.

The narrowest base, in California, is only 19 percent of personal income, whereas the broadest base, in Hawaii, is almost five times that at 94 percent of personal income. (Hawaii’s sales tax base has historically exceeded 100 percent of personal income but took a hit as the island’s economic profile changed during the pandemic.) The ideal sales tax base consists of all final consumption, both goods and services, while exempting intermediate goods to avoid tax pyramiding, where the tax is imposed multiple times on the same final product. The California base is woefully narrow, riddled with exemptions and excluding vast swaths of personal consumption. Hawaii’s base, by contrast, while including certain economically inefficient inclusions, has elements of gross receipts taxation and frequently double-taxes transactions. (It also benefits substantially from spending by tourists.) Both states miss the mark—in opposite directions….

All tax data for FY 2021 are somewhat anomalous due to the pandemic. Sales tax collections rose as disposable income increased and consumer expenditures were channeled into more purchases that tend to be included in sales tax bases. This helped reduce the measured erosion of sales tax bases without indicating any underlying change in policy. Certain states saw significant swings as the composition of consumption changed, Hawaii being a notable—and likely temporary—example. Sales tax reliance, however, contracted at the same time that sales tax receipts increased, since a combination of federal pandemic responses and a booming stock market caused income tax receipts to soar higher still….

…sales tax breadth is below 30 percent in 15 states, led by California (19.32 percent), Massachusetts (21.62 percent), New York (23.10 percent), and Virginia (23.61 percent), and is above 50 percent in four states: Washington (52.70 percent), South Dakota (53.90 percent), New Mexico (58.24 percent), and Hawaii (93.89 percent). The states which have historically seen the greatest sales tax breadth took a hit during the pandemic. Last year, for instance, Hawaii exceeded 119 percent, while New Mexico and South Dakota were both above 60 percent. For FY 2021, mean sales tax breadth is 29.52 percent, while the median is slightly higher at 31.00 percent. In the vast majority of states, sales taxes continue to be imposed on artificially narrow bases….

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