Retail Sales Tax in 2017: Modest Growth in a Vital Revenue Source

State retail sales taxes continue their important contribution to the finances of state governments. Revenue from those taxes in fiscal 2017 exceeded $299 billion, 32 percent higher than the $226 billion collected in fiscal 2010, the first year after the end of the Great Recession of 2007-2009 — and even 25 percent more than the $238.6 billion collected in fiscal 2007, the fiscal year just before the recession hit state revenue systems. The tax continues to yield more revenue than any other state tax except for the individual income tax, which yielded $352.8 billion in 2017. It has been the second largest state tax producer since 2004 (it was the largest in 2003 and 2004 and in all years from 1947 to 1997). All states but Alaska, Delaware, Montana, New Hampshire, and Oregon levy the tax. It adds some diversification from the heavy reliance on the income base in the American revenue system and contributes important revenue for the support of state government services. Indeed, some state administrations have proposed increased reliance on retail sales taxes as a mechanism for providing greater revenue stability, an improved business climate, or greater consistency with some concepts of fiscal fairness. While it is difficult to identify any tax as being particularly popular in the United States, it surely is the case that state retail sales taxes do not engender quite as much general hostility as do the alternative broad-base taxes, the income and property taxes. That makes it important to understand the fiscal performance of retail sales taxes in state revenue systems.

Standardized Retail Sales Tax Collections and Burdens Across States

Table 1 presents the retail sales tax collections for each state in fiscal 2017. Those data are based on the annual general sales tax collection reports¹ from the Governments Division of the U.S. Census Bureau, a tabulation of collections from the taxes levied by each state. Those data by themselves do not provide a standard for comparisons of retail sales taxes across states because of Governments Division reporting conventions (for example, collections of some retail sales taxes that do not apply throughout the state and whose revenue is designated for use only within the area that the tax applies are sometimes included with state tax collections), because of some statutory peculiarities in states (for example, some states exempt motor vehicle sales from the general sales tax but tax them in a virtually equivalent motor vehicle excise tax collected by a department of motor vehicles), and because some data in the Census general sales and gross receipts tax category are for taxes that are not retail sales taxes (for example, the Washington business and occupation tax). Because some of these features in the data have a substantial fiscal impact, comparisons across states without making the appropriate adjustments would cause overstatement of the retail sales tax in some states and understatement in others. The sales tax data used throughout this article have been standardized to reflect the common idea of what a state sales tax includes, removing the individual state peculiarities that prevent the direct use of the Census reported data.² While reported general sales tax collections are the same as standardized retail sales tax collections for many states, the ratio of standardized collections to Census reported collections ranges from 0.73 to 1.34 in fiscal 2017.

Because the states are radically different in economic size, total sales tax yield ranges widely, from Vermont with $479 million to California with more than $35 billion. Thirty-six percent of the total yield comes from only four states (California, Florida, New York, and Texas). That concentration is not unexpected: 35.7 percent of total tax revenue is collected by those four states as well. Because economic activity is not uniformly distributed across states, neither tax bases nor tax collections will be uniformly distributed either. The 23 states that are now full members of the Streamlined Sales and Use Tax Agreement constituted less than 20 percent of the total national sales tax base. Numerous large states, including the top four sales tax collectors, have stayed out of the SSUTA, and those four large holdouts account for roughly as much sales tax revenue as the total from all SSUTA members.

The considerable difference in sales tax revenue collected by the states is not surprising because the states differ widely in size. The difference is narrowed when collections are adjusted for state population. Table 1 shows that per capita sales tax yields range from $531 in Colorado to $2,187 in Hawaii. The mean is $989 and the median is $940, the median being much lower because of the impact of some high-yield states on the mean. Four states (Alabama, Colorado, Georgia, and Missouri) have per capita yields below $600 and 20 have per capita yields above $1,000. Hawaii has per capita yields above $2,000 (a state with both a broad sales tax base and an economy with a considerable tourist sector that boosts the tax base). Per capita yield varies considerably, but not as much as total collections.

States levy statutory rates that range from 2.9 to 7 percent, and the level of these rates influences the yield that states achieve from their taxes. When the yields are adjusted for the difference in statutory tax rate, the range is again wide, from $109 in South Carolina to $546 in Hawaii. Notably, the ratio of highest to lowest state rate-adjusted per capita yield is higher than the similar ratio for unadjusted per capita yield. Differences in rate do not account for differences in per capita collections.

The table shows the typical state sales tax revenue to be around 2 percent of state personal income. The percentage is above 3 percent in three states (Hawaii, Mississippi, and Nevada) and below 1 percent in two states (Colorado and Virginia). There is great concentration around 2 percent, however.

Table 1. Total Taxes, Retail Sales Taxes, and Per Capita Sales Tax Revenue by State, Fiscal 2017

Name	Total Taxes ($K)	Adjusted Retail Sales Tax ($K)	Per Capita Retail Sales Tax Revenue ($)	Per Capita Retail Sales Tax Revenue per Percentage Point of Rate ($)	Sales Tax Revenue as % State Personal Income
Virginia	22,213,025	4,558,016	538.14	125.15	0.99%
Colorado	13,197,606	2,978,382	531.18	183.16	0.99%
New York	79,678,037	13,295,408	669.81	167.45	1.1%
Georgia	22,419,440	5,729,916	549.4	137.35	1.27%
Missouri	12,495,505	3,604,570	589.61	139.55	1.35%
Massachusetts	27,518,360	6,240,822	909.76	145.56	1.38%
Alabama	10,418,152	2,801,373	574.67	143.67	1.44%
Oklahoma	8,569,402	2,470,774	628.56	139.68	1.45%
Vermont	3,127,523	479,105	768.22	128.04	1.50%
Maryland	21,599,795	5,517,621	911.68	151.95	1.53%
California	155,632,088	35,357,699	894.3	142.13	1.53%
Pennsylvania	37,853,091	10,509,734	820.72	136.79	1.58%
South Carolina	9,828,825	3,290,261	654.86	109.14	1.62%
Connecticut	16,345,525	4,236,619	1,180.71	185.94	1.68%
New Jersey	32,325,850	9,591,881	1,065.1	153.3	1.7%
North Carolina	26,855,304	7,656,898	745.31	156.91	1.72%
Illinois	37,978,923	11,712,134	914.87	146.38	1.73%
Wyoming	1,649,550	588,866	1,016.49	254.12	1.79%
Rhode Island	3,266,663	996,390	940.31	134.33	1.83%
Nebraska	5,103,105	1,821,925	948.88	172.52	1.88%
Wisconsin	18,133,496	5,223,935	901.38	180.28	1.88%
Utah	7,832,889	2,533,961	816.92	173.81	1.94%
Michigan	28,628,517	9,223,737	925.86	154.31	2.05%
Louisiana	11,104,720	4,215,378	899.89	179.98	2.07%
Arizona	13,888,611	6,134,055	874.26	156.12	2.1%
Iowa	9,755,430	3,205,997	1,019.16	169.86	2.22%
West Virginia	5,092,275	1,538,279	847.14	141.19	2.23%
Minnesota	25,594,522	6,670,039	1,196.07	173.97	2.25%
Ohio	30,306,468	12,041,610	1,032.85	179.63	2.26%
Kentucky	11,907,759	3,990,439	895.88	149.31	2.27%
Kansas	8,173,821	3,209,506	1,101.74	169.5	2.31%
Idaho	4,511,208	1,650,498	961.3	160.22	2.37%
Maine	4,232,556	1,441,867	1,079.32	196.24	2.39%
North Dakota	3,465,326	998,639	1,322.01	264.4	2.42%
Tennessee	13,893,728	7,260,193	1,081.03	154.43	2.44%
Texas	53,612,926	33,780,274	1,193.46	190.95	2.54%
Washington	23,997,592	10,652,632	1,438.43	221.3	2.56%
Florida	40,218,365	25,346,166	1,207.86	201.31	2.58%
Indiana	18,051,598	7,942,583	1,191.36	170.19	2.7%
Arkansas	9,516,281	3,384,394	1,126.52	173.31	2.76%
South Dakota	1,828,543	1,172,190	1,347.86	299.52	2.79%
New Mexico	5,776,271	2,411,592	1,154.94	225.35	2.96%
Mississippi	7,783,031	3,526,913	1,181.9	168.84	3.25%
Nevada	8,624,618	4,954,070	1,652.44	241.23	3.7%
Hawaii	7,029,026	3,122,549	2,187.37	546.84	4.21%
Total	921,035,346	299,069,888
Mean			988.66	179.89	2.07%
Median			940.31	168.84	2.05%

Reliance, Breadth, and Rates

Table 2 presents three measures of the role of the retail sales tax in finances of a state: reliance (the share of total tax revenue collected by the state from the retail sales tax), base breadth (the share of the state economy as measured by state personal income that the retail sales tax represents), and the standard statutory rate levied on taxable sales.

As noted earlier, the retail sales tax is no longer the largest tax source for state governments. However, its revenue remains critical for state finances. Mean reliance in 2017 is 34.8 percent, a share that is high enough that its revenue would be difficult to replace in light of the considerable public distaste for the other options with the capacity to general considerable amounts of revenue, the individual income and real property taxes. Eleven states collect more than 40 percent of their tax revenue from the retail sales tax (Arizona, Florida, Hawaii, Indiana, Mississippi, Nevada, New Mexico, South Dakota, Tennessee, Texas, and Washington), with five of these states levying both retail sales and individual income taxes. Only six states (California, Colorado, Massachusetts, New York, Vermont, and Virginia) collect less than one-quarter of their tax revenue from their retail sales tax. Of these six, local governments in all but Massachusetts and Vermont make heavy use of the retail sales tax in their finances, causing the state reliance on the tax to understate the significance of the tax to their overall state and local finances. Five states levying no individual income tax (Florida, South Dakota, Nevada, Tennessee, and Texas) are superdependent on the tax, raising more than half of their tax revenue from it and making the continued vitality of the tax especially important for them. There is, of course, no national template for the retail sales tax, so sales tax policy is made state by state.

However, the reliance patterns show the importance of the tax in state tax structures and how national demographic, economic, and legal changes that affect sales tax behavior will require reaction by the states to maintain the necessary revenue flows.

As with sales tax collections, the tax base that produces that revenue varies widely across the states because state economies are of considerably different sizes. Sales tax policy can do little concerning the aggregate economic activity in a jurisdiction, but it does play the decisive role in establishing how much of that total is in the sales tax base. This tax policy can be gauged by a base breadth index, measured by the ratio of the implicit sales tax base (standardized sales tax revenue divided by the statutory sales tax rate) to state personal income. It gauges the extent to which the sales tax structure extends to cover transactions making up economic activity in the state. The base is narrowed by legislative choices to exclude transactions from the tax base (that is, to exclude purchases of services from the base that generally taxes purchases of tangible personal property) and to exempt transactions that otherwise fit within the definition of the tax base (that is, purchases of food for at-home consumption). Household economic behavior also influences the base as individuals’ consumption purchases may be exempt or taxable transactions . States find many reasons to remove transactions that appear to be appropriately in the scope of the tax, often because they hope to make the tax more equitable according to some standard perceived by the lawmakers or because they hope to encourage specific sorts of economic activity by removing sales tax from the transaction.³ Those different legal choices translate into considerable differences in measured base breadth. Mean breadth in 2017 is 37.8 percent, meaning that the sales tax base averages 37.8 percent of state personal income.

They in base breadth, with three states having a base that is less than 25 percent of state personal income (California, Massachusetts, and New Jersey) and four states with a base that is more than 50 percent of state personal income (Hawaii, Nevada, New Mexico, and South Dakota). The practical impact of these differences in base coverage is that each percent of sales tax rate will produce much more revenue for the broad-base taxes than for the narrow-base taxes. For 2017 the breadth of the five broadest states is 2.7 times that of the five narrowest states, meaning that each percentage point of rate will generate 2.7 times as much revenue, other things being equal, for the broad-base states than the narrow-base states. That is a non-trivial difference.  And the overall pattern of coverage has narrowed: In fiscal 1970, the median breadth was 54.4 percent, reflecting a much greater revenue productivity than with the current sales taxes.

Table 2. Reliance, Breadth, and Statutory Rates, Fiscal 2017

Name	Sales Tax Reliance (Share of Total Tax Revenue)	Breadth of Sales Tax Base (Implicit Base Share of State Personal Income)	Statutory Rate, January 1, 2016	Statutory Rate, January 1, 2017	Statutory Rate, January 1, 2018
Alabama	0.2689	0.3594	4%	4%	4%
Arizona	0.4417	0.375	5.6%	5.6%	5.6%
Arkansas	0.3556	0.4249	6.5%	6.5%	6.5%
California	0.2272	0.2439	6.5%	6%	6%
Colorado	0.2257	0.3423	2.9%	2.9%	2.9%
Connecticut	0.2592	0.2652	6.35%	6.35%	6.35%
Florida	0.6302	0.4296	6%	6%	6%
Georgia	0.2556	0.3174	4%	4%	4%
Hawaii	0.4442	1.0529	4%	4%	4%
Idaho	0.3659	0.3955	6%	6%	6%
Illinois	0.3084	0.2772	6.25%	6.25%	6.25%
Indiana	0.44	0.3854	7%	7%	7%
Iowa	0.3286	0.3693	6%	6%	6%
Kansas	0.3927	0.3561	6.5%	6.5%	6.5%
Kentucky	0.3351	0.379	6%	6%	6%
Louisiana	0.3796	0.4138	4%	5%	5%
Maine	0.3407	0.4354	5.5%	5.5%	5.5%
Maryland	0.2554	0.2553	6%	6%	6%
Massachusetts	0.2268	0.2209	6.25%	6.25%	6.25%
Michigan	0.3222	0.341	6%	6%	6%
Minnesota	0.2606	0.328	6.875%	6.875%	6.875%
Mississippi	0.4532	0.4645	7%	7%	7%
Missouri	0.2885	0.3196	4.225%	4.225%	4.225%
Nebraska	0.357	0.3423	5.5%	5.5%	5.5%
Nevada	0.5744	0.5406	6.85%	6.85%	6.85%
New Jersey	0.2967	0.2451	7%	6.875%	6.625%
New Mexico	0.4175	0.5775	5.125%	5.125%	5.125%
New York	0.1669	0.2746	4%	4%	4%
North Carolina	0.2851	0.3623	4.75%	4.75%	4.75%
North Dakota	0.2882	0.4839	5%	5%	5%
Ohio	0.3973	0.3938	5.75%	5.75%	5.75%
Oklahoma	0.2883	0.3215	4.5%	4.5%	4.5%
Pennsylvania	0.2776	0.2626	6%	6%	6%
Rhode Island	0.305	0.2608	7%	7%	7%
South Carolina	0.3348	0.27	6%	6%	6%
South Dakota	0.6411	0.6204	4%	4.5%	4.5%
Tennessee	0.5226	0.3489	7%	7%	7%
Texas	0.6301	0.4068	6.25%	6.25%	6.25%
Utah	0.3235	0.4134	4.7%	4.7%	4.7%
Vermont	0.1532	0.2505	6%	6%	6%
Virginia	0.2052	0.2695	4.3%	4.3%	4.3%
Washington	0.4439	0.3932	6.5%	6.5%	6.5%
West Virgina	0.3021	0.3723	6%	6%	6%
Wisconsin	0.2881	0.3767	5%	5%	5%
Wyoming	0.357	0.448	4%	4%	4%
	0.348	0.3775	5.5706%	5.59%	5.5844%
	0.3235	0.3623	6%	6%	6%

The mean statutory sales tax rate January 1, 2017, the midpoint for most state fiscal years, was 5.59 percent. That is little changed from the mean for the prior year, 5.57 percent. Indeed, recent years have seen a period of considerable rate stability. From January 1, 2016, to January 1, 2018, only two states increased rates (Louisiana by 1 percentage point and South Dakota by 0.5 percentage points), while two states reduced their rates (California by 0.5 percentage points and New Jersey by 0.375 percentage points). Ten states levy a rate of 6.5 percent or higher, and only six levy a rate of 4 percent or lower. The mean has been above 5 percent since 1991, when it was 4.966 percent; above 4 percent since 1981, when it was 3.981; above 3 percent since 1967, when it was 2.81 percent; and above 2 percent since 1960, when it was 1.944 percent. Typical rates have drifted upward. In light of the general narrowing of the sales tax base and the continued reliance on the sales tax, that upward drift in tax rates is not surprising. Whether they have planned it or not, states appear to have adopted a narrow-base, high-rate sales tax policy, a policy that few public finance experts would recommend. The slowed pace of rate increases may reflect some concern that state rates, particularly when combined with the local rates that are added in 37 states, are reaching a level at which problems of evasion, distortion, and discrimination are nearing a critical level.

Perspective on National Totals

Individual states make sales tax policy, as noted earlier, so any focus on national totals can be a bit misleading. Nevertheless, an examination of national sales tax behavior can provide insights into basic issues that may interfere with productivity of the tax and how it fits into the de facto national revenue system. One quick fact about retail sales taxes over the years is that they have raised about one-third of all state tax revenue. Figure 1 shows that this summarization has been accurate for the years from 1970 to 2017 that are examined here. In 1970 the share was 0.3, while it was 0.326 in 2017. There have been fluctuations in that share, reaching a high of 0.35 in 2002 and a low of 0.295 in 1973. Reliance was trending upward, with some dips interrupting the pattern, until 2002, when it began a decline until 2013, at which point it increased again. How that pattern behaves in the future will depend on the interplay of state political choices about tax reliance and the responsiveness of taxes to changes in the economic climate.

Both retail sales tax revenue and the tax base have grown since 1970. Figure 2 shows the path each has taken in real terms since that year. To clearly include both data series in the same graph, given the significant difference in magnitudes, each has been adjusted to their value relative to their 1970 level. It is apparent that both revenue and base have grown over the years, with revenue growing more than base; revenue is about 4.25 times higher in 2017 than it was in 1970, and the tax base is roughly 2.5 times as great. The path of growth has been persistent but not constant. The impact of recessions in 1973-1975, 1980, 1981-1982, 1990-1991, 2001, and 2007-2009 can be discerned in the figure. Of course, the greatest impact was the 2007-2009 Great Recession, after which growth in revenue and base did not return until fiscal 2011. In comparison to that experience, all other recessions have shown a relatively short and mild impact, although their effects certainly translated into fiscal issues for the states as they worked to finance their service obligations.

Figure 3 reflects the decisions that shape the sales tax within the context of state tax policy. The graph shows the breadth of the national total sales tax base as a share of national personal income, and the implied national retail sales tax rate measured by national total sales tax revenue divided by the national total sales tax base, both reported relative to their 1970 level.⁴ The patterns are clear. The sales tax base is applied to a narrowing share of personal income over the years, the product of choices legislatures made about exempting household purchases from the tax and from an increasing share of consumption going to the purchase of services that legislatures typically choose to exclude from the base. The 2017 base ratio is only 68 percent of its 1970 level. That disappearance of the tax base is not new but dates to the early 1980s. It appears to be endemic to American retail sales taxes.

The other part of Figure 3 shows the linchpin for a sales tax policy that produces steady reliance on the tax in combination with a base that is disappearing as a share of consumption expenditure. Through the years since 1970, the implied sales tax rate has increased. The rate of increase was a bit higher in the 1980s and in the Great Recession period, and there has been little change in the implied rate in this decade (just as base disappearance has moderated), but the pattern and the policy, either explicit or implicit, is clear. Over the years since 1970, states have together followed a narrow-base, high-rate policy. It is difficult to identify any tax philosophy or package of economic theory that supports that approach to raising revenue, but that is what the states have ended up doing.

Conclusion

Retail sales taxes continue their important contribution to state tax systems, yielding around one-third of total state tax revenue nationwide. They are, however, much more important in the revenue systems of some states, including some states in which both an individual income and retail sales tax are levied. In the national total, sales tax collections are concentrated in a relatively small number of large states, not surprising as this is also the case for all tax revenue. Productivity of the tax varies considerably among the states, with breadth of base and a substantial tourism sector being important for producing particularly substantial revenue per capita. States vary widely in terms of how broadly their sales taxes cover economic activity in the state, and the difference in breadth means a considerable difference in yield that can be generated by each percentage point in tax rate 

A review of sales tax patterns since 1970 shows three particularly important patterns. First, the sales tax has generated around one-third of total tax revenue throughout the period. There have been some fluctuations, but reliance seems to return to that trend. Second, sales tax revenue and sales tax base have both grown substantially over those years, with revenue growth being considerably greater overall than base growth. The recessions over that period have had a discernable impact on revenue and base, with the greatest impact being, not surprisingly, during the Great Recession. The impact of other recessions has been brief and mild. Third, and most troubling, the sales tax base has narrowed considerably over the years, so that the 2017 base ratio was only 68 percent of its 1970 coverage. Revenue has been maintained by increasing rates applied to that base. Whether intentional or not, states have been following a narrow-base, high-rate sales tax policy, contrary to the basic lessons of tax policy.