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Taxes

Taxes

Sales Tax

The sales tax is one of the most common forms of state tax; every state except New Hampshire, Delaware, Montana, Oregon, and Alaska uses it.  (So if you live near any of those five, you should think about jumping the border before you buy expensive stuff.)

It's also one of the most controversial (although really, almost all taxes are controversial... see: the American Revolution).

The criticism of the sales tax goes like this: every Californian buying a box of detergent pays 8.25% on the $10 purchase regardless of their income. Sounds like a proportional tax, right? 

Wrong. Even though they both pay the same rate on the purchase, the 83¢ paid by a poor person represents a higher percentage of their income than the 83¢ paid by a wealthier person. Of course, 83 cents won’t change a person’s life. But over the course of a year, these pennies add up to quite a bit of money and ultimately, critics say, a significant and unfair impact on the poor.

Many states limit the regressivity of their sales taxes by excluding certain items, such as groceries (see chart below). But for many critics, this only slightly improves an essentially unfair form of taxation. 

So why isn’t the sales tax scrapped altogether? Because it is an easy and efficient way to raise revenue. The sales tax is collected in small increments and therefore few people complain much about it. It is collected by merchants and therefore does not require a large government agency like the Internal Revenue Service to collect.

Chart: State sales taxes and those providing grocery and/or drug exemptions
StateTax RatesExemptions
FoodPrescription DrugsNon-prescription Drugs
ALABAMA4*
ALASKAnone
ARIZONA5.6*
ARKANSAS6.23*
CALIFORNIA7.25**
COLORADO2.9**
CONNECTICUT6***
DELAWAREnone
FLORIDA6***
GEORGIA4**
HAWAII4*
IDAHO6*
ILLINOIS6.25111
INDIANA7**
IOWA6**
KANSAS5.3*
KENTUCKY6**
LOUSIANA4**
MAINE5**
MARYLAND6***
MASSACHUSETTS6.25**
MICHIGAN6**
MINNESOTA6.875**
MISSISSIPPI7*
MISSOURI4.2251.23*
MONTANAnone
NEBRASKA5.5**
NEVADA6.85**
NEW HAMPSHIREnone
NEW JERSEY7***
NEW MEXICO5**
NEW YORK4***
NORTH CAROLINA5.75**
NORTH DAKOTA5**
OHIO5.5**
OKLAHOMA4.5*
OREGONnone
PENNSYLVANIA6***
RHODE ISLAND7***
SOUTH CAROLINA6**
SOUTH DAKOTA4*
TENNESSEE75.5*
TEXAS
UTAH4.71.75**
VERMONT6***
VIRGINIA52.5**
WASHINGTON6.5**
WEST VIRGINIA54*
WISCONSIN5**
WYOMING4**
DIST. OF COLUMBIA6**

In short, the sales tax satisfies two criteria most policymakers like in a tax: it generates the needed revenue and it does so efficiently. But does it satisfy the third criteria most policymakers set? Is it “fair?”

If you're answer is no, maybe you should consider moving to Oregon.  Of course, once you get there you might find that you're not a big fan of the high state property and income taxes.  Some how, some way, somebody's got to pay the piper.

Why It Matters Today

The sales tax is mildly annoying when you buy a Coke for a buck.  (Who has a bunch of pennies sitting around in their pocket?)  

But the sales tax is a really big deal when you're buying a big-ticket item.  Imagine buying a car. Eight percent of $10,000 or $20,000 or $40,000 (depending on whether you're buying a Geo or a Beemer) is a lot of money.

Enough, in fact, to justify buying your car up in Oregon or Montana to avoid the sales tax.  Of course, if you live anywhere near those places, your state probably will probably be onto this plan.  California, for example, will charge you with sales tax the moment you try to register your tax-free Oregon vehicle with Cali plates.  Darn.  "Death and taxes," yet again...

Sometimes, a Song Says it Better: Lap of Luxury, by Jethro Tull

Car sales tax is the biggest tax for most cities.

“Buy me a Datsun or Toyota ---
get the tax man to agree
all expenses I can muster
from the lap of luxury.”

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