The Tax Foundation has released another tax map, this one comparing states on their reliance on sales taxes. Unsurprisingly, we’re No. 1.
TF analyst Janelle Cammenga contrasts the sales tax with the income tax.
Sales taxes are consumption taxes, which are more economically neutral than taxes on capital and income. The reason stems from a commonsense principle: if you tax something, you get less of it. Sales taxes target only current consumption, while income taxes hit both present consumption and future consumption, because they fall on earnings that would either be used for either immediate consumption or saved for future consumption. When the income tax falls on earnings that would be used for future consumption, it also functions as a tax on investment because consumption deferred to the future is paid for with current savings.
Of the top sales tax states, she writes,
Washington—which has neither a corporate nor an individual income tax but levies a harmful gross receipts tax on businesses—relies the most on sales tax revenue, which accounts for 46.4 percent of its total tax collections. Tennessee, which does not tax wage income and will fully repeal its tax on investment income by 2021, has the second-highest reliance on sales taxes at 41.5 percent of state and local tax collections. Louisiana is the third-most reliant on sales tax revenue, with 41.0 percent of tax collections attributable to sales taxes. South Dakota, which does not collect corporate or individual income taxes, is next with 39.6 percent.
Although Washington, Tennessee, South Dakota, and Nevada (39.4 percent) all rely heavily on the sales tax, they are not high-tax states. All four states forgo an individual income tax and choose to raise a large portion of their revenue through the sales tax instead.
It’s about choices. And, remarkably, as the Washington Research Council has written, Washington’s choices have led to revenue performance that is similar to that of most states.
Washington’s tax structure is unusual,but it yields revenues that are similar to other states by multiple metrics…
Despite its lack of an income tax, Washington’s state and local taxes per capita have largely tracked the national average (see Chart 3 on page 2). In 2016 (the most recent data available), Washington’s state and local taxes per capita were $5,050, above the national average of $4,946. By this measure, Washington ranked 17th in the nation.
As a share of personal income, Washington’s state and local taxes rank near the middle of the pack at 28th among the states. Washington’s rank is lower by this measure than per capita because its personal income per capita is consistently higher than the national average. In 2017, Washington ranked ninth highest in the country in personal income per capita. [Citations omitted.]
As we’ve seen in recent years, revenue growth has been among the highest among the 50 states. And, as Clay Hill with the Association of Washington Business has observed, the truth is that Washington state’s tax system has contributed to the state’s run of economic growth.
Some additional perspective from TF:
Sales taxes are the second largest source of state and local tax revenue, accounting for 23.6 percent of total U.S. state and local tax collections in fiscal year 2016 (the latest data available; see Facts & Figures Table 8). Only property taxes are a greater source of state and local tax revenue.
The most recent interstate comparisons from TF show Washington ranking No. 28 in property tax reliance.