The Tax Foundation has provided a ranking of the degree to which states rely on sales taxes. Possibly to no one’s surprise, Washington ranks first in the nation. For most states, the sales tax is important.
Second only to property taxes and tied with individual income taxes, sales taxes are one of the largest sources of state and local tax revenue, accounting for 23.5 percent of total U.S. state and local tax collections in fiscal year 2015…
But Washington stands apart from the crowd.
Washington – lacking both a corporate and an individual income tax but levying the harmful gross receipts tax on businesses – relies the most on sales tax revenue, which accounts for 45.9 percent of total tax collections. Tennessee, which does not tax wage income and is currently phasing out its tax on investment income, has the second highest reliance on sales taxes (40.7 percent of state and local tax collections). South Dakota is the third most reliant on sales tax revenue, with 40.5 percent of tax collections attributable to sales taxes. (South Dakota does not collect individual or corporate income taxes.)
The Tax Foundation analysts add,
Public finance experts generally argue that a sales tax should apply to all final consumption, including goods and services. However, in practice, many states fall short of this ideal due to historical accident or willful exemption of certain classes of goods for political reasons.
One thing to look out for in the near future is how the application of the U.S. Supreme Court’s recent decision in South Dakota v. Wayfair will impact state reliance on sales taxes. The Court’s decision that states may subject online purchases to sales tax will have a broadening effect on state sales tax bases and could increase their attractiveness.
Earlier today we posted more on the Wayfair decision.