State tax shifts favor sales over income, hit lower earners

States Shift Tax Revenue Sources from Income to Sales Taxes

States have adjusted tax structures in recent decades, with many reducing top marginal income tax rates while increasing reliance on sales and consumption taxes. An analysis by the Institute on Taxation and Economic Policy examined rate changes since 1990 and found that top income tax rates declined in multiple states while sales tax rates rose in others. This pattern shifted a larger share of state revenue collection toward purchases rather than earnings.

Census Bureau data indicate that sales taxes now represent the largest single category of state tax revenue in many jurisdictions. The Tax Foundation reports that sales taxes accounted for 32 percent of state tax collections in recent years. Its analysis notes that sales taxes introduce fewer economic distortions than income taxes because they apply to consumption rather than earnings and provide more predictable revenue streams during economic fluctuations.

Lawmakers in several states have cited revenue stability and interstate competition as factors in these changes. Abir Mandal, a senior policy analyst at the Tax Foundation, stated that states such as North Carolina reduced income tax rates to attract workers and businesses from higher-tax states. Similar adjustments followed in South Carolina, Mississippi, and Oklahoma. Mandal added that income tax revenue can vary with economic conditions, while taxes on goods purchased regularly tend to fluctuate less.

Sarah Austin, a senior analyst at the Institute on Taxation and Economic Policy, linked some post-2010 income tax reductions to legislative responses following the Great Recession. She noted that sales tax increases have occurred more frequently than comparable income tax increases when states address budget gaps. The Institute on Taxation and Economic Policy report attributes part of the trend to efforts to flatten or eliminate income taxes in certain states.

Sales taxes apply uniformly to purchases regardless of buyer income level. The Institute on Taxation and Economic Policy analysis describes this structure as placing a proportionally larger burden on lower-income households relative to their total spending. Mandal observed that sales taxes avoid creating direct incentives to reduce reported earnings, which some policymakers consider an advantage over higher income tax rates.

Voter surveys have shown support for higher taxes on high earners in recent years, while state legislative actions have moved in the opposite direction on income tax rates. Austin stated that this divergence reflects differing priorities between public opinion and enacted policy. States continue to weigh revenue stability arguments against the distributional effects of tax changes, with both the Institute on Taxation and Economic Policy and the Tax Foundation providing data on the trade-offs involved in these decisions.