Tariffs and policies lift grocery, housing costs amid shifting consumer habits

States across the country have steadily reduced top income tax rates since 1990 while increasing reliance on sales and consumption taxes, according to a new analysis from the Institute on Taxation and Economic Policy. The changes have shifted more of the tax load onto lower- and middle-income households even as many voters continue to call for greater contributions from high earners and corporations.

The ITEP review tracks rate adjustments over more than three decades and finds a consistent pattern. Top marginal income tax rates have declined in most states, often through rate cuts or the introduction of flat-tax structures. At the same time, sales tax rates have risen and exemptions for everyday items have narrowed in many places. Sales and consumption taxes now represent the largest single source of state tax revenue, according to separate Census Bureau data.

This rebalancing matters because sales taxes are regressive by design. Lower-income households spend a larger share of their income on taxable goods, while higher earners save or invest more of their resources. The result is that states collect a growing portion of revenue from purchases rather than from earnings that scale with wealth. Lawmakers in several states have framed the moves as efforts to attract businesses and high-income residents by flattening income taxes, yet the data show the revenue replacement has come disproportionately from consumption.

The trend has unfolded against a backdrop of uneven economic pressures. Recent reports on commodity prices, including cocoa and other inputs, illustrate how supply disruptions and corporate pricing strategies keep consumer costs elevated even when wholesale prices ease. Mortgage rates have also ticked higher in recent weeks, with the 30-year fixed average reaching 6.696 percent, adding to household expenses for those carrying debt. These factors compound the effect of sales tax increases, which apply directly to items that form the core of most family budgets.

Proponents of the income-tax reductions argue they improve competitiveness and encourage investment. Critics, including the ITEP researchers, note that the shift reduces the overall progressivity of state tax systems. States that once relied more heavily on income taxes now depend on levies that do not adjust for ability to pay. This occurs even as federal policy debates continue over corporate taxation and wealth concentration.

Census figures show sales taxes surpassing other categories in aggregate state collections, a reversal from earlier decades when income taxes played a larger role in many jurisdictions. The change has been gradual but persistent, reflecting legislative choices rather than automatic economic forces. Some states have paired the income-tax cuts with modest expansions of credits or rebates aimed at lower earners, though analysts say these offsets have not fully counterbalanced the broader movement toward consumption-based revenue.

The pattern raises questions about long-term fiscal stability. Sales tax revenue can fluctuate with consumer spending and economic cycles, while income taxes capture gains from investment and wage growth at the top. As states face rising costs for infrastructure, education, and health programs, the reliance on regressive sources may limit options for addressing inequality without further rate hikes on purchases.

Data from the ITEP study and Census Bureau together document a structural change in how states raise money. The effects appear most clearly in the distribution of tax burdens across income groups, with lower earners shouldering a larger share relative to their resources.