Skip to main content
  • Experts
  • Events
  • Briefing Book
  • Resources
  • About
  • Contact
  • Support
  • Fiscal Facts
Twitter
Facebook
Logo Site
  • Topics
    • Individual Taxes
    • Business Taxes
    • Federal Budget and Economy
    • State and Local Issues
    • Campaigns, Proposals, and Reforms
  • TaxVox Blog
  • Research & Commentary
  • Laws & Proposals
  • Model Estimates
  • Statistics
  • Features

The Tax Policy Center's

Briefing Book

A citizen’s guide to the fascinating (though often complex) elements of the US tax system.

Tax Policy Center Briefing Book

The State of State (and Local) Tax Policy

  • Briefing Book
  • Specific State and Local Taxes
  • How do state and local sales taxes work?
  • Chapters
    • Introduction
      • Introduction
        • Introduction
    • Some Background
      • Federal Budget
        • What are the sources of revenue for the federal government?
        • How does the federal government spend its money?
        • What is the breakdown of revenues among federal, state, and local governments?
        • How do US taxes compare internationally?
      • Federal Budget Process
        • How does the federal budget process work?
        • What is the history of the federal budget process?
        • What is the schedule for the federal budget process?
        • What is reconciliation?
        • How is a budget resolution enforced?
        • What is PAYGO?
        • What are rescissions?
      • Federal Budget Outlook
        • How accurate are long-run budget projections?
        • What have budget trends been over the short and long term?
        • How much spending is uncontrollable?
        • What are tax extenders?
        • What options would increase federal revenues?
        • What does it mean for a government program to be off-budget?
        • How did the TCJA affect the federal budget outlook?
      • Taxes and the Economy
        • How do taxes affect the economy in the short run?
        • How do taxes affect the economy in the long run?
        • What are dynamic scoring and dynamic analysis?
        • Do tax cuts pay for themselves?
        • On what do economists agree and disagree about the effects of taxes on economic growth?
        • What are the economic effects of the Tax Cuts and Jobs Act?
      • Economic Stimulus
        • What is the role of monetary policy in alleviating economic downturns?
        • What are automatic stabilizers and how do they work?
        • What characteristics make fiscal stimulus most effective?
      • Distribution of Tax Burdens
        • How are federal taxes distributed?
        • Are federal taxes progressive?
        • How should progressivity be measured?
        • What is the difference between marginal and average tax rates?
        • What criticisms are levied against standard distributional analysis?
        • How should distributional tables be interpreted?
        • Who bears the burden of the corporate income tax?
        • Who bears the burden of federal excise taxes?
        • How do financing methods affect the distributional analyses of tax cuts?
        • How do taxes affect income inequality?
      • Tax Expenditures
        • What are tax expenditures and how are they structured?
        • What is the tax expenditure budget?
        • Why are tax expenditures controversial?
        • What are the largest tax expenditures?
        • How did the TCJA affect tax expenditures?
      • Tax Gap and Tax Shelters
        • What is the tax gap?
        • What does the IRS do and how can it be improved?
        • What is a tax shelter?
      • Recent History of the Tax Code
        • What did the 2008–10 tax stimulus acts do?
        • What did the American Taxpayer Relief Act of 2012 do?
        • How did the Tax Cuts and Jobs Act change personal taxes?
        • How did the Tax Cuts and Jobs Act change business taxes?
    • Key Elements of the U.S. Tax System
      • Individual Income Tax
        • What is the standard deduction?
        • What are itemized deductions and who claims them?
        • How did the TCJA change the standard deduction and itemized deductions?
        • What are personal exemptions?
        • How do federal income tax rates work?
        • What are tax credits and how do they differ from tax deductions?
        • How do phaseouts of tax provisions affect taxpayers?
      • Capital Gains and Dividends
        • How are capital gains taxed?
        • What is the effect of a lower tax rate for capital gains?
        • What is carried interest, and how is it taxed?
        • How might the taxation of capital gains be improved?
      • AMT
        • What is the AMT?
        • Who pays the AMT?
        • How much revenue does the AMT raise?
        • How did the TCJA change the AMT?
      • Taxes and the Family
        • What is the child tax credit?
        • What is the adoption tax credit?
        • What is the earned income tax credit?
        • Do all people eligible for the EITC participate?
        • How does the tax system subsidize child care expenses?
        • What are marriage penalties and bonuses?
        • How did the TCJA change taxes of families with children?
      • Taxes and the Poor
        • How does the federal tax system affect low-income households?
        • What is the difference between refundable and nonrefundable credits?
        • Can poor families benefit from the child tax credit?
        • Why do low-income families use tax preparers?
        • How does the earned income tax credit affect poor families?
        • What are error rates for refundable credits and what causes them?
        • How do IRS audits affect low-income families?
      • Taxes and Retirement Saving
        • What kinds of tax-favored retirement arrangements are there?
        • How large are the tax expenditures for retirement saving?
        • What are defined benefit retirement plans?
        • What are defined contribution retirement plans?
        • What types of nonemployer-sponsored retirement savings accounts are available?
        • What are Roth individual retirement accounts?
        • Who uses individual retirement accounts?
        • How does the availability of tax-favored retirement saving affect national saving?
        • What’s the difference between front-loaded and back-loaded retirement accounts?
        • What is an automatic 401(k)?
        • How might low- and middle-income households be encouraged to save?
      • Taxes and Charitable Giving
        • What is the tax treatment of charitable contributions?
        • What entities are tax-exempt?
        • Who benefits from the deduction for charitable contributions?
        • How would various proposals affect incentives for charitable giving?
        • How large are individual income tax incentives for charitable giving?
        • How did the TCJA affect incentives for charitable giving?
      • Taxes and Health Care
        • How much does the federal government spend on health care?
        • Who has health insurance coverage?
        • Which tax provisions subsidize the cost of health care?
        • How does the tax exclusion for employer-sponsored health insurance work?
        • What are premium tax credits?
        • What tax changes did the Affordable Care Act make?
        • How do health savings accounts work?
        • How do flexible spending accounts for health care expenses work?
        • What are health reimbursement arrangements and how do they work?
        • How might the tax exclusion for employer-sponsored health insurance (ESI) be reformed?
      • Taxes and Homeownership
        • What are the tax benefits of homeownership?
        • Do existing tax incentives increase homeownership?
      • Taxes and Education
        • What tax incentives exist for higher education?
        • What tax incentives exist to help families pay for college?
        • What tax incentives exist to help families save for education expenses?
        • What is the tax treatment of college and university endowments?
      • Tax Complexity
        • Why are taxes so complicated?
        • What are the benefits of simpler taxes?
        • What policy reforms could simplify the tax code?
      • Wealth Transfer Taxes
        • How do the estate, gift, and generation-skipping transfer taxes work?
        • Who pays the estate tax?
        • How many people pay the estate tax?
        • What is the difference between carryover basis and a step-up in basis?
        • How could we reform the estate tax?
        • What are the options for taxing wealth transfers?
        • What is an inheritance tax?
      • Payroll Taxes
        • What are the major federal payroll taxes, and how much money do they raise?
        • What is the unemployment insurance trust fund, and how is it financed?
        • What are the Social Security trust funds, and how are they financed?
        • Are the Social Security trust funds real?
        • What is the Medicare trust fund, and how is it financed?
      • Excise Taxes
        • What are the major federal excise taxes, and how much money do they raise?
        • What is the Highway Trust Fund, and how is it financed?
      • Energy and Environmental Taxes
        • What tax incentives encourage energy production from fossil fuels?
        • What tax incentives encourage alternatives to fossil fuels?
        • What is a carbon tax?
      • Business Taxes
        • How does the corporate income tax work?
        • What are pass-through businesses?
        • How are pass-through businesses taxed?
        • Is corporate income double-taxed?
      • Tax Incentives for Economic Development
        • What is the new markets tax credit, and how does it work?
        • What is the Low-Income Housing Tax Credit and how does it work?
        • What are Opportunity Zones and how do they work?
      • Taxes and Multinational Corporations
        • How does the current system of international taxation work?
        • How do US corporate income tax rates and revenues compare with other countries’?
        • What are the consequences of the new US international tax system?
        • How does the tax system affect US competitiveness?
        • How would formulary apportionment work?
        • What are inversions, and how will TCJA affect them?
        • What is a territorial tax and does the United States have one now?
        • What is the TCJA repatriation tax and how does it work?
        • What is the TCJA base erosion and anti-abuse tax and how does it work?
        • What is global intangible low-taxed income and how is it taxed under the TCJA?
        • What is foreign-derived intangible income and how is it taxed under the TCJA?
    • How Could We Improve the Federal Tax System?
      • Comprehensive Tax Reform
        • What is comprehensive tax reform?
        • What are the major options for comprehensive tax reform?
      • Broad-Based Income Tax
        • What is a broad-based income tax?
        • What would and would not be taxed under a broad-based income tax?
        • What would the tax rate be under a broad-based income tax?
      • National Retail Sales Tax
        • What is a national retail sales tax?
        • What would and would not be taxed under a national retail sales tax?
        • What would the tax rate be under a national retail sales tax?
        • What is the difference between a tax-exclusive and tax-inclusive sales tax rate?
        • Who bears the burden of a national retail sales tax?
        • Would tax evasion and avoidance be a significant problem for a national retail sales tax?
        • What would be the effect of a national retail sales tax on economic growth?
        • What transition rules would be needed for a national retail sales tax?
        • Would a national retail sales tax simplify the tax code?
        • What can state and local sales taxes tell us about a national retail sales tax?
        • What is the experience of other countries with national retail sales taxes?
        • What did the President’s Advisory Panel on Federal Tax Reform say about the national retail sales tax?
      • Value Added Tax (VAT)
        • What is a VAT?
        • How would a VAT be collected?
        • What would and would not be taxed under a VAT?
        • What would the tax rate be under a VAT?
        • What is the difference between zero rating and exempting a good in the VAT?
        • Who would bear the burden of a VAT?
        • Is the VAT a money machine?
        • How would small businesses be treated under a VAT?
        • What is the Canadian experience with a VAT?
        • Why is the VAT administratively superior to a retail sales tax?
        • What is the history of the VAT?
        • How are different consumption taxes related?
      • Other Comprehensive Tax Reforms
        • What is the flat tax?
        • What is the X-tax?
      • Recent Comprehensive Tax Reform Proposals
        • Simple, Fair, and Pro-Growth: Proposals to Fix America’s Tax System, Report of the President’s Advisory Panel on Federal Tax Reform, November 2005
        • The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform, December 2010
        • Debt Reduction Task Force, “Restoring America’s Future,” Bipartisan Policy Center, November 2010
        • The Tax Reform Act of 2014: Fixing Our Broken Tax Code So That It Works for American Families and Job Creators, House Ways and Means Committee
        • The Graetz Competitive Tax Plan, Updated for 2015
      • Return-Free Tax Filing
        • What is return-free filing and how would it work?
        • What are the benefits of return-free filing?
        • What are the drawbacks of return-free filing?
        • How would the tax system need to change with return-free filing?
        • Who would qualify for return-free filing?
        • Would return-free filing raise taxes?
        • What was the experience with return-free filing in California?
        • What other countries use return-free filing?
    • The State of State (and Local) Tax Policy
      • State and Local Revenues
        • What are the sources of revenue for state governments?
        • What are the sources of revenue for local governments?
      • Specific State and Local Taxes
        • How do state and local individual income taxes work?
        • How do state and local sales taxes work?
        • How do state and local property taxes work?
        • How do state and local corporate income taxes work?
        • How do state estate and inheritance taxes work?
        • How do state earned income tax credits work?
        • How do state and local severance taxes work?
        • How do state and local soda taxes work?
        • How do marijuana taxes work?
      • Fiscal Federalism and Fiscal Institutions
        • How does the deduction for state and local taxes work?
        • What are municipal bonds and how are they used?
        • What types of federal grants are made to state and local governments and how do they work?
        • What are state rainy day funds, and how do they work?
        • What are tax and expenditure limits?
        • What are state balanced budget requirements and how do they work?
    • Glossary
      • Glossary
        • Glossary

How do state and local sales taxes work?

Specific State and Local Taxes

<2/9>
Q.

How do state and local sales taxes work?

A.

Forty-five states and the District of Columbia levy general sales taxes that apply (with some exemptions) to all goods and certain services. Thirty-seven states (including, Alaska, which has no state tax) also allow general sales taxes at the local level. Most states apply separate sales taxes to particular goods, including tobacco, alcohol, and motor fuels.

HOW MUCH REVENUE DO STATE AND LOCAL GOVERNMENTS RAISE FROM SALES TAXES?

States rely on sales taxes more than local governments do. States collected $457 billion from sales taxes in 2017, or 35 percent of their own-source general revenue (table 1). “Own-source” revenue excludes intergovernmental transfers. Nearly two-thirds ($300 billion) of that total came from general sales taxes, while the other third ($157 billion) came from selective sales taxes (or excise taxes) on specific purchases such as motor fuel, tobacco, and alcohol. Local governments collected $124 billion from sales taxes in 2017, or 11 percent of their own-source general revenue. Of that total, $89 billion came from general sales taxes and $34 billion came from selective sales taxes. (Census includes the District of Columbia’s revenue in the local total.)

 

Nevada relied on sales tax revenue more than any other state in 2017, with general sales and selective sales taxes accounting for 47 percent of combined state and local own-source general revenue. General sales and selective sales taxes also represented 30 percent or more of combined state and local revenue in Arizona, Arkansas, Florida, Hawaii, Louisiana, New Mexico, South Dakota, Tennessee, Texas, and Washington. Among the states with a general sales tax, Massachusetts and Wyoming relied least on general sales and selective sales tax revenue as a percentage of combined state and local own-source revenue (15 percent in both states).

Every state and the District of Columbia collected revenue from selective sales taxes in 2017. The average revenue from these taxes was 8 percent of state and local own-source general revenue, but 15 states collected 10 percent or more from selective sales taxes. Nevada’s 17 percent from selective sales taxes was the highest revenue share of any state, while Wyoming’s 4 percent was the lowest.  

HOW DO GENERAL SALES TAX RATES DIFFER ACROSS STATES?

Colorado has the lowest state general sales tax rate (2.9 percent). No other state with a general sales tax has a rate below 4.0 percent, but the state general sales tax rate is below 5.0 percent in 10 other states (figure 1). In addition to California, which has the highest state general sales tax rate (7.25 percent), four states (Indiana, Mississippi, Rhode Island, and Tennessee) have rates at or above 7.0 percent. Alaska, Delaware, Montana, New Hampshire, and Oregon do not have a state general sales tax.

Thirty-seven states (including Alaska, which has no statewide tax) allow local governments to impose their own general sales taxes. The maximum sales tax rates levied by local governments range from 0.5 percent in Hawaii to 8 percent in Colorado.

What purchases are subject to the general sales tax?

General sales taxes typically apply to most tangible goods. One notable exception is food purchased for use at home: only 13 states tax such purchases, and six of these states tax food at a lower rate than their general sales tax rate. Five of the 13 states that tax food for home consumption provide income tax credits to low-income residents to help offset the tax. In contrast, food bought for immediate consumption at restaurants is taxed in most states, and sometimes at a higher rate than the general sales tax rate.

Many states also exempt prescription and nonprescription drugs, textbooks, and clothing from general sales taxes. Some states have sales tax holidays, periods in which specific purchases—for example, clothes and school supplies right before the start of a new school year—are sold tax-free.

The taxation of services (e.g., dry cleaning, carpentry work, barbershops) is more complicated. All states tax some services, but exemptions are common. Very few states tax professional services, such as doctors and lawyers. Hawaii and New Mexico are exceptions to that rule, taxing nearly all services.

How do sales taxes apply to online purchases?

The evolving treatment of online and other remote sales (e.g., catalog sales) is complex. In 1992, the Supreme Court ruled (Quill Corp. v. North Dakota) that under the commerce clause of the US Constitution, a retailer with no physical presence in the online purchaser’s state of residence (technically called a "nexus” requirement) is not required to collect a state or local sales tax from the consumer.

However, the Supreme Court revisited this issue in 2018 in South Dakota v. Wayfair, Inc., overturned Quill, and gave states broad authority to collect the tax. The Supreme Court upheld a South Dakota law requiring any entity with sales of $100,000 or more or with at least 200 transactions in South Dakota to collect and remit the state’s sales tax. Other states quickly enacted similar laws. As of March 2020, Florida and Missouri were the only states with a general sales tax but not a law requiring remote sellers to collect tax.

Many states are now working on legislation that would require “marketplace facilitators,” organizations such as Amazon and eBay that allow third-party retailers to also sell items on their platform, to collect state sales taxes on those third-party sales as well. As of January 2020, 38 states and the District of Columbia had marketplace facilitator collection provisions.

Taxing online sales is not completely new, though. Many large retailers had already begun voluntarily collected the tax even before Quill. Most notably, Amazon has collected taxes in every state with a general sales tax since April 2017.

Further, states levy use taxes in addition to sales taxes. Consumers are subject to use taxes on goods purchased outside their state for use in their home state if they did not pay a sales tax and this includes online purchases. The use tax rate is the same as the sales tax rate, but few consumers know it exists and actually pay it. Many states with both a sales tax and an individual income tax (such as California, Kentucky, Virginia, and Utah) give taxpayers a chance to declare liability and pay use taxes on their income tax returns.

What taxes do states levy on tobacco, alcohol, and motor fuels?

All states levy “selective” sales taxes—with different rates than the general sales tax—on some goods and services. Three of the best known are taxes on tobacco, alcohol, and motor fuels. Those products are also subject to a federal tax. For tobacco and alcohol, the taxes are sometimes called sin taxes because one purpose of the tax is to discourage consumption. Marijuana and soda are also increasingly taxed by states and localities.

Tobacco Taxes

Cigarette taxes are typically levied per pack. In 2020, Missouri had the lowest rate (17 cents per pack) and the District of Columbia had the highest ($4.50). In six states (Alabama, Illinois, Missouri, New York, Tennessee, and Virginia), some local governments levy an additional cigarette tax. Local cigarette tax rates range from 1 cent per pack in Alabama and Tennessee to $4.18 per pack in Chicago (a Cook County tax of $3.00, plus a city tax of $1.18).

All states also levy taxes on other tobacco products, including cigars and loose tobacco. State and local governments also increasingly—21 states and the District of Columbia in 2020—tax e-cigarettes and vaping products.

State and local governments collected $19 billion in revenue from tobacco taxes in 2017, nearly all of it from cigarette taxes.

Alcohol Taxes

Alcohol taxes are generally paid at the wholesale level, so the cost is incorporated into the retail price. The excise taxes are levied per gallon (not as a percentage of the price), and beer, wine, and distilled spirits have different tax rates. In addition to the excise tax, many states also levy a general sales tax on the final purchase price of alcohol, and some states and cities have special sales tax rates for alcohol.

Some states, such as New Hampshire and Pennsylvania, collected most of their revenue from government-run liquor stores instead of traditional alcohol taxes, generating revenue through various fees, price mark-ups, and net profits. In total, 22 states collected revenue from government-owned liquor stores.

State and local governments collected $17 billion in revenue from alcohol in 2017—$7 billion from alcohol taxes and $10 billion from government-owned liquor stores.

Motor Fuels Taxes

Motor fuel taxes are typically per gallon taxes. That is, consumers pay tax based on how much gas they purchase, not as a percentage of the final retail price of gasoline. However, 20 states and the District of Columbia tie at least a portion of their gasoline tax rate to the retail price. The lowest gasoline tax rate is in Alaska (8.95 cents per gallon) and the highest is in Pennsylvania (57.6 cents per gallon).

States earmark much of their motor fuel tax revenue for transportation spending, which has meant funding gaps for transportation as gasoline has recently stagnated. States are considering options like tying the gas tax rates to inflation or population, taxing based on price, and taxing miles traveled instead of gas (as more drivers use hybrid or electric cars). State and local governments collected a combined $47 billion in revenue from motor fuel taxes in 2017.

Local Special Sales Tax

Some cities (e.g., Boston, San Francisco, and Washington, DC) also have special tax rates for specific goods and services (e.g., restaurant meals, hotel accommodations, rental cars, and parking) that are higher than their general sales tax rates. These higher tax rates are often designed to collect a significant share of their revenue from visitors, who use and benefit from city services and presumably have less political clout than local voters.

Updated May 2020
Data Sources

Urban-Brookings Tax Policy Center.  State and Local Finance Data: Exploring the Census of Governments. Washington, DC: Urban-Brookings Tax Policy Center.

———. Statistics. “State Cigarette Tax Rates: 2001 to 2018”; “State Motor Fuels Tax Rates: 2000 to 2018”; and “State Sales Tax Rates: 2000 to 2018.”

Further Reading

Auxier, Richard, and John Iselin. 2017. “Infrastructure, the Gas Tax, and Municipal Bonds.” Washington, DC: Urban-Brookings Tax Policy Center.

Auxier, Richard C., and Kim S. Rueben. 2018. “The Evolution of Online Sales Taxes and What’s Next for States.” Washington, DC: Urban-Brookings Tax Policy Center.

Auxier, Richard. 2014. “Reforming State Gas Taxes; How States Are (and Are Not) Addressing an Eroding Tax Base.” Washington, DC: Urban-Brookings Tax Policy Center.

Dadayan, Lucy. 2019.  "Are States Betting on Sin? The Murky Future of State Taxation." Washington, DC: Urban-Brookings Tax Policy Center.

National Conference of State Legislators. 2020. "Remote Sales Tax Collection." Washington DC: NCLS.

Urban Institute. State Tax and Economic Review. State and Local Finance Initiative.

  • ‹Read Previous How do state and local individual income taxes work?
  • Read Next› How do state and local property taxes work?
  • Donate Today
  • Topics
  • TaxVox Blog
  • Research & Commentary
  • Laws & Proposals
  • Model Estimates
  • Statistics
  • Privacy Policy
  • Newsletters
Twitter
Facebook
  • © Urban Institute, Brookings Institution, and individual authors, 2022.