Sales tax is regressive. Everyone pays the same percentage at the register, but that flat rate consumes a much larger share of a lower-income household’s earnings than a higher-income household’s. Nationwide, families in the bottom 20 percent of earners pay roughly 7 percent of their income toward sales and excise taxes, while the top 1 percent pay about 1 percent.1ITEP. Who Pays? 7th Edition That sevenfold gap is the defining feature of a regressive tax.
Why a Flat Rate Falls Harder on Lower Earners
A progressive tax charges higher rates as income rises. The federal income tax works this way, with rates climbing from 10 percent on the first dollars of taxable income to 37 percent above a high threshold. A regressive tax does the opposite in practical terms: it takes a bigger bite from people who earn less.
Sales tax lands in the regressive column because it taxes spending, and lower-income households spend nearly everything they earn. A family living paycheck to paycheck has no real choice but to route most of its income through the cash register, where the tax applies. A higher-income household can move money into savings, investments, or retirement accounts that the sales tax never touches.
Economists describe this as a higher marginal propensity to consume. Someone earning $35,000 a year might spend 90 percent of their income on goods and services. Someone earning $350,000 might spend 30 percent and invest the rest. The flat rate treats both buyers identically at the point of sale, but the economic weight of that rate lands very differently on their budgets. Courts have generally upheld sales taxes as constitutional because the rate is uniform and applied to the transaction rather than the individual. Uniformity at the register doesn’t translate to uniformity in real financial impact.
What the Disparity Looks Like in Dollars
A simple example makes the math concrete. Picture two households in the same jurisdiction with a combined sales tax rate of 8 percent.
The first household earns $30,000 a year and spends $20,000 on taxable goods. That household pays $1,600 in sales tax, which works out to about 5.3 percent of its total income. The second household earns $300,000 and spends $60,000 on taxable items. Its sales tax bill is $4,800 — three times the dollar amount, but only 1.6 percent of total income.
Real-world data confirms the pattern at scale. The Institute on Taxation and Economic Policy finds that the lowest-income 20 percent of taxpayers pay about 7 percent of their income in sales and excise taxes, the middle 20 percent pay roughly 4.8 percent, and the top 1 percent pay around 1 percent.1ITEP. Who Pays? 7th Edition A $1,600 annual tax bill can wipe out a family’s ability to build an emergency fund. A $4,800 bill barely registers as a line item for a high earner.
How State and Local Rates Change the Picture
Five states impose no statewide sales tax at all: Alaska, Delaware, Montana, New Hampshire, and Oregon. In the remaining 45 states plus the District of Columbia, statewide base rates range from 2.9 percent in Colorado to 7.25 percent in California.2Tax Foundation. State and Local Sales Tax Rates, 2026
The base rate rarely tells the whole story. Counties, cities, and special districts in many states layer their own sales taxes on top of the state rate. When all layers are combined, the population-weighted average across the country sits at about 7.53 percent. Louisiana has the highest average combined rate at 10.11 percent, followed by Tennessee at 9.61 percent, Washington at 9.51 percent, and Arkansas and Alabama each near 9.46 percent.2Tax Foundation. State and Local Sales Tax Rates, 2026
Local add-ons deepen the regressive effect. They raise the total rate on everyday purchases without any adjustment for the buyer’s income, and they hit the same necessities the state tax already reaches.
What States Do to Blunt the Regressivity
Most states try to soften the regressive edge by exempting goods that dominate lower-income budgets. Roughly 37 states exclude unprepared groceries from their sales tax base, and several states that still tax groceries apply a reduced rate rather than the full statewide rate. Prescription medications enjoy even broader protection; virtually every state with a sales tax exempts prescribed drugs. Many states also exempt residential utilities like electricity, water, and heating fuel.
These exemptions matter most for families that spend the highest share of their income on necessities. Removing the tax from groceries and medicine effectively lowers the rate that lower-income households face. Wealthier households benefit from the same exemptions, but the savings represent a smaller fraction of their total spending. The tradeoff is lost revenue: every exemption shrinks the tax base, which can lead to higher rates on everything else or reduced public services.
Credits and Rebates
Some states take a different approach. They let the tax apply at the register and then return part of it through credits on the state income tax return. Idaho offers a grocery tax credit of $155 per person, or up to $250 with qualifying receipts, to offset the sales tax residents pay on food. Hawaii runs a similar credit program tied to income eligibility. These credits function as targeted refunds, putting money back into the hands of lower-income taxpayers while keeping the tax base intact.
Sales Tax Holidays
Close to two dozen states schedule annual windows, often in late summer, when certain categories of goods can be purchased tax-free. The most common categories are clothing, school supplies, and computers, with per-item price caps that vary by state. Clothing and school supplies typically cap around $100 per item, while computers can go up to $1,500. Some states have expanded their holidays to include energy-efficient appliances and emergency preparedness supplies like generators and batteries. Critics point out that the savings are small relative to a household’s annual tax burden and that retailers sometimes raise prices to capture part of the benefit.
How Sales Tax Compares to Other Taxes
Sales tax is not the only consumption-based tax, and it is not the only regressive one. Federal excise taxes on fuel, tobacco, and alcohol work the same way: a fixed amount per unit that falls harder on lower-income consumers as a share of their earnings. The federal government also imposes a 12 percent excise tax on certain heavy trucks and trailers and a gas guzzler tax on fuel-inefficient passenger vehicles.
The federal income tax sits at the other end of the spectrum, with rates that rise as income rises. Property taxes are harder to classify, since they’re based on asset value rather than income; that can be regressive for asset-rich but cash-poor homeowners and progressive for wealthy property owners.
When researchers measure the total tax burden across all levels of government, sales and excise taxes consistently show the steepest regressive tilt. States that rely heavily on sales tax revenue and have no income tax, such as Tennessee and Washington, tend to have the most regressive overall tax systems.1ITEP. Who Pays? 7th Edition Where you live determines how heavily the regressive pattern shapes your household budget, and whether the exemptions and credits available to you meaningfully offset it.