Sales tax is regressive because everyone pays the same percentage at the register, but that percentage represents a much larger share of a lower-income household’s total earnings than a wealthy household’s. A family that spends nearly every dollar it earns on taxable goods ends up handing over a bigger slice of its income in sales tax than a household that saves or invests most of what it makes. The statutory rate is flat. The real burden is not.
What Regressive Actually Means
A tax is regressive when the effective rate falls as income rises. The number printed on your receipt stays constant for every shopper, but the portion of a household’s total income that number represents shrinks the more that household earns. Economists measure this by comparing tax paid as a fraction of household income across earning levels. When the fraction is highest for the poorest households and lowest for the richest, the tax is regressive by definition.
The federal income tax runs the opposite direction. It uses a progressive bracket structure where higher slices of income face higher rates.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A proportional or flat tax charges the same percentage of income to everyone. Sales tax looks proportional because the statutory rate is flat, but its actual effect is regressive because any income that isn’t spent on taxable goods is never touched.
The Math Across Income Levels
A simple comparison shows the disparity. Assume a combined state and local rate of 8% and a household spending $20,000 a year on taxable goods. A family earning $30,000 pays $1,600 in sales tax, or 5.3% of gross income. A household earning $300,000 buying the same basket also pays $1,600, but that’s just 0.53% of income. The rate at the register never changed. The effective rate is ten times higher for the lower-income family.
That example understates the gap, because lower-income households spend more of each additional dollar than wealthier ones do. Research from the Wharton School estimates that the lowest income quintile spends roughly 55 cents of every additional dollar on consumption, while the highest quintile spends about 12 cents. When nearly every dollar you earn flows into taxable purchases, the sales tax effectively becomes a tax on your whole income.
National data confirms the pattern. The poorest 20% of households pay an average effective state and local tax rate of about 11.4%, while the top 1% pays roughly 7.4%. Sales and excise taxes are the primary driver of that gap, because income and property taxes tend to be more progressive or proportional. The sales tax piece, standing alone, is what tilts the overall state and local burden against lower earners.
Why Higher Earners Pay a Smaller Share
The mechanic behind the tilt is simple: sales tax only hits money spent on taxable goods, and wealthier people spend a smaller fraction of what they earn. A high earner who directs half their income into retirement accounts, brokerage portfolios, or real estate shelters that money entirely from sales tax. Those activities sit outside the sales tax base no matter how large the amounts.
Households living paycheck to paycheck don’t have that option. When rent, utilities, food, and transportation consume everything you earn, nearly 100% of your income passes through the sales tax net at some point. The tax code doesn’t set out to penalize people for being unable to save, but the structural effect is the same. The less financial flexibility you have, the higher your effective sales tax rate climbs.
What Gets Taxed Matters as Much as the Rate
The choice of what to tax has as much impact on regressivity as the rate itself. Necessities like food, clothing, and medication account for a larger share of lower-income budgets, so taxing those items amplifies the effect. About 40 states now fully exempt unprepared grocery food from state sales tax. Roughly 10 states still tax groceries, at rates ranging from under 1% to the full state rate, with Mississippi and South Dakota among those charging the highest.
Prescription drugs enjoy broader protection. Nearly every state with a sales tax exempts them; Illinois stands as the sole state imposing a state-level tax on prescriptions, at 1%. Over-the-counter medications get less consistent treatment. Some states exempt them, others tax at the full rate, and a few draw the line based on whether a doctor prescribed the product.
The split between grocery food and prepared food is another pressure point. A bag of rice from the grocery store might be tax-exempt, while the same rice from a deli counter is taxable. The line usually turns on whether the seller heated, mixed, or served the food with utensils, but the specifics vary by state. This matters because lower-income workers who rely on prepared meals due to long hours or limited kitchen access end up paying tax on food that wealthier households buy in exempt form.
How Combined Rates and Inflation Deepen the Effect
Rates vary widely by location. Five states impose no general sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. In the remaining 45, combined state and local rates range from under 2% in some areas to over 10% in others, with a national average around 7.5%. Local add-ons are what push many areas into double digits. Lower-income residents who can’t easily shop across jurisdictional lines absorb the full combined rate, while higher-income consumers with cars and flexible schedules can sometimes shift purchases to lower-rate areas.
Inflation compounds the problem because sales tax is calculated as a percentage of the purchase price. When the cost of groceries, energy, or household supplies rises, the tax collected on those items rises with it, even if the household’s income hasn’t moved. A Congressional Budget Office analysis found that from 2019 to 2023, the average annual price increase for the lowest income quintile’s consumption bundle was 4.7%, compared to 4.4% for the highest quintile, driven largely by sharper increases in food and energy costs.2Congressional Budget Office. An Update About How Inflation Has Affected Households at Different Income Levels Since 2019 Fixed-income households, including retirees and people receiving disability benefits, are especially exposed because their income adjustments often lag behind real-time price increases at the store.
What States Do to Soften It
States use three main tools to blunt the regressive edges of their sales taxes: exemptions, credits, and holidays.
Exemptions for groceries, medicine, and sometimes clothing are the most common approach and the most effective at narrowing the gap, because they remove entire categories of spending from the tax base. The trade-off is lost revenue, which is why some states tax groceries at a reduced rate rather than exempting them entirely.
Refundable sales tax credits work differently. Instead of exempting products, a state gives lower-income households a flat dollar credit on their income tax return to reimburse some of the sales tax paid during the year. Hawaii offers a refundable food and excise tax credit. Several other states rely on their state earned income tax credit to serve a similar function. Credits are better targeted than exemptions because they benefit only lower-income filers, while exemptions apply to everyone regardless of income.
Sales tax holidays are the most visible but least impactful tool. About 20 states offer short windows, usually a few days in late summer, when certain items like clothing, school supplies, or computers can be purchased tax-free below a per-item price cap. They generate real savings on individual purchases, but the annual dollar benefit per household is small compared to a year-round grocery or clothing exemption, and they tend to shift the timing of purchases rather than reduce overall spending on taxable goods.
None of these mechanisms fully eliminates the regressive nature of sales tax. Exemptions leave large categories of spending taxable. Credits depend on households filing income tax returns to claim them, which many low-income filers skip. Holidays cover a handful of days out of 365. Any tax triggered by consumption rather than income will land harder on people who must consume everything they earn. States can soften the impact, but the tilt is built into the design.