Sales tax draws steady criticism for five reasons: it takes a larger share of income from people who earn less, it swings hard when the economy slows, it forces businesses to act as unpaid tax collectors across dozens of jurisdictions, it distorts what people buy through arbitrary product classifications, and it pushes shoppers across borders in ways that hurt local retailers. Understanding why sales tax is bad, in the view of economists and tax policy analysts, means looking at each of these effects separately, because they land on different people in different ways. Forty-five states and the District of Columbia collect a general sales tax, with combined state and local rates running from under 2 percent to nearly 10 percent, so the problems below apply almost everywhere in the country.
It Takes a Bigger Bite From Lower Earners
Sales tax is regressive. A household earning $30,000 a year spends nearly all of that income on taxable goods and services, so nearly all of it passes through the sales tax system. A household earning $200,000 saves and invests a large share, and those dollars never trigger a register. Both households pay the same posted rate, but the effective rate as a percentage of income is far higher for the lower earner.
The math is easy to picture. A worker earning the federal minimum wage of $7.25 per hour who spends $50 on taxable household goods at a 6 percent rate pays $3 in tax, close to half an hour of labor.1U.S. Department of Labor. Minimum Wage For someone earning $200,000, that same $3 barely registers. Lower-income families cannot defer spending; the money goes to rent, food, and transportation as it comes in.
Grocery Taxes Make It Worse
Taxing food sharpens the regressive edge, because groceries take a much larger share of a low-income budget than a high-income one. As of 2026, seven states still impose a statewide tax on unprepared groceries: Alabama, Hawaii, Idaho, Mississippi, Missouri, South Dakota, and Tennessee. Rates run from around 1 percent up to the full state sales tax rate.
Most states have moved the other way and exempt unprepared groceries entirely. Arkansas and Illinois eliminated their statewide grocery taxes in 2026. Some states that still tax food offer grocery tax credits on the income tax return, but a credit paid out at refund time provides less immediate relief than not paying the tax at the register in the first place.
It Leaves Governments Scrambling in a Downturn
When a recession hits, consumer spending is one of the first things to fall. People who lose jobs, or fear losing them, cut discretionary purchases quickly, and sales tax revenue drops with that spending. The timing is bad: revenue falls at the same moment demand rises for unemployment benefits, food assistance, and emergency healthcare.
General sales taxes account for roughly 12 percent of combined state and local general revenue nationwide, and some states collect over 20 percent of their total revenue from sales taxes.2Tax Policy Center. How Do State and Local General Sales and Gross Receipts Taxes Work Property tax revenue is steadier because assessed values adjust slowly and don’t track daily consumer behavior. Sales tax revenue can swing sharply quarter to quarter, and jurisdictions that lean heavily on it end up cutting spending, freezing hiring, or raising fees at the worst possible moment.
It Turns Retailers Into Unpaid Tax Collectors
Businesses collect the tax and remit it to the state, and the administrative work involved has grown substantially. The Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc. overturned the earlier rule that a business needed a physical presence in a state before that state could require it to collect sales tax.3Supreme Court of the United States. South Dakota v. Wayfair, Inc. Now any business that crosses an economic nexus threshold, a set dollar amount of sales or number of transactions in a state, can be required to collect and remit that state’s tax with no employee, warehouse, or office there.
Thresholds range from $100,000 to $500,000 in sales depending on the state, and a growing number of states have dropped the 200-transaction count that appeared in the original South Dakota law and rely on the dollar figure alone.3Supreme Court of the United States. South Dakota v. Wayfair, Inc. A business has to monitor its sales in every state individually, and the answer to where it owes changes as revenue moves through the year. Twenty-four states participate in the Streamlined Sales and Use Tax Agreement, which standardizes definitions and filing procedures across member states, but several of the largest states are not members, so the uniformity has gaps.4Streamlined Sales Tax Governing Board. Streamlined Sales Tax
Meeting these obligations usually means paying for tax automation software, which runs from roughly $20 a month for a basic small-business plan to over $500 a month for managed compliance across multiple state registrations. The alternative is manually tracking rates, filing returns, and watching thresholds across dozens of jurisdictions. Missed filings trigger penalties that commonly run around 5 percent of unpaid tax per month up to a cap, plus interest, and some states add flat-fee late penalties on each return. A small business that unknowingly crosses a threshold can face audit exposure in several states at once.
It Picks Arbitrary Winners and Losers
Sales tax systems routinely draw lines between similar products in ways that steer consumer choices without much economic logic behind the line. Prepared versus unprepared food is the most visible example. In many states, a hot sandwich from the deli counter is taxable while an identical cold sandwich from the refrigerated case is exempt. A loaf of bread from the store bakery may be exempt cold and taxable hot. Retailers and consumers navigate rules that hinge on temperature, packaging, and where in the store the transaction happens.
Tax-free holidays add their own distortion. Many states set aside a few days each year during which items like clothing, school supplies, or computers can be bought without tax. The holidays are politically popular, but they mostly shift the timing of purchases rather than create new spending. A family that was going to buy school supplies in early August waits for the tax-free weekend in late July, and the state collects less revenue without any real increase in economic activity.
Digital products are treated inconsistently across the country. Whether a downloaded album, an e-book, or a cloud software subscription is taxable depends on the state. Some states tax digital versions of goods that would be taxable in physical form; others exempt digital goods entirely. Software-as-a-service is the messiest category: some states treat it as taxable tangible property, others classify it as an exempt intangible service, and others tax it only under specific conditions. Two companies selling nearly identical online services can face completely different tax obligations depending on where their customers sit.
It Rewards Driving Across the Border
Combined state and local rates vary sharply across the country. Five states impose no general sales tax at all: Alaska, Delaware, Montana, New Hampshire, and Oregon. Parts of other states push close to 10 percent. On a $2,000 television, a few percentage points can mean $100 or more in savings, enough to justify a trip across a county or state line.
That cross-border shift hurts retailers in higher-tax areas who cannot cut prices enough to close the gap. A store a mile inside a high-tax jurisdiction can lose customers to an otherwise identical competitor a mile across the border. The Wayfair ruling has partly leveled things for online purchases, but geography still shapes outcomes for physical stores.3Supreme Court of the United States. South Dakota v. Wayfair, Inc.
One thing most cross-border shoppers don’t realize: buying in a lower-tax or no-tax state doesn’t legally erase the tax. Nearly every state with a sales tax also imposes a complementary use tax at the same rate, meant to capture tax on out-of-state purchases where the seller didn’t collect at the point of sale.5Office of the Law Revision Counsel. United States Code Title 4 Section 110 – Definitions A shopper who drives to a no-tax state to buy a laptop is supposed to report and pay use tax at home. Compliance on everyday purchases is very low because states have limited ability to track out-of-state cash transactions, and the gap between what the law requires and what actually gets paid amounts to a hidden subsidy for cross-border shopping.