If you’re contemplating a move to a different state, you’ve likely considered state income taxes when making your decision. However, it’s important to also consider the impact of state and local sales taxes on your budget.
Four states—Delaware, Montana, New Hampshire, and Oregon—do not impose statewide sales taxes, nor do they have local sales taxes. While lacking a statewide sales tax, Alaska permits cities and towns to impose sales taxes. When factoring in these local taxes, the Tax Foundation, an independent think tank, calculates Alaska’s total sales tax at 1.81 percent, which is still significantly below the national average of 6.59 percent. Following Alaska, the states with the lowest combined state and local sales taxes are Hawaii (4.44 percent), Wyoming (5.44 percent), Wisconsin (5.43 percent), and Maine (5.5 percent).
On the opposite end of the spectrum, Tennessee and Louisiana have the highest combined state and local sales taxes, both around 9.55 percent. Tennessee, with a state sales tax of 9.547 percent, is only slightly behind Louisiana. Other states with high sales tax rates include Arkansas (9.44 percent), Washington (9.24 percent), and Alabama (9.24 percent).
It’s worth noting that states must generate revenue from various sources, and some with low-income taxes may compensate with higher sales taxes. For example, Tennessee does not tax wage income but does tax dividends and capital gains. Similarly, Washington and Texas lack income taxes and have above-average sales taxes.
Certain states with low sales taxes, such as Alaska and Montana, rely significantly on income from natural resource taxes. On average, the combined state and local sales tax rate across the United States is 6.59 percent. Keep in mind that rates can vary by city, county, and municipality, and these rates are adjusted based on population to calculate the average local tax rate. Hawaii, New Mexico, and South Dakota have comprehensive sales tax bases, including many business-to-business services. The ranking of Washington, D.C., does not impact the state average.
Regarding what is and isn’t taxed, most states exempt essential purchases like groceries from sales taxes. This is significant because groceries constitute a significant portion of people’s expenses. However, the rules can be somewhat idiosyncratic. Some states exempt food from the sales tax but impose it on soda and candy. For instance, Louisiana taxes bottled water but not soda or candy. Food stamps, also known as SNAPs, are not subject to state sales taxes.
All states except Illinois exempt prescription drugs from sales tax, and in Illinois, they are taxed at a minimal rate of 1 percent, compared to the statewide sales tax rate of 6.25 percent. In addition, several states do not levy sales taxes on nonprescription drugs, including:
- Connecticut
- Florida
- Maryland
- Minnesota
- New Jersey
- New York
- Pennsylvania
- Texas
- Vermont
- Virginia
- the District of Columbia