If you’re considering moving to another state, you’ve probably factored state income taxes into your decision. But state and local sales taxes will cut into your budget as well.
Lowest and highest sales tax states
Four states — Delaware, Montana, New Hampshire and Oregon — have no statewide sales tax, or local sales taxes, either.
Alaska has no statewide sales tax, but it allows cities and towns to levy sales taxes. The Tax Foundation, an independent think tank, weights local sales taxes and adds them to statewide sales taxes. It calculates Alaska’s sales tax at 1.76 percent, still well below the national average of 7.12 percent. The lowest state and local sales taxes after Alaska’s are in Hawaii (4.44 percent), Wyoming (5.34 percent), Wisconsin (5.43 percent) and Maine (5.5 percent).
On the other end of the spectrum is Tennessee, whose state sales tax is 9.55 percent — the highest in the U.S. Following Tennessee on the ranking of the states with the highest sales taxes are Arkansas (9.53 percent), Louisiana (9.52 percent), Washington (9.23 percent) and Alabama (9.22 percent).
States have to get revenue from somewhere, and sometimes states with low income taxes have high sales taxes. “Tennessee has a very high sales tax but a very low income tax,” says Janelle Cammenga, policy analyst at the Tax Foundation. “In fact, Tennessee doesn’t tax wage income at all — it just taxes dividends and capital gains.” Washington and Texas, which don’t have state income taxes, also have above-average sales taxes.
Some states with low sales taxes, such as Alaska and Montana, get significant income from natural resource taxes. That, too, can have its drawbacks. Alaska, for example, expects to take in $693 million less in taxes in 2020 than it did in 2019, primarily because of declining oil prices.
How High are Sales Taxes in Your State?
Overall, the average combined state and local sales tax is 7.12 percent. City, county and municipal rates vary. These rates are weighted by population to compute an average local tax rate. The sales taxes in Hawaii, New Mexico and South Dakota have broad bases that include many business-to-business services. D.C’s rank does not affect states’ ranks, but the figure cited indicates where it would rank if included.
Note: States are ranked from highest combined state and local sales tax (#1) to lowest (four tied for #47)
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What’s taxed and what isn’t
Although it might feel like you’re taxed on everything you buy, most states exclude some purchases from sales taxes. All but 13 states, for example, don’t tax groceries. “That’s a huge one, because most people spend a lot of their income on groceries,” Cammenga says. Even then, the rules can be quirky. Some states that exempt food from the sales tax will impose it on soda and candy. Louisiana taxes bottled water but not soda or candy. Groceries bought under the Supplemental Nutrition Assistance Program (SNAP), often referred to as food stamps, aren’t subject to state sales tax, either.
All states except Illinois exempt prescription drugs from sales tax, and Illinois taxes them at just 1 percent, compared with 6.25 percent for its statewide sales tax. A few states — Florida, Maryland, Minnesota, New Jersey, New York, Pennsylvania, Texas, Vermont and Virginia — and the District of Columbia don’t charge sales taxes on nonprescription drugs.