Sales tax is regressive because it takes a larger percentage of income from people who earn less

A regressive tax is one where the tax rate, in effect, goes down as your income goes up. Sales tax is regressive because everyone pays the same percentage — usually between 4 and 10 percent depending on the state — but that percentage represents a much larger share of a poor person's budget than a rich person's.

Here is the concrete difference: A person earning $25,000 a year spends most of that money on taxable goods — groceries, clothes, gas, household items. A person earning $250,000 a year spends a smaller fraction of their income on those same goods. The wealthy person saves or invests the rest; the low-income person does not. When both pay 7 percent sales tax, the low-income person loses a bigger chunk of their actual spending power.

This is different from a progressive tax, where the rate increases with income — like federal income tax, where higher earners pay a higher percentage. It is also different from a flat tax, which charges everyone the same rate and is theoretically neutral but still affects people differently depending on how much they spend versus save.

Key Takeaways

  • Sales tax takes the same percentage from everyone, but that percentage represents a larger share of income for lower earners because they spend more of their money on taxable goods.
  • A person earning $30,000 might spend $28,000 on taxable purchases, while a person earning $300,000 might spend $80,000, meaning the tax burden falls harder on the first person.
  • States with higher sales tax rates and no income tax (like Tennessee and Texas) tend to be more regressive overall because they rely more heavily on this tax.
  • Some states reduce the regressivity of sales tax by exempting groceries or other essentials, though this does not eliminate the effect.

How the math works: the same rate, different impact

Suppose two people each buy $100 worth of goods in a state with 7 percent sales tax. They both pay $7. That looks equal — and it is, in absolute dollars. But look at their actual income:

Person A earns $20,000 a year. That $7 is 0.035 percent of their annual income. If they make similar purchases every week, they pay roughly $364 in sales tax per year — about 1.8 percent of their gross income.

Person B earns $200,000 a year. That same $7 is 0.0035 percent of their annual income. Even if they spend more in absolute dollars, their total sales tax as a percentage of income stays much lower — often under 0.5 percent of gross income — because they save and invest a large portion of what they earn.

The gap widens with higher tax rates. In a state with 10 percent sales tax, the effect becomes even more pronounced. A low-income household might pay 2 to 3 percent of gross income in sales tax, while a high-income household pays less than 1 percent.

Which states rely most heavily on sales tax

States vary widely in how much they depend on sales tax revenue. Some states have no income tax at all and rely almost entirely on sales tax, making their tax systems more regressive overall.

Tennessee, Texas, Florida, and Washington have no state income tax and instead fund government through sales tax, property tax, and other sources. This means residents in those states pay a larger share of their tax burden through sales tax than residents in states with income tax.

States like California and New York have both income tax and sales tax, which makes their overall system more progressive because the income tax portion is graduated — higher earners pay a higher rate. Even though these states also have sales tax, the income tax offsets some of the regressivity.

Local sales tax rates also vary. Some cities and counties add their own sales tax on top of the state rate, pushing the total as high as 10 percent or more in places like New Orleans, Los Angeles, and parts of Tennessee.

Exemptions that reduce (but do not eliminate) the regressivity

Many states try to soften the regressive effect of sales tax by exempting certain goods. The most common exemption is groceries — about half of all states do not charge sales tax on food bought for home consumption.

This helps, because low-income households spend a much larger share of their budget on food than high-income households do. Removing that from the tax base reduces the overall burden on people with less money.

Some states also exempt prescription medications, medical devices, or utilities. A few exempt clothing. But these exemptions are inconsistent — what counts as "groceries" varies by state, and many states tax prepared food, restaurant meals, and snacks even if they exempt raw ingredients.

Even with exemptions in place, sales tax remains regressive because low-income people still spend a higher percentage of their income on other taxable goods like gas, household supplies, and clothing. Exemptions reduce the problem but do not reverse it.

How sales tax compares to income tax and property tax

Income tax is generally progressive — the more you earn, the higher percentage you pay. Federal income tax has brackets: someone earning $50,000 pays a lower rate than someone earning $500,000. This is the opposite of sales tax.

Property tax is more complicated. It can be regressive or progressive depending on the area and how it is assessed. In places where property values have risen sharply, long-term homeowners may pay less in property tax than renters in the same area pay in sales tax, because renters have no property tax deduction. In other places, property tax is high enough that it becomes a burden on lower-income homeowners.

Most states use a combination of all three — income tax, sales tax, and property tax — to fund schools, roads, and services. The overall regressivity or progressivity of a state's tax system depends on how much weight each tax carries.

Why states keep sales tax even though it is regressive

If sales tax is regressive, why do states use it? The answer is practical: sales tax is easier to collect than income tax, and it is harder to avoid. A business must collect it at the point of sale. Income tax requires people to file returns and report earnings, which costs more to administer and creates more opportunities for evasion.

Sales tax also brings in revenue from tourists and visitors who do not live in the state but spend money there. A person visiting from out of state pays sales tax but does not pay state income tax, so the state captures some tax revenue from them anyway.

States with no income tax often chose that policy for political reasons — the idea that income tax is a burden on workers and businesses. But they still need revenue, so they rely on sales tax instead. The result is a more regressive system overall, but one that some voters and politicians prefer.

Frequently Asked Questions

Is sales tax regressive in every state?

Yes, sales tax is regressive in every state because it charges the same rate to everyone but takes a larger percentage of income from lower earners. However, the degree of regressivity varies. States that exempt groceries are less regressive than states that tax everything. States with income tax are less regressive overall than states with no income tax.

Does sales tax affect rich people at all?

Yes, but much less as a percentage of their income. A wealthy person pays the same 7 or 8 percent on purchases they make, but because they save a large portion of their income, their total sales tax burden is a tiny fraction of what they earn. A low-income person spends almost all their income, so sales tax takes a much larger bite.

What is the difference between regressive and progressive tax?

A progressive tax takes a higher percentage from people who earn more — like federal income tax with its brackets. A regressive tax takes a higher percentage from people who earn less — like sales tax. A flat tax charges everyone the same rate, which sounds neutral but still affects lower earners more because they spend a higher percentage of their income.

Can states make sales tax less regressive?

States can reduce regressivity by exempting necessities like groceries, medicine, and utilities from sales tax. Some states also offer tax credits or rebates to low-income households. But these measures only soften the effect — they do not eliminate it. The fundamental structure of sales tax means it will always take a larger percentage from lower earners.

Why do low-income people pay more sales tax than rich people?

Low-income people spend almost all their money on taxable goods — food, gas, clothes, household items. Rich people spend a smaller fraction of their income on those same goods and save or invest the rest. When both pay the same tax rate, the low-income person's tax burden is a larger share of their total income.