States get their tax revenue from a variety of different sources. Unlike the federal government, which relies almost solely on income taxes, most states add on property taxes and sales taxes to help finance statewide and local government expenses. The immense popularity of online marketplaces Amazon.com (NASDAQ:AMZN) and eBay (NASDAQ:EBAY) show the length to which consumers will go to avoid having to pay sales taxes, as those companies have traditionally been able to avoid having to collect sales tax in most of the jurisdictions they serve. Moreover, the competitive advantage that they've gained has helped send brick-and-mortar retailers Best Buy (NYSE:BBY) and Sears Holdings (NASDAQOTH:SHLDQ) into serious difficulty, and countless small businesses suffer from the disadvantage of having to charge their customers sales taxes that those customers could avoid by going to Amazon, eBay, or other untaxed online retail sources.
Of course, just how big the sales-tax burden is varies greatly not just from state to state but also within states, as local-option sales taxes allow cities and counties to add on their own extra charge on shoppers. Using a combination of figures from the Tax Foundation, including general state sales taxes and average local-option surtaxes, let's look at the seven states that top the list in imposing the highest sales-tax rates.
7. New York
New York has a relatively low statewide sales tax of 4%, but local taxes more than double that total, bringing the combined average rate up to 8.48%. On a per-person basis, state and local governments collect an average of $1,783 in sales and excise taxes, the sixth highest in the nation, and combined with high rates on income and property taxes, New York ranks as the most burdensome for state and local taxes in the nation.
Arkansas carries a 6% general sales tax rate, with local options adding another 2.61% on average for a combined rate of 8.61%. Yet because spending is lower, total per-person sales and excise tax collections are $1,649, ranking it eighth. But on property taxes, Arkansas ranks among the two cheapest places to live from a tax standpoint, offsetting some of the sales-tax burden.
Oklahoma's 4.5% statewide sales tax is looks attractive until you tack on 4.17% in local add-on taxes. Nevertheless, spending is extremely low, putting overall per-person sales-tax collections in the lower half of states nationally. With average property taxes in the bottom five in the nation and relatively low income-tax rates as well, Oklahoma's overall tax burden isn't very high despite its high sales-tax rates.
With 6.5% statewide taxes and 2.36% in add-ons at the local level, Washington's overall 8.86% average sales-tax rate helps give the state the highest average collections of sales and excise taxes, at $2,416 per person. Yet the high sales taxes are more understandable when you consider that Washington doesn't have an income tax at all and boasts relatively little per-person revenue from property taxes as well.
Louisiana's 4% general sales tax more than doubles when you add in 4.87% for locally imposed sales taxes. Those figures combine with excise tax to produce a total burden of $1,928, fourth highest in the nation. Again, though, modest property-tax revenue and income tax rates make the sales tax more palatable, especially given that visitors bear a substantial amount of its effects.
Arizona's overall combined tax rate tops the 9% mark, with 6.6% rates statewide added to 2.56% in average local taxes. Yet the state only ranks 20th in per-person sales and excise taxes at $1,365, suggesting that spending levels are relatively restrained compared to other states. Overall, Arizona's ranks in the bottom quarter for total tax burden, with sales taxes being the biggest contributor to revenue.
Topping the sales-tax list is Tennessee, with a 7% statewide rate combined with a 2.44% local sales tax. But with an income tax that only applies to interest and dividends and with very low property-tax revenue, sales taxes are just about the only source of potential revenue left for state and local governments to go after.
Hitting visitors as well as residents
One thing to remember about sales taxes is that if structured well, they can transfer a substantial amount of tax liability away from residents and onto visiting tourists. The high rates that prevail in tourist locations like Louisiana and Arizona show just how attractive sales taxes can be. Yet opponents note their regressive impact on low-income residents. In the end, sales taxes are just one of many financial aspects associated with where you choose to live, and taking into your account your own spending patterns is essential to determine the impact sales taxes have on your personal finances.
Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter: @DanCaplinger. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.