Why Sales Tax Rates Might Start Decreasing Across the US

by Lee Breslouer January 18, 2022

In today’s topsy-turvy economic landscape, costs seem to only go in one direction: up. Inflation is rising. Consumer prices are increasing. But state legislatures around the country are proposing sales tax rate reductions, potentially making it easier for consumers to purchase goods and services despite the pressure of surging costs. Why is this happening? 

State budgets are the key to understanding sales tax rates

States use the money generated from sales taxes to fund state budget items like hospitals and schools. In March 2020, state budget offices were worried about the potential for serious budget deficits due to a lack of spending and potential employment losses.  

“Many states lowered their revenue estimates at the beginning of the pandemic because a lot of people didn’t know what [the world] would look like and what to expect from their budgets,” said Aidan Davis, Senior Policy Analyst at the Institute for Taxation and Economic Policy. 

Spending did not decrease – and while unemployment rose in 2020, the current unemployment rate is near historic lows. Federal stimulus payments – part of the CARES Act – helped increase spending, and boosted tax collections across the country. Research from Pew published in May 2021 confirmed this outlook: “…for states collectively, cumulative tax revenue since the onset of COVID-19 reached pre-pandemic levels for the first time, though without adjustments for inflation.” 

Since 2021, the picture only got rosier financially for many states, leading to surpluses. “That made surpluses appear larger than they would have appeared in a regular year,” Davis said. 

Budget surpluses leave states to decide how to utilize the additional funds

Each state has its own idea of how to implement sales tax – in fact, Louisiana was recently sued for allegedly having one that was too complicated – and how to use a budget surplus. States use lowering or raising sales tax as one arrow in the quiver of its economic policy. 

The Tax Foundation lays this out in a recent report: “Sales taxes are just one part of an overall tax structure and should be considered in context. For example, Tennessee has high sales taxes but no wage income tax, whereas Oregon has no sales tax but high income taxes. While many factors influence business location and investment decisions, sales taxes are something within policymakers’ control that can have immediate impacts.”

Those immediate impacts are critical – it’s a way for state politicians to quickly put money back in the pockets of its constituents while the state has sufficient income. In 2022, Connecticut policymakers have proposed temporarily lowering the sales tax rate after a significant budget surplus, and other states with surpluses have acted similarly. 

Mississippi – a state with a budget surplus – is considering a bill that proposes reducing sales tax on groceries, increasing it on other goods, and phasing out income tax entirely. Davis said rate cuts are also currently being discussed in New Mexico and Maine. 

Instead of lowering the sales tax rate, other states are looking to reduce the tax burden on its constituents in unique ways. “In Utah, the governor [Gov. Spencer Cox] has a budget proposal for a grocery tax credit, which he’s touting as an equitable alternative to the income tax reduction,” said Davis. “It’s more of a sales tax credit [for consumers] rather than an across the board cut.” 

The future of sales tax rates 

It’s difficult to predict what will happen with sales tax rates overall since every state finds itself in a different budgetary situation. But one thing is for certain – sales tax rates (and regulations) are always changing. It can be a full-time job just keeping track of these changes. When your business automates sales tax filing and remittance through TaxJar’s AutoFile, we track these changes on your behalf so you can focus on what’s important: growing your business. Contact our sales team to learn more about how we can help you with sales tax compliance.

The basics of US sales tax

Learn the fundamentals of sales tax.

Watch the video