Key facts
- States have reduced top income tax rates and increased sales/consumption taxes since 1990.
- This policy shift aims to attract residents and businesses and ensure stable revenue.
- Sales taxes disproportionately affect lower-income individuals.
- Louisiana recently raised its sales tax while cutting income tax due to budget shortfalls.
- Public sentiment increasingly favors taxing the wealthy more, contrary to legislative actions.
Many U.S. states are shifting their tax policies away from taxing high earners and corporations and toward taxing everyday purchases, according to a new analysis from the Institute on Taxation and Economic Policy (ITEP). Since 1990, top income tax rates have generally fallen, while sales and consumption taxes have increased, leading to a greater tax burden on consumers.
This trend reflects a broader change in state tax policy, with some states flattening or eliminating income taxes and sales taxes becoming the largest source of state revenue. Analysts attribute this shift partly to competition among states to attract residents and businesses, particularly from high-income tax states like California and New York. The Tea Party movement's influence after the Great Recession also played a role in driving down income tax rates.
Arguments for prioritizing sales taxes include their stability compared to potentially volatile income tax revenues. However, this strategy carries risks, as demonstrated by Louisiana's recent reversal of a sales tax cut and subsequent budget shortfalls linked to lower income and corporate tax collections. The state raised its sales tax to 5% and cut its income tax to a flat 3% in 2025.
Sales taxes are widely considered regressive, meaning they disproportionately impact lower-income individuals. This makes the shift politically challenging at a time when public opinion increasingly favors higher taxes on the wealthy, a sentiment that contrasts with the legislative actions observed over the past decade.