A Sales Tax Word of Warning in Hawaii, New Mexico, South Dakota, and Wyoming

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Photo: Emily Metcalf

BY THE TAX FOUNDATION – Our recent report on state and local sales taxes has generated enormous media attention and interest. In most states, consumers pay not only a state sales tax and a local one, and our calculations allow an apples-to-apples comparison of combined sales tax rates across the country.

There are two caveats, and regrettably, they were left out of the initial release of the report (we corrected the omission shortly after the report’s release). One affects just one state: Montana, which has no state sales tax, does have resort sales taxes in select towns. Unfortunately, collections data is not available from those towns for us to calculate a rate.

The other caveat is much more important, and affects Hawaii, New Mexico, South Dakota, and Wyoming. These states have broad-based sales taxes that are so unlike other states’ sales taxes that many experts in those states consider them different kinds of taxes altogether. For example, most states do not apply the sales tax to services or many business-to-business transactions, but those four states sweep most of those in.

Earlier this year, Professor John Mikesell of Indiana University estimated that sales taxes in the United States on average apply to about 40 percent of the economy. That is, 40 percent of personal income is subject to sales tax. In the four states noted, the percentages are significantly higher: New Mexico (60% included in tax base), South Dakota (67% included in tax base), Wyoming (99% included in tax base), and Hawaii (108% included in tax base). Hawaii in particular is astonishing as that means the tax base is larger than the economy, resulting in multiple taxation of the same product or service.

Such nuances are difficult to convey in a table or a map but are important to remember when doing interstate comparisons. So while Hawaii’s combined rate is a low-sounding 4.35%, the sales tax burden on residents is the third highest in the country ($2,043 per person per year, as against an average of $1,005).

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  1. Although http://www.taxfoundation.org has not yet posted all of the most recent state-to-state comparative rates and collections, it is interesting to note that in 2009, California’s levy was 8.25% and per capita collections were $788. New Jersey collected $951 per capita with a 7% rate. Rhode Island’s 7% tax pulled in $773 per resident. In the same year, Hawaii’s nominal 4% brought in $1906 per capita. Clearly, we pay a lot more than 4% (and receive a lot less in return)!

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