Sales Tax, Property Tax and Who Really Pays for Your State

The cashier at your hardware store hands you a receipt with a line that says "tax." You did not hand her that money, exactly. You handed it to the store, and the store hands it to the state. So who paid the tax: you, or the store?

Congratulations. You have just stumbled into one of the oldest puzzles in public finance, and the answer is going to change how you read every campaign promise about taxes. Politicians love to say "we will make the corporations pay," as if a corporation were a person with a wallet and a conscience. A corporation is a legal arrangement. The money has to come out of someone's pocket: a customer's, an employee's, an owner's, a tenant's. Every tax has a legal payer, the one the law says must write the check, and an economic payer, the one who ends up poorer for it. They are not always the same person.

Hold that thought, because we are about to apply it to the two taxes that fund most of state and local government when you take income taxes out of the picture: the sales tax and the property tax. A state with no income tax is never a state with no taxes. It is a state that has chosen where to put the weight.

The legal payer and the economic payer

The vocabulary is simple. Economists call the question "tax incidence," meaning who actually bears the burden. Three rules of thumb will get you most of the way.

1. The legal payer is whoever the statute says must pay. A retailer is the legal collector of sales tax. A homeowner is the legal payer of the property tax on a house.
2. The economic payer depends on how easily people can change their behavior. If a buyer can walk away from a purchase easily, the seller has to absorb more of the tax. If the buyer needs the product badly, the buyer absorbs more.
3. Over time, burdens move. A landlord who gets a higher property tax bill will try to raise the rent. Whether the landlord succeeds depends on the local housing market.

That last one is worth an example. A property tax is legally paid by the owner. But renters live in properties that carry property tax, and in many markets that cost shows up in the monthly rent. So the owner writes the check, and some of the burden slides to the tenant. The same idea explains why the argument about who pays a tax is rarely settled by reading the statute. If you want a fuller version of the principle at the federal level, our piece on who really pays a tariff, following the dollar from dock to shelf follows a tariff from dock to shelf.

How a sales tax is collected

A sales tax is a percentage added to the price of a covered purchase. The buyer pays it at the register. The retailer is the legal collector, adds up the tax collected, and remits it to the state on a schedule. A $100 purchase in a place with a 6 percent sales tax comes to $106, and the retailer sends $6 to the state. Because merchants file returns on every sale, sales taxes are straightforward to administer, and they bring in a steady stream of revenue.

Two features make the sales tax interesting.

The base. A sales tax only reaches what the law covers. That is a policy choice. Many states exempt groceries, prescription drugs, or both, to protect low-income families, and some tax food at a reduced rate. A handful of states tax a broad range of services, such as repairs, haircuts or legal work, but most tax services only narrowly. The economy has been shifting from goods to services for decades, which means a sales tax that covers only goods covers a shrinking share of what families spend. That is why legislatures keep arguing about whether to widen the base.

The out-of-state seller. For decades, an old rule meant that a seller with no physical presence in your state did not have to collect your state's sales tax. In 1992, the Supreme Court held in Quill Corp. v. North Dakota that a state could not require a mail-order seller with no physical presence there to collect its tax. In 2018, in South Dakota v. Wayfair, the Court overruled Quill and allowed states to require remote sellers to collect, once they have a substantial connection to the state. This is why your online order now comes with a line of tax.

Why does this matter to your family? Because the sales tax is the one tax that you can partly control. Spend less on taxable items, and you pay less. The flip side is the hit to a family that has no room to cut. A family that spends everything it earns on taxable necessities pays a bigger share of income in sales tax than a wealthy family that saves and invests. That is the regressivity critique, and it is a fair one. The conservative answer is not to deny it, but to answer it with the right design: exempt the necessities, keep the rate low, and keep the base broad.

How a property tax is built

A property tax begins with a value that someone else decides. Here is the chain:

1. The local assessor determines the value of your property, often based on market value and sometimes on a fraction of it.
2. A rate is applied to that assessed value. Rates are often expressed in "mills," where one mill is one dollar per thousand dollars of assessed value.
3. Exemptions and credits reduce the bill: a homestead exemption, an exemption for seniors or veterans, a circuit-breaker credit for low-income owners.

The result is your bill. If your assessed value is $200,000 and your combined rate is 20 mills, then the tax is 200 × 20 = $4,000. We work through the whole calculation, with an appeal, in Work Out Your Own Property Tax Bill With Mill Rates and Exemptions.

Notice who sets each ingredient. The assessor sets the value. A county, a city, a school district and sometimes a special district each set their own share of the rate, usually through budgets adopted at public meetings and sometimes through votes by the public. The state sets the limits, the exemptions, and the rules for appeals. That is how a bill that arrives with one name on it contains the decisions of half a dozen local bodies.

Why local government lives on property taxes

In most states, the property tax is the local government's main revenue source, and it is the main funding source for public schools. There is a good reason for this. Real estate cannot move. A factory can threaten to move to another state. A house cannot. That makes property a reliable tax base for the school district and the sheriff's department, who need to know what they will have next year.

It also means your property tax bill is a bill from the people closest to you. Your school board and county commission set rates in meetings you can attend, which is more accountability than you get from almost any other tax. If you want to change your property tax, you have more leverage locally than at the state level.

The downside is the tension that gave us the tax revolts of the 1970s. Property taxes are bills on wealth that is not income. A retiree on a fixed income may own a home that has soared in value, and the tax bill rises with the assessment even though the retiree's income did not. Proposition 13 and the Tax Revolt That Rattled Every Statehouse tells the story of what happens when voters decide that is unfair.

Why "no income tax" never means "no tax"

Now put the pieces together. A state with no broad personal income tax still needs revenue. It will have some combination of sales taxes, property taxes, severance taxes on minerals, taxes on business, fees on visitors, and licensing. We compare five real states in Income Tax or No Income Tax, and What Each Choice Costs a State.

The mistake to avoid is treating the absence of one tax as a free lunch. Each system has a payer. In a no-income-tax state, the payers are shoppers, property owners, businesses, visitors, and anyone who depends on the businesses and the housing market. The tradeoff may be worthwhile, and for many families it is. But anyone who tells you the government is paid for with money from nowhere is selling something.

The argument for broad bases and low rates

Here is the conservative case in four sentences. A broad tax base with a low rate raises the same revenue as a narrow base with a high rate, but it distorts fewer decisions. Every exemption invites lobbying, and every lobbying victory pushes the rate up for everyone else. A simple tax is easier for a family to understand and harder for a politician to use as a favor to a friend. And a low rate keeps the tax small enough that people do not rearrange their lives to avoid it.

Think of a sales tax with 40 carve-outs. Each carve-out has a sponsor, a lobbyist, and a justification that sounded reasonable in the committee room. By the time you add them up, the tax code looks like a garage sale where every item has a different price tag. That is the argument for a clean, broad base: fewer exceptions, lower rate, less room for mischief. It is the same logic conservatives made in the federal tax reform of 1986, which traded a pile of loopholes for lower rates (our piece on the 1986 tax reform that lowered rates by closing loopholes tells it).

The argument for targeted credits

Fairness requires the other side of the case, stated in its best form. Advocates for targeted relief say that a flat approach hurts the people with the least slack. A grocery exemption protects a family that spends most of its income on food. A homestead exemption protects an owner who is house-rich and cash-poor. A circuit-breaker credit, which caps property tax relative to income, protects the retiree. These advocates argue that a pure broad-base, low-rate system ignores real differences between households, and that targeted relief puts the help where it is needed.

That argument has force, and I think it is partly right. A tax system that ignores the retiree on a fixed income is a system that will lose a referendum. The practical question is how targeted a credit should be, and who decides the target. Every credit is also a spending program, delivered through the tax code, and it comes with its own lobbyists and cliffs. A credit that phases out as income rises can create a hidden marginal tax rate, so that a raise leaves a family worse off. We explain the difference between a deduction and a credit in four families, one tax change, and how a deduction differs from a credit.

My verdict is this. Use broad bases and low rates as the default. Use a few clear, simple, well-targeted exemptions for necessities and for families on fixed incomes. Resist the temptation to hand out credits for every worthy cause, because every worthy cause is a reason to raise the rate on someone else.

Reading your own tax bills

You can learn more about your state in an evening than most candidates will tell you in a campaign. Pull your last property tax bill. It should list the value, the exemptions, and the rate broken down by taxing body: county, school district, city and so on. Pull a receipt and look at the sales tax line, and look up on your state revenue department's website which items are exempt. Then ask three questions.

1. Which body sets each rate, and when does it meet?
2. What are the limits on increases, and what votes are needed to exceed them?
3. Who is exempt, and who pays more as a result?

If you can answer those, you know more than most of the people who vote on the next budget.

The bottom line

• Every tax has a legal payer and an economic payer. When someone promises that "business will pay," ask who ends up paying: customers, workers, owners or tenants.
• A state without an income tax relies on sales, property and other taxes. The choice may be worth making, but it is never free.
• Sales taxes work best with a broad base, a low rate and exemptions for necessities such as groceries. Property taxes work best with honest assessments, clear limits and relief for fixed-income owners.
• Your best leverage is local. Read your property tax bill, find which bodies set each rate, and show up when they meet.