By Jeffrey Michael
For the past 55 years, the roster of states with and without a sales tax has not changed while the economy has changed dramatically.
Montana, Alaska, Delaware, New Hampshire, and Oregon are the only five states that do not have a general statewide sales tax. Mississippi was the first state to enact a general sales tax in 1930. Over the next 40 years, 44 additional states implemented sales taxes, with Vermont being the last to do so in 1969. For the past 55 years, the roster of states with and without a sales tax has not changed while the economy has changed dramatically, shifting away from goods production and toward services.
Montana’s economic structure has also shifted toward services and tourism. Natural resource industries like mining and timber that once generated a large share of state tax revenue have decreased in prominence. As Montana hosts more visitors who do not pay state income taxes – and property taxes have increased for local residents – more Montanans have been asking if it is time to reconsider the stateﾕs longstanding opposition to a general sales tax.
Arguments for a sales tax
Taxing tourists
In a state with 15 million annual visitors and a little more than 1 million residents, taxing tourists is a frequent argument for a sales tax. Many states with large tourism economies like Nevada, Hawaii, and Florida rely heavily on sales taxes. Sales taxes are one way for a state to export a portion of its tax burden to nonresidents and get visitors to contribute more to local public services that they utilize when visiting the state. The Montana Legislative Fiscal Division sales tax model estimates that nonresident visitors would pay approximately 12% of a typical, general sales tax in Montana.
Many people believe nonresidents should pay their fair share through a sales tax, but out-of-state business investors and second-home owners do pay a significant share of property taxes.
In 2025, out-of-state addresses made up 33.8% of the taxable value of Montana residential property. Some property taxes for education have a uniform rate statewide, and out-of-state addresses paid 33.8% of these. The level of most property taxes is set by local governments and school districts. Out-of-state addresses paid an average of 18.2% of local residential property taxes in 2025 although that figure varies widely across communities. Averaged across all state and local property taxes, the nonresident share of Montana residential property taxes is 22%, about twice as large as the estimated nonresident share of a general sales tax would be if adopted.
If a general sales tax is used to lower property taxes, the overall share of taxes paid by nonresidents could decrease – especially if sales tax revenue were used to offset statewide education property taxes that are a larger share of property tax bills in resort communities like Big Sky. In addition, some Montana retailers – like RV dealers, for example – that target out-of-state buyers are likely to object to the argument that the burden of a sales tax on nonresident purchases falls exclusively on the nonresidents themselves. Surveys of Montana tourists show that they are increasingly budget conscious, and a sales tax could result in them purchasing less while they are here.
Exporting taxes to nonresident tourists is not as simple as it appears. It requires a targeted approach to the application of the tax and the use of the revenue.
Equity and stability
Households and businesses have different circumstances and structures, and thus the burden of different types of taxes can vary widely. For instance, some households are wealthy in property but have modest incomes and relatively low consumption. This characterizes many senior households and long-time Montana residents who have seen their property values rise much faster than their incomes. Introducing a sales tax to lower property taxes would benefit these individuals and alleviate concerns that they are taxed out of their homes.
In contrast, there are other households with low property wealth and comparatively high incomes and spending. Examples of these types of households are renters and young families, and they would be more burdened by a shift toward sales tax and away from property taxes. Because of these different circumstances and how they can change across an individualﾕs lifetime, it could be more equitable to use a variety of taxes to generate government revenue.
Using more taxes at lower rates can also reduce volatility in government revenue. Sales taxes can be a good stabilizer as they fluctuate less in economic cycles than income taxes. Sales taxes can also be more stable and predictable for households than property taxes that can change quickly with market conditions.
Tax can support economic growth
An argument for taxes on consumption, like sales taxes, is that it encourages saving and investment, which can boost productivity and long-term economic growth. While this is a strong argument for a national value-added or consumption tax, it is less convincing for state and local economies.
Economically efficient tax policy is often summarized as having low rates on a broad tax base. A broad array of taxes allows governments to keep tax rates relatively low across the board, and business and consumer decision making is less impacted by low tax rates. In contrast, systems that concentrate taxes with high rates on some activities while exempting others can result in distorted decisions driven by avoiding highly taxed activities rather than maximizing economic value.
Online shopping
A sales tax would apply equally to the transactions by brick-and-mortar stores and online retailers. In contrast, Montana’s current heavy reliance on property taxes is a major cost burden for traditional retailers that online sellers largely avoid. Thus, if a general sales tax were used to reduce property taxes, it would help Montana Main Street businesses compete with Amazon and other online sellers based outside the state.
The case against a sales tax
Burden for low-income households
A regressive tax is when low-income households pay a higher share of their incomes in taxes than higher income households. Sales taxes are regressive because low-income households have low savings and spend more of their income on taxable goods. Higher-income households have higher savings rates, and more of their spending is on untaxed services and out-of-state travel, therefore, they would likely pay a lower share of their income in state and local sales taxes. The share of income paid in tax is one of the most common metrics to evaluate tax equity and fairness.
Economically efficient tax policy is often summarized as having low rates on a broad tax base.
A 2025 report by the Minneapolis Federal Reserve, Fiscal Productivity of the U.S. Federal and State Governments, provides a detailed and current analysis of the regressivity of state taxes. The report confirms that the typical state sales tax is regressive, with households in the bottom 10% of the income distribution paying about 4.5% of their income in sales tax whereas households in the top decile of income pay about 1% of their income in sales tax. However, the report also finds state and local property taxes to be comparably regressive. Combining owners and renter households, the analysis finds the bottom 10% of the income distribution pay about 8% of their income in property taxes compared to the top 10% of households paying less than 2% of their income in property taxes. In 2025, Montana passed a law implementing tiered property tax rates by value, thus making Montanaﾕs property tax system more progressive than typical property tax systems that charge uniform rates across all values and types of real property.
Sales taxes can also be designed in ways to make them less regressive – primarily by exempting necessities for low-income households from the sales tax while expanding sales tax to services purchased more by high-income households. Tiered sales tax rates for certain big-ticket purchases like motor vehicles or rebates for low-income households could also be considered to make a sales tax less regressive.
New tax will lead to government growth
One argument against sales tax is that government will get bigger and less efficient if given more sources of tax revenue. However, there is no reason that having an additional tax revenue source would lead to higher government spending. Montana is a politically conservative state, and thus, most supporters of a statewide sales tax, and most previous proposals, would use sales tax revenue to reduce other taxes instead of expand government programs.
The data suggests that this argument is much stronger when it comes to income taxes than sales taxes. For example, the Minneapolis Fed study finds that nine of the 10 states with the lowest average tax burden do not have an income tax. These states also tend to have the most regressive tax systems. Sales taxes do not show a similar correlation. Montana and New Hampshire are states without sales tax and below-average overall tax burdens, whereas Oregon and Delaware have no sales tax, but still have above-average overall tax burdens.
Conclusion
A review of the pros and cons of a sales tax from a Montana perspective does not yield a clear conclusion for or against. One important insight comes from when considering a common proposal of using sales tax revenue to reduce property taxes. Using a general sales tax to lower property taxes would not increase tax revenue from nonresidents because of the large share of Montana property tax payments made by out-of-state addresses. In most states, sales and property taxes are similarly regressive, but Montana shifted to tiered property tax rates in 2025 that make property taxes less regressive. A sales tax could make the overall tax system more stable and equitable by diversifying sources of revenue and support business investment that might be discouraged by Montana’s property taxes.
Using a general sales tax to lower property taxes would not increase tax revenue from nonresidents because of the large share of Montana property tax payments made by out-of-state addresses.
A final question is: How much revenue could general a sales tax produce for Montana and how does it compare to other taxes? Montana’s constitution limits any statewide sales tax to a maximum of 4%. The Legislative Fiscal Division model estimates about $1.3 billion in revenue from a 4% general sales tax that has a typical structure that exempts groceries, medicine, gasoline, and most services with the notable exception of restaurant meals. The Montana Department of Revenue recently estimated that revenue could increase to between $1.5 billion and $1.7 billion annually if the hypothetical 4% sales tax were extended to more services. While this revenue would be substantial, it is significantly less than the nearly $2.5 billion in total property taxes paid in Montana.
Jeffrey Michael is director at the Bureau of Business and Economic Research at the University of Montana.
