What Is a Luxury Tax?

luxury-tax Credit: Andrew E. Russell/CC-BY-2.0

A luxury tax is essentially a tax placed on any goods or services the United States government as well as many state governments deem as non-essential. Such a tax is aimed at only those who are wealthy enough to afford luxury items. Despite the fact that many items formerly considered luxury goods no longer are viewed that way, the term persists.

In most cases, luxury taxes, sometimes called "sin taxes" are similar to a sales tax, but only on high-end products and services, including jewelry. Some states even charge a luxury tax on real estate purchases over a specific dollar amount.

Another type of luxury tax in place today is that used by various professional sports leagues to prevent a particular team from signing the majority of talented players in a given season. The luxury sports tax is a surcharge attached to the collective total payroll of a team beyond an established amount of money established by the governing league.

Consumer luxury tax funds are often used to offset state or federal budgets during lean times. Sports luxury tax monies, on the other hand, are commonly divided among teams that generate less revenue in order to help level the playing field.