Every year around this time, my inbox starts filling up with the same question: where can I still find decent yield without taking on crazy risk? Rates have come down, Treasuries feel stingy, and corporate bonds make me nervous when the economy looks shaky. Then I remember one of my favorite sleepy corners of the fixed-income world that almost nobody talks about at holiday parties—sales-tax revenue bonds.
Yeah, the ones literally funded by everything we buy from Black Friday through Christmas. Turns out, while the rest of us are stressing about higher prices, these bonds are quietly handing investors tax-free income that often beats plain-vanilla municipal paper by a noticeable margin. And the best part? Many of them come with credit protections that have sailed through every recession in living memory.
The Hidden Appeal of Shopping-Fueled Bonds
Let me paint the picture. When you swipe your card at the mall or click “buy now” online, a slice of that transaction flows to state and local governments as sales tax. Certain issuers take those receipts, ring-fence them, and use them to back specific bonds. Essential stuff gets built—convention centers, highways, schools—while investors collect coupons that Uncle Sam can’t touch.
In my experience, most people hear “sales tax bond” and immediately think volatile. After all, if consumers stop spending, revenue drops, right? That’s the theory. Reality has been far kinder. These structures usually come loaded with extra collateral, big reserve funds, and coverage ratios that make credit analysts sleep easy at night.
Extra Yield Without Extra Heartburn
Here’s what catches my eye right now. High-quality sales-tax deals can offer anywhere from 10 to 40 basis points more yield than comparable general obligation bonds from the same state. That might sound small written down, but compounded over decades inside a tax-free wrapper, it’s real money.
Take a big, diversified state issuer as an example. Their GO paper might yield 3.40% out to twenty years. The sales-tax tranche from the same state? Closer to 3.70% or 3.80% with essentially the same triple-A or double-A rating. When you’re managing a ladder for retirement cash flow, those extra dollars every six months feel pretty nice.
“While tariff-driven price increases create uncertainty about consumer behavior this year, sales-tax bonds feature strong security provisions and reserves that have proven resilient through economic cycles.”
– Head of municipal strategy at a major asset manager
I love that quote because it captures exactly why I’m comfortable owning these securities heading into what could be a choppy 2026.
Only 6% of the Market—But Growing Fast
One reason they still fly under the radar? They’re a relatively small slice of the overall muni pie—roughly six or seven percent depending on whose index you check. But that share has been creeping higher for years as states realize they can tap consumption taxes instead of constantly hiking property or income levies.
Nearly every state collects sales tax, and dozens layer on local option taxes too. That creates thousands of potential issuers. The biggest and best-documented streams have decades of collection history—data that makes underwriters and rating agencies very happy.
- Second-largest revenue source for most states (behind personal income tax)
- Forty-five states plus thousands of local jurisdictions
- Long performance track record through multiple recessions
- Typically over-collateralized debt service coverage
When I dig into the numbers, what always impresses me is how these revenue streams held up during Covid. Yes, collections dipped hard in the second quarter of 2020, but reserves and structural features kept every single senior lien payment current. That’s the kind of stress test you can’t fake.
What to Look For (and What to Avoid)
Not every sales-tax bond is a slam dunk, of course. I’ve learned the hard way that doing homework matters more here than with plain GO paper. A few quick filters I run on any new idea:
- Length of collection history—twenty years minimum, fifty is better
- Coverage ratios—I want to see 2x or higher on senior debt service
- Reserve funds—fully funded debt service reserves plus additional cushions
- Breadth of the tax base—states that exempt groceries or medicine tend to be more stable
- Essentiality of purpose—infrastructure everyone needs beats discretionary projects
Skip the narrow, tourist-dependent deals or anything tied to a single mall. I’ve seen those trade like high-yield credits for a reason. Stick with broad statewide pledges or large metro areas and the risk/reward tilts heavily in your favor.
Performance Outlook for 2026 and Beyond
Most forecasts I read call for sales-tax receipts to grow around 3.5% next year—slower than the post-pandemic surge but still positive. That’s plenty to cover debt service on just about every highly-rated deal out there.
Even if we get a mild slowdown, the built-in buffers mean rating agencies are unlikely to swing the downgrade axe. We saw the same pattern in 2008-2009: collections fell, coverage thinned, but no senior lien defaults. Zero. That track record is why I’m happy adding duration here when everyone else is scared.
Perhaps the most interesting aspect? Valuation. Spreads versus GO paper remain historically wide in many parts of the curve. To me, that smells like opportunity.
How Retail Investors Can Actually Buy These
Gone are the days when you needed a private banker to access decent individual bonds. Most major brokers now let you screen by revenue source. Type “sales tax” or specific state abbreviations into the bond desk and you’ll usually find a handful of institutional-sized blocks broken down into $5,000 or $10,000 pieces.
If picking individual names feels like work, plenty of actively managed muni funds overweight this sector on purpose. Some intermediate-duration funds I follow have 15-20% allocated to dedicated revenue streams including sales-tax pledges—way above benchmark weight.
Want passive exposure? A couple of the larger muni ETFs have decent slugs too, though they rarely break out the exact sub-sector in marketing materials. Sometimes you have to dig into the holdings file to see the real story.
Putting It All Together
Look, nobody is going to get rich buying five percent tax-free bonds. But in a world where safe cash yields have collapsed and stock valuations make my stomach turn, grabbing an extra quarter-point or more of tax-free income with triple-A type credit risk feels like stealing.
I’ve been allocating fresh money to this pocket of the market for months now, and every time I run the numbers again, I like what I see. Resilient revenues, fat coverage ratios, and a yield advantage that compounds beautifully inside retirement accounts.
So while everyone else obsesses over the latest Fed statement or tariff headline, I’ll be over here collecting my coupons—funded by all the shopping they’re worrying about. Funny how that works.
If you’ve been searching for tax-efficient income that doesn’t keep you up at night, maybe it’s time to take a closer look at the bonds powered by America’s favorite pastime: spending money.
