Where Do State and Local Governments Get Their Revenue?

 
 
January 29, 2013

Washington, D.C., January 29, 2013—Property taxes make up the largest category of state and local government revenue at 35%, with sales and gross receipts close behind at 34%, according to a new analysis by the Tax Foundation. The corporate income tax brings in the smallest amount of any major tax, providing only about 3% of the money taken in by state and local tax collectors.

“State and local governments obtain income from a variety of sources, and the breakdown changes drastically from state to state,” said Tax Foundation economist Elizabeth Malm. “Proportions vary based on the types of taxes and fees administered within state borders, the types of resources within the state, and the policy priorities of state and local governments.”

When a state has an abundance of natural resources, for example, state governments are able to collect large revenues from taxes on those resources that are often not financed by state residents themselves. Instead, the state may be able to export the economic burden of those taxes to nonresident consumers in the form of higher prices. States such as Alaska and Wyoming do this with taxes on resources like oil, coal, and natural gas.

States vary widely on how heavily they lean on the various tax categories. New Hampshire receives almost 65% of its total state and local revenue from property taxes, while Arkansas receives less than a fifth of its budget from the same source.

The composition of all state and local revenue has also shifted significantly over time. A century ago, property taxes provided over 80% of all state and local government funding, while in recent decades that proportion has fallen to around a third of total tax receipts. The corporate income tax rose from nonexistent in 1913 to raising 6% of state and local revenue in 1980, only to fall back to 3.4% in fiscal year 2010.

Tax Foundation Fiscal Fact No. 354, “The Sources of State and Local Tax Revenues” by Elizabeth Malm and Ellen Kant is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state, and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

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