Where Do State and Local Governments Get Their Tax Revenue?

August 27, 2010

Fiscal Fact No. 242

Introduction

Newly released Census data show how different the 50 states' fiscal systems are. Their reliance on various sources of tax revenue differs widely because they have different endowed resources and policy priorities. These differences are reflected in state-local tax collections no matter how large or small a fraction of the residents' income state and local governments have decided to take in taxes.

States heavily endowed with valuable natural resources, such as Alaska and Wyoming, will usually exploit those tax revenue sources, which they can do without much fear of driving the activity out of state, given that those natural resources are largely immobile. States with more tourism like Nevada and Florida rely more heavily on sales taxes so that they can forgo taxing income. A calculated decision by a state to concentrate taxation in a few sources is a plus for the state's taxpayers, significantly lowering the administrative burden for government and taxpayers and making the state tax climate conducive to economic growth. Of course, that means relying more heavily on the remaining tax sources for revenue. 

Tables 1-4 are "top ten" tables, highlighting the states that rely heavily on each of four major categories: property taxes, individual income taxes, general and selective sales taxes,[1] and licenses and other taxes.[2] The data are the latest available for states and localities, fiscal year 2008, which stretched from July 1, 2007, to June 30, 2008. Combined state-local data is best for interstate comparison because what some states accomplish with local taxes is accomplished in other states with state-level taxes. In particular, several states have converted traditionally local property taxes that fund public schools into state-level taxes in response to court decisions.

New Hampshire is an outlier on property tax dependence (see Table 1) because it is the only state with neither a wage tax nor a state or local general sales tax. In addition, New Hampshire has no substantial mineral resources that would generate severance tax revenue. Florida and Texas are also more reliant on property taxes because they have chosen not to tax personal income. All of the other states especially dependent on property taxes are in the northeast and Midwest.

Table 1
In Which States Do Governments Rely Most on Property Taxes?

Fiscal Year 2008

State

Fraction of Tax Revenue Coming from Property Taxes

New Hampshire

61.6%

Rhode Island

42.3%

New Jersey

42.2%

Florida

41.3%

Vermont

40.1%

Texas

38.8%

Michigan

37.5%

Illinois

36.8%

Wisconsin

36.2%

Connecticut

36.0%

Note: Includes residential and commercial real estate (mostly local revenue)
as well as personal property taxes on cars, boats, etc. (mostly state revenue).

Source: Tax Foundation calculations based on data from Census Bureau's
government finance data for state and local governments during fiscal year 2008.

Six states derive more than half their state-local revenue from general and selective sales taxes (see Table 2). Tennessee, Nevada and South Dakota rank 1, 2, 3 and use the revenue to forgo wage taxes.

Table 2
In Which States Do Governments Rely Most on Sales Taxes?

Fiscal Year 2008

State

Fraction of Tax Revenue from General and Selective Sales Taxes

Tennessee

57.9%

Nevada

55.7%

South Dakota

54.3%

Louisiana

52.9%

Hawaii

51.5%

Arkansas

51.4%

Arizona

48.3%

Mississippi

47.0%

Florida

46.9%

Alabama

46.8%

Note: The major selective sales taxes are levied on motor fuel, tobacco, insurance premiums, public utilities (power, telephone service, etc.), amusements and alcoholic beverages.

Source: Tax Foundation calculations based on Census Bureau's government finance data for state and local governments during fiscal year 2008.

Marylanders pay the highest average local income taxes in the country, making the state more dependent than any other on personal income taxes (see Table 3). Oregon is the next most dependent because it imposes no general sales taxes at the state or local level.

Table 3

In Which States Do Governments Rely Most on Personal Income Taxes?

Fiscal Year 2008

State

Fraction of Tax Revenue from Personal Income Taxes

Maryland

40.4%

Oregon

39.7%

Massachusetts

36.8%

New York

33.6%

North Carolina

33.1%

Connecticut

32.5%

Kentucky

32.0%

Minnesota

31.5%

Virginia

30.9%

Ohio

30.0%

Note: States and localities generally lump wages, dividends, interest and capital gains together when applying their individual income taxes.

Source: Tax Foundation calculations based on data from Census Bureau's government finance data for state and local governments during fiscal year 2008.

Most of the states heavily dependent on license revenue and other taxes are generating severance tax revenue from mining activity (see Table 4). Timber in Oregon, coal in Wyoming, oil in Alaska, Texas and Oklahoma: these are revenue sources most states do not have. Delaware derives much revenue from corporation licenses, and Nevada depends on gambling taxes.

Table 4

In Which States Do Governments Rely Most on Licenses and Other Taxes?

Fiscal Year 2008

State

Fraction of Tax Revenue Coming from Licenses & Other Taxes

Alaska

73.1%

Delaware

33.5%

North Dakota

30.7%

Wyoming

28.6%

Montana

20.1%

New Mexico

19.0%

Oklahoma

18.8%

Texas

14.3%

Nevada

13.9%

Oregon

13.2%

Note: Licenses include taxes imposed on motor vehicle licenses, business or corporation licenses, and hunting or fishing licenses. Other taxes include severance taxes (natural resources), stock transfer taxes, and estate/gift taxes.

Source: Tax Foundation calculations based on data from Census Bureau's government finance data for state and local governments during fiscal year 2008.

Nationwide, states and localities are most dependent on property taxes, collecting over 30 percent of their total tax revenue from that source (see Table 5). In fiscal year 2008, states and localities were, as a group, equally dependent on sales and income taxes. Each provided 22.9 percent of total revenue. Licenses and other taxes provided 8.2 percent of total state and local revenue, and corporate income tax revenue provided 4.3 percent.

Table 5

State and Local Tax Revenue by Major Source as a Percentage of Total Revenue

Fiscal Year 2008

Property
Tax

Sales Tax

Individual
Income Tax

Corporate
Income Tax

Licenses
and Other
Taxes

General Sales

Selective Sales

United States

30.8%

22.9%

10.8%

22.9%

4.3%

8.2%

Alabama

16.4%

29.5%

17.3%

22.7%

3.7%

10.3%

Alaska

11.0%

2.2%

3.6%

0.0%

10.1%

73.1%

Arizona

29.2%

39.6%

8.7%

14.8%

3.4%

4.3%

Arkansas

15.5%

39.5%

11.9%

24.9%

3.6%

4.4%

California

28.4%

22.1%

6.7%

30.0%

6.4%

6.5%

Colorado

31.2%

26.8%

7.8%

25.8%

2.6%

5.8%

Connecticut

36.0%

15.3%

9.8%

32.5%

2.6%

3.8%

Delaware

16.3%

0.0%

13.2%

28.7%

8.3%

33.5%

Florida

41.3%

31.2%

15.8%

0.0%

3.0%

8.7%

Georgia

30.4%

29.1%

8.6%

26.3%

2.8%

2.9%

Hawaii

18.6%

38.9%

12.6%

22.9%

1.6%

5.4%

Idaho

23.9%

27.3%

8.6%

29.1%

3.9%

7.2%

Illinois

36.8%

16.1%

17.2%

17.8%

5.4%

6.6%

Indiana

30.2%

25.0%

12.0%

23.5%

4.0%

5.3%

Iowa

32.2%

21.1%

11.2%

25.4%

3.0%

7.1%

Kansas

31.0%

25.8%

8.7%

24.8%

4.4%

5.3%

Kentucky

19.6%

20.3%

16.8%

32.0%

4.6%

6.6%

Louisiana

15.8%

39.6%

13.3%

17.7%

3.9%

9.7%

Maine

36.4%

17.9%

10.9%

26.3%

3.1%

5.4%

Maryland

23.9%

13.6%

11.1%

40.4%

2.7%

8.4%

Massachusetts

34.3%

12.1%

6.3%

36.8%

6.4%

4.2%

Michigan

37.5%

21.8%

10.6%

20.3%

4.7%

5.0%

Minnesota

26.8%

18.9%

12.3%

31.5%

4.2%

6.3%

Mississippi

25.0%

34.0%

13.0%

16.8%

4.2%

7.0%

Missouri

27.6%

25.4%

11.2%

27.5%

1.9%

6.3%

Montana

34.1%

0.0%

15.9%

25.2%

4.7%

20.1%

Nebraska

33.1%

25.0%

8.1%

23.0%

3.1%

7.7%

Nevada

30.4%

31.9%

23.9%

0.0%

0.0%

13.9%

New Hampshire

61.6%

0.0%

16.0%

2.4%

12.4%

7.7%

New Jersey

42.2%

16.6%

6.9%

23.4%

5.2%

5.6%

New Mexico

14.5%

35.7%

10.5%

15.7%

4.6%

19.0%

New York

28.3%

16.7%

7.9%

33.6%

8.2%

5.5%

North Carolina

23.7%

21.8%

11.8%

33.1%

3.6%

6.0%

North Dakota

23.3%

19.6%

11.3%

10.0%

5.1%

30.7%

Ohio

29.1%

20.4%

11.1%

30.0%

1.9%

7.5%

Oklahoma

17.2%

29.3%

9.1%

22.6%

2.9%

18.8%

Oregon

34.0%

0.0%

8.8%

39.7%

4.3%

13.2%

Pennsylvania

28.7%

17.0%

12.4%

26.5%

4.1%

11.3%

Rhode Island

42.3%

17.4%

11.2%

22.4%

3.0%

3.6%

South Carolina

32.7%

24.1%

10.8%

21.8%

2.4%

8.3%

South Dakota

34.3%

40.1%

14.3%

0.0%

2.8%

8.4%

Tennessee

24.6%

46.3%

11.6%

1.5%

5.3%

10.7%

Texas

38.8%

31.3%

15.5%

0.0%

0.0%

14.3%

Utah

23.7%

27.9%

10.4%

27.7%

4.2%

6.2%

Vermont

40.1%

11.7%

17.8%

21.2%

2.9%

6.3%

Virginia

32.3%

14.5%

11.7%

30.9%

2.4%

8.1%

Washington

27.3%

48.0%

14.6%

0.0%

0.0%

10.0%

West Virginia

19.3%

17.3%

19.8%

23.6%

8.4%

11.7%

Wisconsin

36.2%

18.7%

8.7%

27.2%

3.5%

5.5%

Wyoming

34.1%

32.9%

4.4%

0.0%

0.0%

28.6%

Dist. of Columbia

32.0%

16.6%

9.1%

25.1%

7.8%

9.4%

Notes: Property tax includes residential and commercial real estate (mostly local revenue) as well as personal property taxes on cars, boats, etc.  (mostly state revenue). The major selective sales taxes are levied on motor fuel, tobacco, insurance premiums, public utilities (power, telephone service, etc.), amusements and alcoholic beverages. State and local governments generally lump wages, dividends, interest and capital gains together when applying their individual income taxes. In license category, taxes are imposed on motor vehicle licenses, business or corporation licenses, and hunting or fishing licenses. In category of other taxes, major revenue sources are severance taxes (natural resources), stock transfer taxes and estate/gift taxes.

Source: Tax Foundation calculations based on data from Census Bureau's
government finance data for state and local governments during fiscal year 2008.


[1] The major selective sales taxes are levied on motor fuel, tobacco, insurance premiums, public utilities (power, telephone service, etc.), amusements and alcoholic beverages.

[2] Major fees are imposed on motor vehicle licenses, business or corporation licenses, and hunting or fishing licenses. Major tax sources are severance taxes (natural resources), stock transfer taxes, and estate/gift taxes.

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