State-Local Tax Burdens Dip As Income Growth Outpaces Tax Growth

Thu, 07 Aug 2008 00:00:00 EDT

Special Report No. 163

Note: The methodology of this paper is described in detail here.

Introduction

For 18 consecutive years the Tax Foundation has published an estimate of the combined state-local tax burden shouldered by the residents of each of the 50 states. For each state, we calculate the total amount paid by the residents in taxes, and we divide those taxes by the total income in each state to compute a "tax burden" measure.

We make this calculation not only for the most recent year but also for earlier years because tax and income data are revised periodically by government agencies, and in the case of the current report, we have changed our own methodology to take advantage of new datasets.

The goal is to focus not on the tax collectors but on the taxpayers. That is, we answer the question: What percentage of their income are the residents of this state paying in state and local taxes? We are not trying to answer the question: How much money have state and local governments collected? The Census Bureau publishes the definitive comparative data answering that question.

Here are some examples of the difference between collections (focusing on the tax collector) and burdens (focusing on the taxpayer).

When Connecticut residents work in New York City and pay income tax there to both the state and the city, the Census Bureau will duly tally those amounts as New York tax collections, but we will count them as part of the tax burden of Connecticut's residents.
When Illinois and Massachusetts residents own second homes in nearby Wisconsin or Maine, local governments in Wisconsin and Maine will tally those property tax collections, but we will shift those payments back to the states of the taxpayers.
When people all over the country vacation in Disney World or Las Vegas, tax collectors will tally the receipts from lodging, rental car, restaurant and general sales taxes in Florida and Nevada, but we will use economic tools to tally those payments in the states where the vacationers live.

Every state's economic activity is different, as is every state's tax code. As a result, they vary in their ability to "export their tax burden"-that is, to collect revenue from non-residents. Economists have been studying this phenomenon since at least the 1960s when Charles McLure (1967) estimated that states were extracting between 15 and 35 percent of their tax revenue from non-residents.

Much of this interstate tax collecting occurs through no special effort by state and local legislators or tax collectors. Tourists spend as they travel, and all those transactions are taxed. People who own property out of state naturally pay property tax out of state. And the burden of business taxes is borne by the employees, shareholders and customers of those businesses, wherever they live.

However, many states have made a conscious effort for years to raise taxes on non-residents, and that effort seems to be accelerating. In fact, many campaigns for tax-raising legislation in the last several years have explicitly advertised the preponderance of non-voting, non-resident payers as a reason for resident voters to accept the tax.

This beggar-thy-neighbor effort has been mostly legislative, exemplified by a wave of tax hikes on tourism: hotel rooms, rental cars, restaurant meals, and local sales taxes in resort areas. States and localities have also enacted separate, higher tax rates for non-residents' property and income. The effort to soak nonresidents has also been administrative, as departments of revenue have pursued non-resident income tax revenue from individuals and corporations with far more zeal than in years past.

In some cases the tax exporting is a wash from the tax collector's perspective. That is, a state collects about the same amount from non-residents as its own residents pay to out-of-state governments. But in many cases there's a significant difference.

By tallying tax payments in the taxpayers' home states, this annual tax burden report allows policymakers, researchers, media, and citizens to go beyond a tally of collections to the question of which states' residents are most burdened by state and local taxes.

Tax Foundation State and Local Tax Burden Estimates for 2008: An In-Depth Analysis and Methodological Overview

Thu, 07 Aug 2008 00:00:00 EDT

Working Paper No. 4

Each year the Tax Foundation releases state-local tax burdens for the residents of each state. The burdens are effective tax rates calculated by totaling state-local level taxes paid by taxpayers in each state, then dividing by their income. The burdens also reflect the economic incidence of taxes that are commonly shifted to out-of-state taxpayers. This paper will discuss how that analysis is conducted.

Tax Foundation - Publications > Overview

State-Local Tax Burdens Dip As Income Growth Outpaces Tax Growth

Tax Foundation State and Local Tax Burden Estimates for 2008: An In-Depth Analysis and Methodological Overview