For most states, FY 2003 stretched from July 2002 through June 2003, a period that saw the beginning of the economic recovery, the continuation of the war in Afghanistan, and the beginning of the US led invasion of Iraq. State taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. collections began to stabilize following significant drop of the major tax collection sources, such as sales and personal income taxes.
State tax increases for FY 2003 was approximately $11.5 billion, or 2.1 percent. This number was narrowly exceeded estimates and expectations across states. As expected. Over the last few years, revenue estimates have fallen well short of projections, and so the above expected collections of FY 2004 came as a welcomed surprise. This As for FY 2005, 24 states have enacted tax and fee changes resulting in a net increase of $3.5 billion, which include $888 million in cigarette taxes, $711 million in sales taxes, and $708 million in other taxes.1
It is in this context that we look back at state tax revenue in FY 2003, for which Census Bureau data are now final. During FY 2003, the tax revenue collected from the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. fell for a second consecutive year; it fell by approximately 2.0 percent between fiscal year 2002 and fiscal year 2003. On the other hand, consumer spending increased in this same period, and as a result, sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. collections were up by approximately $5 billion, or 2.7 percent, and therefore benefited states heavily dependent on the sales tax.
State Tax Collections in Fiscal Year 2003
State tax and fee collections were 2.1 percent higher in FY 2003 than in FY 2002, but remained significantly short of record highs experienced in the late nineties up to 2001 (see Figure 1 and Table 1). The growth in state collections was fairly consistent. Eleven sources of revenue experienced an increase: General sales taxes, corporate income taxes, motor fuel taxes, licenses, insurance taxes, public utility taxes, state-level property taxes, tobacco taxes, severance taxes, alcohol taxes and “all other taxes”. The two pillars of state revenue, individual income taxes and general sales taxes, moved in opposite directions, with general sales tax collections increasing by 2.7 percent, while individual income tax collections fell by 2.0 percent. This was the second consecutive year that individual income tax collections fell. Adjusted for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power.
, the increase in overall tax collections was 0.3 percent.
Over the longer run, between FY 1993 and FY 2003, the fastest growing category of state tax collections was individual income taxes, which rose at an average annual rate of 5.2 percent. The second fastest growing revenue source was estate and gift taxes which averaged 4.7 percent increases per year. General sales tax revenue grew 4.6 percent per year, while all “other taxes” rose at an annual average rate of 5.8 percent. “Other taxes” is a catch-all category that includes amusement sales, pari-mutuel sales, documentary and stock transfer taxes and miscellaneous taxes (mostly other sales taxes).
Growth in the individual income tax accelerated from FY 1995 through FY 2001, but then declined sharply from FY 2001 through FY 2002. However, collections stabilized in FY 2003. By FY 1998, individual income taxes had overtaken general sales taxes as the single largest source of state tax collections, and continued to grow at a faster rate until FY 2001. However, since then, the individual income tax revenue has dropped, while the general sales tax revenue has remained fairly steady. As of FY 2002, the individual income tax and general sales tax produce very similar levels of revenue.
Although some states manage without a sales tax or without an individual income tax, the overall distribution of taxes confirms that these two sources provide the majority of tax collections. General sales taxes provided 33.8 percent of all collections, and individual income taxes provided 33.3 percent.
States that relied on the sales tax for over 50 percent of their tax collections in FY 2003 were Washington (61.8%), Tennessee (61.4%), Florida (55.6%), and South Dakota (53.4%) Nevada (53.1%) and Hawaii (50.2%). On the other hand, states that collected over half their revenue with the individual income tax are Oregon (70.6%), New York (55.8%), Virginia (52.2%), and Massachusetts (51.4%).
State Tax Collections Compared to Taxpayers’ Income
In most years, taxpayers total income (NNP) has usually grow slightly faster than state governments tax collections. The average difference over the past decade is 0.51 percent, with income (NNP) growth outpacing tax growth. This trend became more significant as we moved into in FY 2003, as taxpayer’s total income (NNP) grew by 4.77 percent faster than state tax collections.
However, the growth rate total income (NNP) relative to state government tax collections varies dramatically from state to state. North Dakota’s total income revenue grew 7.18 percent faster than the states tax collections. Other states where growth in total income outpaced state tax collections by a significant amount were Wyoming, South Dakota, Nevada, Hawaii, and Montana.
From FY 2002 to FY 2003, there were no states which saw tax collections grew faster than taxpayer’s income.
State Tax Collections, Per Capita and Per 1,000 of Income
Adjusting tax collections into per capita terms controls for differences in population, while adjusting into per $1,000 of income controls for difference in income.
States with the highest per capita tax collections include Hawaii, Connecticut, and Minnesota while states with the lowest tax collections include Texas, South Dakota, Texas and Alabama. States with the highest levels of tax collections per $1,000 of personal income include Hawaii, West Virginia, and Vermont while states with the lowest levels of tax collections include Colorado, New Hampshire and South Dakota.
Various measurements of state tax collections can differ substantially. For example, Maryland and Mississippi show an almost equally large disparity between their rankings “per capita” and “per $1,000 of personal income” but in opposite directions. This disparity can be explained by the difference in income per capita in the two states.
Income per capita in Mississippi is approximately 86 percent of that in Maryland. As a result, Mississippi is ranked 32nd in tax collections per capita, but in terms of tax collections per $1,000 of personal income, it is ranked as the 10th highest. On the other hand, Maryland is ranked 17th in tax collections per capita but only 40th in tax collections per $1,000 of personal income.
In some cases, taxes are high by any measure. If Washington, D.C. were a state, it would have the highest tax collections of any state, whether measured per capita or per $1,000 of personal income.
Changes in State Tax Rates During 2004
The final collections data for FY 2003 show that state governments were funded slightly better than in FY 2002, due to the economic recovery, and the reduction in unemployment.
Individual Income Taxes
2004 was somewhat of a quiet year with regard to changes in state rates and brackets. Only 2 states altered their brackets in 2004 compared with six states and the District of Columbia in 2003. In 2004, Louisiana lowered the top bracket from $50,000 to $25,000. As of 2004, all income over $25,000 is taxed at 6 percent. Michigan lowered its flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets.
from 4.0 percent to 3.9 percent in 2004. Ten states adjusted their income tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat.
for inflation during calendar year 2004, as they do every year; Arkansas, California, Idaho, Iowa, Maine, Minnesota, Montana, North Dakota, Utah and Wisconsin.
- Arkansas widened all six of their brackets, with the upper bracket of 7 percent coming into effect after $28,499 of income, compared to the previous amount of $27,899.
- California widened all six of their brackets, with the upper bracket of 9.3 percent coming into effect after $40,346 of income, compared to the previous amount of $39,133.
- Idaho Widened all eight of their brackets, with the upper bracket of 7.8 percent coming into effect after $22,079, compared to the previous amount of $21,730.
- Iowa widened all nine of their brackets, with the upper bracket of 8.98 percent coming into effect after $55,890 of income, compared to the previous amount of $55,850.
- Maine widened all four of their brackets, with the upper bracket of 8.5 percent coming into effect after $17,350 of income, compared to the previous amount of $16,950.
- Minnesota widened all three of their brackets, with the upper bracket of 7.85 percent coming into effect after $63,860 of income, compared to the previous amount of $6,440.
- Montana widened seven of their ten brackets, with the upper bracket of 11 percent coming into effect after $80,300 of income, compared to the previous amount of $77,800.
- North Dakota widened all five of their brackets, with the upper bracket of 5.54 percent coming into effect after $319,100 of income, compared to the previous amount of $311,950.
- Utah widened all six of their brackets, with the upper bracket of 7 percent coming into effect after $4,313 of income, compared to the previous amount of $3,750.
- Wisconsin widened all nine of their brackets, with the upper bracket of 6.75 percent coming into effect after $129,150 of income, compared to the previous amount of $126,420.
Corporate Income Taxes
Not one state reduced its corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.
rate, (although in 1998, Michigan began a 23-year phase-out of it’s 2.3 percent single business tax (SBT) by reducing the rate 0.1 percent each year. However, for FY 2003 the states stabilization fund fell below $250 million, and therefore the corporate rate was not reduced.) Meanwhile, two states increased their corporate income tax rates:
- New Jersey moved from a flat rate of 9 percent, and introduced to new rates. Corporate income below $50K is now taxed at 6.5 percent, while income over $50K, but less than $100K, is now taxed at 7.5 percent.
- North Dakota altered their rate structure, and eliminated the previous maximum rate of 10.5 percent. Now the highest corporate tax rate is 7 percent, and applies to all income over $30K.
Sales Tax Rates
Two states lowered their sales tax rates during 2004. California’s rate went from 7.25 to 6.25 percent, and Texas’s rate decreased from 8.25 percent to 6.25 percent.
Other Tax Rate Changes
Although most states continue to rely on sales and income taxes as the mainstays of their tax systems, they are also collecting substantial revenue from excise taxes. Table 7 lists each state’s gasoline tax, cigarette tax, and its rates on distilled spirits, wine and beer, as well as its sales tax rate.
Excise TaxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections.
Rates
During 2004, nine states, and the District of Columbia altered their gasoline tax rates. Six states along with the District of Colombia increased their gasoline rates. Iowa increased its gasoline tax by half a cent, to 20.5 cents per gallon. Kentucky increased its rate from 15 cents to 16 cents per gallon. Maine increased its tax from 22 cents per gallon to 25.2 cents per gallon. Nevada increased its gasoline tax rate by 1 cent, to 24 cents per gallon. Ohio also increased their gasoline tax, to 26 cents per gallon, from 24 cents per gallon. South Dakota increased its rate by 6 cents to 22 cents per gallon. The District of Columbia increased its gasoline tax from 20 cents per gallon, to 22.5 cents per gallon.
On the other hand, Florida lowered its gasoline tax from 13.9 cents per gallon to 4 cents per gallon. Illinois lowered their tax rate from 25 cents per gallon to 19 cents per gallon. New York also lowered its gasoline tax rate from 32.7 cents to 22.65 cents per gallon.
Even more states increased cigarette taxes than increased gasoline taxes. Seven states raised their cigarette tax rates, with five of them – Delaware, Michigan, New Jersey, Pennsylvania and Rhode Island -increasing the cigarette tax by more than 35 cents, per pack of 20 cigarettes.
Methodology
Fiscal year 2003 state tax collections are based on data from the Bureau of the Census. Census data records the tax collections received from various taxes levied at the state level. While excellent for a state-by-state comparison of state-level tax systems, the data are not sufficient for a computation of the actual tax burdens borne by taxpayers in each state. Tax burden calculations require tax incidenceTax incidence is a measure of who ultimately pays a tax, either directly or through the tax burden. This burden can be split between buyers and consumers, or different groups in the economy.
analysis, which account for the many ways that tax burdens can be shifted onto non-residents.
For example, income taxes paid by corporations to the state of California are not fully borne by the residents of California. Some portion of the real tax burden will be borne by residents of other states, whether as customers, out-of-state employees, or shareholders. Similarly, the severance taxes levied by the state of Alaska are not borne in full by Alaskan residents but instead by consumers of oil-based products throughout the country.
The Census data used in this report makes no adjustment for this effect. For a more complete state-by-state tax incidence analysis, refer to the “Tax Freedom Day” study published every April by the Tax Foundation in the Special Report series, which is also available on the web at www.taxfoundation.org/taxfreedomday.html.
Notes
1 “The Fiscal Survey of States,” The National Governors Association and the National Association of State Budget Officers, ISBN 1-55877-351-7, December 2004.