From the Archives: Looking Back at Tax Foundation State Tax Research from 60 Years Ago
July 29, 2011
In this period of ever-increasing state taxes, it is often useful to look to the past in order to spotlight certain catalysts in tax policy. A 1951 Tax Foundation Project Note, “Major State Taxes, 1939 and 1951,” outlines the changes in rates and yields for several major federal and state taxes from 1939 to 1951. Though the report finds (as of 1951) that “the evidence adduced from the trend in state sales tax collections [from 1939 to 1950] does not seriously militate against the use of [a national sales tax by the Federal government],” the point of this post is just to look to the past to briefly try and pinpoint the origins of certain tax trends.
It may come as a surprise that the first state sales tax was enacted in 1921 and it was only in the depression years of the 1930s that state sales taxes became popular. Yet even still, by 1950 sales taxes were yielding higher state revenues than any other state duty. Indeed, overall state revenue from sales taxes increased 107% in real terms from 1939 to 1950, yet only 5 out of the 24 states to have sales taxes during this duration actually increased their rates. It was the growth in real income and the subsequent increases in consumption, not hikes in sales tax rates, that actually allowed for the aforementioned increase in tax yields. It is, of course, intuitive that if people have more money, and by extension are consuming more, states will gain a larger yield on sales taxes
In another arena, revenue from state corporate and individual income taxes increased 143% and 108% respectively (adjusted for inflation), and combined grew to be the third-highest yielding state tax by 1951. As the brief states, “[t]he propensity of both the states and Federal government to rely more heavily upon income taxes as a source of revenue is evident” (p. 13). However, similar to the sales tax, very little of the increase in revenue was from hiked tax rates, but instead from a nation-wide increase in income.
Most intriguing is that the motor fuel tax, which was the highest yielding state tax in 1939, was increasingly becoming a less poignant revenue raiser. The motor fuel tax dropped from 26% of state revenues in 1939 to 20% by 1950—it was overshadowed by the sales tax which went from 15% to 21% of total state revenue yields (and would continue to increase in subsequent decades). There was also a reduction in total revenue yields from the motor fuel tax, the alcoholic excise tax, and the motor vehicle tax during this period.
Ultimately, the data shows that during this period we witnessed a complete shift in the main sources of state revenue. Whereas in the past we saw the states heavily relying on taxes such as the motor fuel tax, in this period there was a clear transition to new revenue foci that are, in addition to local property taxes, still the largest revenue yielding state taxes to this day. It seems intuitive that such reliance on these more robust taxes allowed for the expansion of state governments—most certainly if changes in lifestyle with increased consumption meant that over time states could expand in size without needing to increase tax rates. However, a decrease in revenue from state sales and income taxes would also necessitate a subsequent rise in those very taxes in the future. Altogether, it would be no mistake to say that starting at this time, as goes the state sales and income taxes, so goes the state services.
This post is part of a series highlighting Tax Foundation research from the past. Please keep in mind that government data used in these older studies may have since been revised and should not be cited.