Federal Tax Burdens in States and Metropolitan Areas
Research Aid No. 5
Information as to the amount of Federal taxes collected in each state is readily available from official government sources, on a reasonably current basis. The Annual Report of the Internal Revenue Service (IRS) contains state-by-state data on Federal tax collections, classified by major type of tax, with approximately a one-year lag.
The collections statistics, a byproduct of administrative operations, are not designed to reveal the geographic origin of the taxes in terms of the ultimate incidence or burden. The collections data reflect merely the location of the IRS office where the taxes are paid.
From an economic standpoint, it is desirable to know more about geographic tax origins than the place where payment is made. Knowledge of the burden or incidence of Federal taxes by area can serve many purposes in economic analysis. To ascertain the burden of taxes by area requires special estimating techniques. First, a set of assumptions is required concerning the vexing problem of the incidence o f each major tax, a subject on which there is as yet n o consensus among economists. Given those assumptions, satisfactory data must be found or developed to carry out the allocation of the tax burden to specific areas. The results of the allocation procedure must thus be regarded as estimates, unlike the exact dollar-and-cent figures resulting from the collections process.
As estimates, the tax burden figures have limitations inherent in the state of economic knowledge as well as in the statistical data through which they are developed. Over the years, various organizations and individual s have devoted a great deal of study and research to the problem of determining the geographic incidence of taxes. In the early 1950’s the Tax Foundation first developed such estimating procedures. The first formal statement o f the allocation formula was published in 1957, a revise d edition came in 1963.
The sources and methods used in these allocations have been modified from time to time to take account of changes in budgetary concepts of taxes, the availability of new statistical materials, and advances in economic knowledge generally. Content of Study The remainder of this section enlarges upon the foregoing discussion of the inadequacies of collections data for determining tax burdens, the possible uses of data on tax burdens by area, theoretical incidence questions, and some of the limitations.
Section II describes the Tax Foundation’s formula, including assumptions and data for deriving tax burden estimates for states, and presents pertinent data including allocations for the most recent period, fiscal yea r 1974. Section III illustrates one of the popular applications of tax burden estimates by state—that of comparing Federal grants-in-aids to state-local governments with corresponding tax costs by state.