State-Local Tax Burden Rankings: Methodology

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Section A.

Methodological Overview and Data Sources

A state’s state-local tax burden is the total amount residents of that state pay in state and local taxes, even if some of those payments go to out-of-state jurisdictions. Our measure expresses this 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. burden as a proportion of total state income. This means that two broad statistics are needed to make the calculation for each state: total state and local taxes paid by state residents (what we call the tax burden) and total state income.

For the tax portion, the first step is to convert tax collections by state, as reported by the Census Bureau’s Government Finance Division,[1] to total state and local taxes paid by residents of each state, even if those taxes are paid to out-of-state jurisdictions. Each tax collection amount from the Census Bureau is first divided into categories, such as property taxes being narrowed to personal property or property taxes on business property, to ensure the most accurate final tax burden estimates can be calculated. Then, the collection figures are allocated to states via a variety of methods. In some instances, the collection amount is assumed to be borne fully by the residents of the collecting state. In others, the amount collected is allocated to other states. Section B contains a detailed overview of what types of taxes are included in the total taxes paid measure, in addition to detailed descriptions of incidence assumptions and allocation methods for each tax subcomponent.

A similar procedure is completed for the income portion. National totals are taken from the Bureau of Economic Analysis (BEA) and then allocated to states based on some allocator. For the definition of income used in this study, in addition to descriptions of incidence assumptions and allocation methods for each subcomponent of income, see Section C.

Before interpreting the figures in this piece as definitive measures of the degree of state and local tax exporting, one should note that the estimates presented here do not account for the federal deductibility of state and local taxes paid within the federal individual and corporate tax codes. Accounting for such deductibility is a goal for future state and local tax burden estimates because the deductibility is not uniform across geographies for a variety of reasons, most notably varying state and local tax policies, which minimize the effect of taxation, particularly for high-income individuals due mostly to the progressivity of the federal individual income tax.

An ideal tax burden study would include compliance costs and economic efficiency losses associated with taxation. Neither is included here. As a result, this study assumes that the total economic cost of taxation is equal to the tax burden. In a perfect measure, full costs would include compliance and efficiency costs. The tax burden estimates presented here do not weigh the value of the government services provided with tax revenue. This is the norm in such studies.

Each year, state and local governments and federal agencies publish more complete data on public finances. Each year, the Tax Foundation updates any historical revised data. For this reason, the entire historical series of state-local burden estimates is revised each year using the most recent data available.

The time frame for the estimates is the standard state fiscal year, and collection figures for those few states that do not operate on the standard July 1 to June 30 fiscal year have been adjusted accordingly to correspond to that time frame.[2]

Below is a full list of data sources, in order of importance:

Bureau of Economic Analysis

• National Income and Product Accounts Tables[3]
• Regional Economic Accounts[4]
• Satellite Industry Accounts Data[5]
• Annual Industry Accounts[6]

Census Bureau

• State Government Finances[7]
• State Government Tax Collections[8]
• State & Local Government Finance[9]
• Quarterly Summary of State & Local Taxes[10]
• American Community Survey[11]
• Population Estimates (data downloaded via Bureau of Economic Analysis)[12]
• Housing[13]
• Commodity Flow Survey[14]
• Economic Census[15]
• Current Population Survey[16] (joint project with Bureau of Labor Statistics)
• Statistical Abstract of the United States[17]
• Economic Indicators[18]
• Commuting (Journey to Work)[19]

Urban Institute-Brookings Institution Tax Policy Center

• State and Local Finance Data Query System[20]

The Nelson A. Rockefeller Institute of Government

• State Revenue Reports[21]

Council on State Taxation

• Total state and local business taxes[22]

Internal Revenue Service

• Statistics of Income[23]

Energy Information Administration

• State Energy Data System[24]

U.S. Travel Association

• The Impact of Travel on State Economies (payment required)[25]

Bureau of Transportation Statistics

• American Travel Survey (ATS) 1995[26]

Centers for Disease Control and Prevention

• Behavioral Risk and Factor Surveillance System[27]

Beer Institute

• Brewers Almanac[28]

Orzechowski and Walker

• The Tax Burden on Tobacco (2011)[29]

State Departments of Revenue (or equivalent)

• Data on resident versus non-resident income tax filers

Commerce Clearing House

• State Personal Income Tax Reciprocal Agreements via State Tax Smart Charts

Congressional Budget Office

• The Budget and Economic Outlook[30]
• Historical Budget Data[31]
• Budget Projections[32]
• 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. Receipts and the Individual Tax BaseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. [33]

Section B.

Tax Definition, Incidence Assumptions, and Allocation Methods in State-Local Tax Burden Rankings

In this report, state-local tax burden begins with the Census Bureau’s definition of a tax and then adds special assessments. This includes license taxes such as occupational and business license taxes and motor vehicle license taxes. Non-tax revenue items are not included in this paper’s estimates, such as lotteries and liquor store revenues. For a full list of what is included, in addition to the Census code for each tax, see Table 1 below.

The time frame for the estimates is the standard state fiscal year of July 1 through June 30. Data from the few states that use a different fiscal calendar have been adjusted to the standard state fiscal year.

When moving beyond the legal incidence of a tax, assumptions must be made using both economic theory and empirical economic literature to determine what parties bear the economic burden of a tax and by how much. These assumptions allow us to allocate the total tax burden to the respective subgroups. For our purposes, subgroup refers to the state of residence.

For most taxes, we assume that the tax is fully shifted forward to final product consumers, even those paid by businesses. Of course, this is not a perfect measure of the true incidence share. Whether it is borne by factors of production or consumers will vary by the type of product being sold and that product’s elasticity of demand.

With regard to corporate income taxes, property taxes on business property (non-residential), and insurance taxes paid by businesses, we assume that the taxes are borne by all owners of capital nationwide and all workers nationwide, using an equal split. This is based on the assumption that taxes on business are borne equally by capital and labor. Share of capital income in each state is defined as each state’s share of the national total of capital gains realizations plus dividends plus interest income. The remaining 50 percent (wage-earners nationwide) is allocated to U.S. residents based upon their share of the nation’s wage and salary income.

We allocate all consumption taxes to residents based on disposable income rather than personal income.[35] Some subcomponents of income are allocated in this manner, as well. Table 2 in Section C further explains our calculations for personal income.

In general, the model functions in the following manner. First, total state collections as indicated by the Census Government Finance Division[36] are divided into subgroups, if necessary. Then incidence assumptions are made based on economic theory and empirical literature. Finally, the initial Census collections amount for the state is allocated to states across the nation based on the incidence assumptions. In some cases, the tax may be assumed to be borne by residents of the collecting state.

The following section describes the data sources, incidence assumptions, and methods of allocation for each of the taxes and license taxes listed in Table 1.

Property Taxes

Property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. collections, as reported by the Census Bureau, are split first into property taxes on business property and property taxes on non-business property. This split is made using estimates provided by the annual publication by the Council on State Taxation (COST), Total State and Local Business Taxes,[37] which estimates the total property taxes paid by businesses each year by state. The remainder is then assumed to be paid by non-business entities.

The business portion is then further split into two categories: property taxes on real estate and property taxes on non-real estate using the BEA Regional Economic Accounts data on Gross Domestic Product (GDP) by State.[38]

• The real estate portion is further split into property taxes on residential real estate (rental units) and property taxes on non-residential real estate (commercial leasing) using rental property business data from the Economic Census.[39] The residential portion is assumed to be borne by residents of the collecting state and thus allocated fully to the collecting state. The non-residential portion is assumed to be borne equally between capital and labor nationwide. It is allocated to states based on the share of capital income and net earnings, split evenly.[40] Data on capital gains is from the IRS Statistics of Income,[41] while data on dividends and interest income and net earnings are from BEA Regional Economic Accounts.[42]
• The non-real estate portion is assumed to be borne equally between capital and labor nationwide and is again allocated to states based on share of capital income, 50 percent, and net earnings, remaining 50 percent.[43]

The non-business portion of property taxes is divided into three categories: taxes on personal property, taxes on owner-occupied housing, and taxes on seasonal homes.

• The amount that is devoted to personal property is taken from BEA Regional Economic Accounts, namely the state and local personal property tax from Annual State Personal Income,[44] It is assumed to be borne by residents of the collecting state.
• The residual is then assumed to be borne by owner-occupied housing and seasonal homes with the relative share going to owner-occupied housing versus seasonal homes determined by the proportion of the total number of housing units in a state that are owner-occupied housing versus the proportion that are seasonal homes, as estimated by the Census Bureau.[45] The owner-occupied portion is assumed to be borne by residents of the collecting state, while the seasonal homes portion is allocated to states using 1995 American Travel Survey[46] data on owned vacation homes by state with the figures adjusted using population growth and estimates of ownership by non-tourists using data obtained from American Community Survey.[47]

General and Other Selective Sales Taxes[48]

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 are first divided into three groups: sales taxes on business inputs, sales taxes paid by tourists, and sales taxes paid by non-tourists on personal consumption.

Sales taxes on business inputs is estimated using COST’s business tax study statistics on the general sales tax.[49] The portion paid by business is assumed to be passed forward to consumers on the basis of their estimated consumption from each industry category.[50] This is done using BEA Regional Economic Accounts data[51] to estimate that fraction of sales taxes on business inputs that is paid by each industry. Then depending upon the industry, the tax is assumed to be either borne fully by residents of the collecting state, or allocated using some other method, with some portion going to out-of-state consumers.

For example, sales taxes paid by manufacturing firms within a state are allocated on the basis of a state’s share of national disposable personal income under the assumption that taxes on manufacturing are borne by nationwide consumers.[52] Sales taxes paid by the mining industry are allocated similarly to severance taxes, whose incidence assumptions for severance taxes and method of allocation are discussed later in this paper. Sales taxes paid by the retail and wholesale trade are assumed to be borne by consumers purchasing products within that state, most of which are own-state residents. The remaining portions are tourists or non-tourist out of state travelers, such as daily commuters who travel from state A to state B for work. Ultimately, however, all sales taxes paid by business are assumed to be borne by end-use personal consumers in the form of higher prices.

For those sales taxes that are borne by tourists, the total tax collected is broken down into four subcategories: food services, retail trade, accommodation, and other tourist purchases. The estimated split between these four categories is made using sales tax rates for general sales and meals, in addition to domestic travel expenditures data provided by the U.S. Travel Association (USTA) annual publication The Impact of Travel on State Economies.[53]

Adjustments are made to account for business travelers, whose travel consumption taxes are assumed to be borne by consumers nationwide and are allocated to states based on share of disposable personal income.[54] Sales taxes paid by foreign tourists are estimated using a combination of the BEA Satellite Industry Accounts Data[55] and state-by-state data from USTA.[56] Business tourist expenditures portion is not included in this category, but this is part of COST’s business tax study estimate. It is assumed to be borne by consumers nationwide and is allocated to states based on share of disposable personal income.[57]

In terms of incidence and allocation of sales taxes paid by tourists, the following assumptions are made:

• For the food services category as defined by the USTA study, each state’s meals tax rate is applied to those expenditures as opposed to the general sales tax rate, thus giving us the sales taxes paid by tourists on food services.[58]
• For lodging, state-by-state data on accommodations sector GDP is used to approximate the amount of general sales taxes that were paid for lodging, all of which is assumed to be borne by tourists.[59]
• Tourist expenditures on food, retail sales, and lodging are allocated to states on the basis of the number of person trip days that one state’s residents spent as “tourists” in that given state. The source of this data was the 1995 American Travel Survey, and this data is then extrapolated using travel industry growth data and population growth.[60]

The fraction of total local sales taxes, general and selective, that is paid by tourists is assumed to follow the same breakdown as state-level sales taxes.

Sales taxes paid by non-tourist personal consumers is assumed to be the residual of the above two categories. This is allocated to states based partially upon state of residence (that is, borne by residents of the collecting state) and partially upon place of work. It is split evenly for general sales tax and 30 percent to the state of resident and 70 percent for place of work for food services. Data on place of work comes from BEA Regional Economic Accounts[61] and Census Commuting (Journey to Work)[62] data.

Alcoholic Beverages Sales Taxes

This portion of the model attempts to account for smuggling across state lines by assuming that a state is either solely an importer or solely an exporter of alcoholic beverages. This assumption is determined by comparing state sales data with state consumption data. If a state’s sales exceeds its consumption, it is deemed an exporter. If a state’s consumption exceeds its sales, it is deemed an importer.

State-by-state sales data on alcohol shipments is taken from the Beer Institute’s annual publication, the Brewers Almanac.[63] Consumption data for each state is taken from the Centers for Disease Control and Prevention’s (CDC) Behavioral Risk Factor Surveillance System. This includes alcohol consumption by state.[64]

If the state is deemed an exporter, total sales is multiplied by one minus the ratio of consumption sales. The result is used as the collections associated with that state. The collections from all states that are deemed exporter states are aggregated into a pool of national exported taxes. It is then allocated to consumers nationwide based on share of disposable personal income and based also upon estimated importation of alcohol by state. If a state is deemed an importer, taxes are assumed to be borne by residents of the collecting state.

Amusements and Pari-Mutuels Sales Taxes[65]

Each state’s collections are divided into two categories: tax collections from tourists and tax collections from non-tourists.

• The tourist portion is estimated using recreation expenditure data from the USTA Impact of Travel on State Economies.[66] The tourist portion is assumed to all be personal and not business-related. This tourist portion is allocated to states using data from the 1995 American Travel Survey, which was extrapolated using population growth.[67]
• The non-tourist portion is assumed to be remainder and is allocated via state of residence and wages by place of work, using a 30 percent and 70 percent split, where the data is from BEA Regional Economic Accounts[68] and Census Commuting (Journey to Work)[69].

Insurance Premiums Sales Taxes

Collections are divided into three categories using GDP by state from BEA Regional Economic Accounts.[70] These categories are insurance taxes for real estate (housing), insurance taxes paid by businesses, and non-housing or non-business insurance taxes (automobiles, for example).

• Taxes levied on housing are assumed to be borne by the homeowner and are allocated fully to the collecting state.
• Those levied on businesses are assumed to be borne by owners of capital nationwide and allocated to states based on share of capital income (capital gains realizations plus dividends plus interest income). Data on capital gains is from the IRS Statistics of Income,[71] while data on dividends and interest income and net earnings are from BEA Regional Economic Accounts.[72]
• The remainder, such as those taxes that are paid for other personal insurance, such as automobile insurance, are assumed to be borne by the consumer within the state itself and not nationwide. They are allocated fully to the collecting state.

Motor Fuels Sales Taxes

Motor fuel sales taxes, as classified by the Census Bureau, include the taxes imposed on three main motor fuels: aviation fuel, diesel fuel, and gasoline.

• Taxes paid on aviation fuel are assumed to be borne by travelers to the United States worldwide, with a double weight applied to U.S. travelers relative to foreign travelers. These are allocated in the same manner as the Federal Air Transport Tax.
• Taxes paid for diesel fuel are assumed to be borne by consumers nationwide and allocated to states based on their share of disposable personal income.[73]
• Motor fuel taxes are divided into two groups: those borne by domestic residents and those borne by tourists driving in the state. The amount of fuel consumed by tourists in a state is estimated using data from the USTA[74] and is allocated to states using data from the American Travel Survey[75] which was extrapolated using population growth. The non-tourist portion (the remainder) is allocated to residents of the collecting state (80 percent) and a small fraction on the basis of wages by place of work (20 percent). This data is from BEA Regional Economic Accounts[76] and Census Commuting (Journey to Work).[77] Note that for most states, a large fraction of “tourists” are actually in-state residents driving long-trips.

Public Utilities Sales Taxes

Public utility taxes are assumed to be borne by the consumers of final products, whether directly through personal energy consumption or indirectly through the consumption of other products whose producer paid public utility taxes.

First, public utility tax collections are split into electricity taxes, telephone taxes, water taxes, and television taxes. The largest and primary category are public utility taxes on electricity.

Public utility taxes on electricity are allocated initially to states based upon electricity consumption by state and sector from the Energy Information Agency (EIA).[78] Then, these taxes are further divided within states into five sector-specific categories based on end use: electricity used in the transportation sector, the industrial sector, the residential sector, the commercial sector, and electricity exported to other states. This is done using EIA data, as well.

• Taxes on the transportation sector are assumed to be borne by the entire nation and allocated to states based on their share of disposable personal income.[79]
• Industrial sector taxes are borne by the entire nation and allocated in relation to disposable personal income.[80]
• Residential electricity taxes are assumed to be fully borne by residents of the collecting state.
• Commercial sector electricity taxes are allocated in the same manner as retail sales taxes.
• Adjustments are made for the importing and exporting of electricity across state lines. States importing taxed electricity’s collections are allocated from nationwide pool of exporting state collections.

Note that adjustments are made for the exporting and importing of electricity between states using EIA data.[81]

Public utility taxes on telephone are divided into two subgroups: taxes paid by businesses and taxes paid by non-business households. Taxes paid by businesses are assumed to be borne by consumers nationwide and are allocated to states based on their share of disposable personal income.[82] Those taxes paid by households are assumed to be borne by residents of the collecting state. The same procedure is done for public utility taxes on water. Public utility taxes on television are assumed to be entirely from personal consumption and are thus assumed to be borne by residents of the collecting state.

Tobacco Products Sales Taxes

This portion of the model, similar to the portion addressing Alcoholic Beverages Sales Taxes, attempts to account for smuggling across state lines by assuming that a state is either solely an importer or solely an exporter of alcoholic beverages. This assumption is determined by comparing state sales data with state consumption data. If a state’s sales exceeds its consumption, it is deemed an exporter. If a state’s consumption exceeds its sales, it is deemed an importer.

State-by-state sales data is taken from the Orzechowski and Walker paper entitled The Tax Burden on Tobacco.[83] The allocation uses this data series as well. Consumption data for each state, by place of resident consumption, is taken from the CDC Behavioral Risk Factor Surveillance System.[84]

If the state is deemed an exporter, total sales is multiplied by one minus the ratio of consumption sales. It is used as the collections associated with that state. Then, the collections from all states that are deemed exporter states are aggregated into a pool of national exported taxes. Finally, it is allocated to consumers nationwide based on share of disposable personal income and based upon estimated importation of cigarettes by state. If a state is deemed an importer, taxes are assumed to be borne by residents of the collecting state.

Alcoholic Beverages License Taxes

Total state collections are allocated based on same distribution as Alcoholic Beverages Sales Taxes.

Amusements License Taxes

Total state collections are allocated based on same distribution as Amusements and Pari-Mutuels Taxes.

Corporations License Taxes

Total state collections are allocated based on same distribution as Corporate Income Taxes, which is discussed in subsequent section.

Hunting and Fishing License Taxes and Other License Taxes[85]

Total state collections are first divided into two categories: personal license taxes and business license taxes. The amount estimated to be personal is equal to the minimum of BEA’s “Other Personal Taxes” category from the Annual State Personal Income data (Regional Economic Accounts),[86] or the “Hunting and Fishing Licenses” plus “Other Licenses” from Census’s Government Finances Division.[87] The business amount is assumed to be the remainder. The personal portion is assumed to be borne by residents of the collections state. The business portion is assumed to be borne by consumers nationwide and allocated to states using share of disposable personal income.[88]

Motor Vehicles License Taxes and Motor Vehicle Operators License Taxes[89]

Total state collections are initially divided into two categories: personal license taxes and business license taxes. The personal amount equals the BEA Regional Economic Accounts estimate of motor vehicle licenses from Annual State Personal Income data.[90] The business amount is assumed to be the remainder. The personal portion is assumed to be borne of residents of the collecting state. The business portion is assumed to be borne by consumers nationwide and is allocated to states based on their share of disposable personal income.[91]

Public Utilities License Taxes

Total state collections are allocated based on same distribution as Public Utilities Sales Taxes.

Occupation and Business License Taxes NEC (Not Elsewhere Classified)

Total state collections are allocated to states based on share of gross earnings (from BEA Regional Economic Accounts) and includes adjustment for commuters.

Individual Income Taxes

In all states besides the nine that do not tax ordinary income, income derived from earnings raises the bulk of the income tax revenue. One consequence of this is that the income tax can legally be imposed on non-residents who work in a state, yet live in another state. Some states have reciprocal agreements with other states. These prohibit one state from taxing one state’s non-resident worker’s wages.

Total state collections are divided into two categories: income taxes paid by residents and income taxes paid by nonresidents. The portion that is paid by nonresidents is allocated based on each state’s Department of Revenue data, if available. If this data is unavailable, the amount paid by nonresidents is estimated using Census Commuting (Journey to Work) data.[92] Income taxes paid by residents are borne fully by the collecting state.

Adjustments are made for reciprocity agreements between states,[93] proprietor income using BEA Regional Economic Accounts data[94], and residents of other countries. The share of local income taxes borne by residents versus nonresidents is assumed to follow the same breakdown as state-level income taxes.

Corporate Income Taxes

In this study, we assume that corporate income taxes are borne equally by capital and labor. In other words, we assume that 50 percent of each state’s 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. collections are paid by U.S. residents based upon their share of capital income.[95] Data on capital gains is from the IRS Statistics of Income,[96] while data on dividends and interest income are from BEA Regional Economic Accounts.[97] The remaining 50 percent is allocated to U.S. residents based upon their share of the nation’s wage and salary income using data from BEA Regional Economic Accounts.[98]

Death and Gift Taxes

State and local estate taxes are assumed to be borne fully be the deceased at the time of death, and thereby are assumed to be borne by residents of the same state that collects the estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. revenue. Collections are allocated entirely to residents of the collecting state. The same applies for gift taxes.

Documentary and Stock Transfer Taxes

Total state collections allocated based on same distribution as Property Taxes, less personal property taxes.[99] Please refer to Figure 1.

Severance Taxes

Severance tax collections are first divided into taxes on energy and taxes on non-energy, such as timber, using GDP by State data from BEA Regional Economic Accounts.[100] Then using EIA[101] data on production by state, the energy portion of severance taxes are divided into further into three categories based upon their share of energy production in a state: coal, natural gas, and crude oil. Then these three categories of imbedded severance taxes are initially allocated to states based on that state’s share of coal, natural gas, or crude oil consumption.

Each of these three consumption categories (coal, natural gas, or crude oil) in each state is divided further into five sectors: residential sector, electricity sector, commercial sector, industrial sector, and transportation sector.

• Residential sector taxes are assumed to be borne by residents of the collecting state for all three consumption categories.
• Electricity sector severance taxes follow the same distribution as electricity Public Utilities Sales Taxes in a state for all three consumption categories.
• Severance taxes paid on energy use by the commercial sector are allocated in the same manner as the retail trade sales taxes for all three consumption categories.
• Industrial sector taxes are assumed to be borne by consumers nationwide and are allocated to states based on share of disposable personal income[102] for all three consumption categories.
• Transportation sector severance taxes in the coal and natural gas consumption categories are assumed to be borne by residents of the collection state. Transportation sector taxes in the crude oil consumption category are further divided into three categories: aviation fuel, motor gasoline, and other. Aviation fuel follows the same allocation as the Federal Air Transport Tax. Motor gasoline follows same allocation as Motor Fuels Sales Taxes. The final category, other, is assumed to be borne by consumers nationwide and is allocated to states based on share of disposable personal income.[103]

This method includes the possibility that another state’s residents bear the burden of severance taxes that are included in final products sold by businesses in the of commercial or industrial sector, as well as those embedded in transportation prices.

Non-energy severance taxes are assumed to be borne by consumers nationwide and are allocated to states based on share of disposable personal income.[104]

Other NEC (Not Elsewhere Classified) Taxes

Total state collections are allocated entirely to residents of collecting state.

Special Assessments

Total state collections are allocated based on same distribution of Property Taxes, less personal property taxes.[105]

Section C

Income Definition, Incidence Assumptions, and Allocation Methods in State-Local Tax Burden Estimates

The definition of income used in this study is a hybrid between the BEA’s calculation of “personal income”[106] and the income concept used by the Congressional Budget Office in its annual study of effective federal tax rates.[107]

The income measure used here adds to personal income the following: capital gains realizations, pension and life insurance distributions, corporate income taxes paid, and taxes on production and imports less subsidies. It subtracts from personal income the nonfungible portion of Medicare and Medicaid, initial contributions to pensions from employers, and imputed personal interest. See Table 3 at the end of this Appendix for detailed information on each subcomponent of income and the allocation method of attributing each national measure to the states.

Note that some small fraction of income is still double-counted over a lifetime, most notably the contributions of individual employees to pension and life insurance funds. There is also a timing problem with respect to the corporate income taxes paid and the fact that capital gains realizations are used as opposed to retained earnings (accrued capital gains). Capital gains realizations are used for two reasons. The first is due to systematic movements across geographies over life cycles such as individuals moving to Arizona or Florida. The second is because we are only looking at state and local taxes where the corporate income tax is relatively minor.

To determine the amount of income within each state for a fiscal year, national quarterly totals for each income category were taken from BEA National Income and Product Accounts Tables (NIPA)[108] and allocated to states using data from two sources: BEA Regional Economic Accounts[109] and the IRS Statistics of Income Division.[110]

Income amounts are on a July-June basis, and are thereby not equivalent to a calendar year. When possible, quarterly data from BEA Regional Economic Accounts[111] was used to allocate income on the state fiscal year basis. When annual data was only available, the fiscal year total is assumed to be half calendar year one and half calendar year two.

The largest portion of income in our measure, personal income, was allocated perfectly since quarterly data is available at both the national level and regional level from BEA. For other variables such as capital gains, IRS data that is only available on a tax year (calendar year) basis was used and the fiscal year split, as noted above, was made. Such was the case with the state-by-state data used to subtract initially the full amount and then re-allocate the national total of Medicare and Medicaid benefits after the non-fungible portion was removed. The Current Population Survey (CPS)[112] was the source of the fungibility fraction and it was assumed to be constant for all states, but differs between Medicaid, which is not very fungible, and Medicare, which is highly fungible. Due to the fact that the CPS historically underreports health insurance and program participation, upward adjustments were made to the CPS aggregate data to reflect the underreporting as measured by an Urban Institute study from 2007.[113]