State-Local Tax Burdens Fall in 2009 as Tax Revenues Shrink Faster than Income
Note: this is not the most recent edition of this report. Newer data is available here.
New Jersey's Citizens Pay the Most, Alaska's Least
Special Report No. 189
• Taxpayers pay taxes not only to the state and local governments where they reside but also to out-of-state governments, both naturally and by design. Nationwide, over a quarter of all state and local taxes are collected from non-residents, and a true measure of the tax burden on the residents of any state must take this into account. This paper attempts to quantify the tax shifting across states and how it affects the distribution of state and local tax burdens.
• During fiscal year 2009, in the midst of a national recession, both income and taxes shrank, but taxes fell faster than incomes. The result was that tax burdens decreased from 9.9 percent in 2008 to 9.8 percent in 2009.
• In 2009, the residents of New Jersey, New York and Connecticut paid the highest state-local tax burdens in the nation. They're the only three states where taxpayers give up 12 percent or more of their income in state-local taxes, a full percentage point above the next highest state, Wisconsin.
• Alaskans, consistently the least taxed in the nation, again paid the least in 2009, just 6.3 percent. The next lowest state, over a full percentage point higher, is Nevada at 7.5 percent.
For nearly two decades 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, then divide those taxes by the state's total income to compute a "tax burden." 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.
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 targeted nonresidents with higher property taxes and, in rare cases, higher income taxes. The effort to soak non-residents 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 all state and local taxes.
More information on state-local tax burdens: