State Policy Reports

State and Local Tax Collections

The U.S. Census Bureau recently released data on state and local government revenues for fiscal year (FY) 1997. This article presents the new data on state and local tax collections, covering the three major tax categories (property, sales and personal income). It focuses on the differences among the states and the major factors causing the differences. The data is available on the Census Bureau’s website (www.census.gov). The site has more recent data available for state, but not local, finances in FY 1998 and state tax collections in FY 1999.

State Share of State-Local Tax Burden

The following table shows the share of total state and local tax revenues that are levied by state governments. Twenty-two states are responsible for more than two-thirds of the taxes levied in their states. Only two states, New York and New Hampshire, raise less than half of the total state and local taxes.

On average, states raise 61% of total state and local tax revenues. Most states levy more than that, however, while some of the larger states levy considerably less. This explains why the national average falls between #31 Oregon and #32 Louisiana. Only 11 states deviate from the national average by more than 10 percentage points, nine on the high side (more than 71% of revenues raised by the state) and two on the low side (less than 51% of revenues raised by the state).

State rankings reflect the extent to which states take the lead on providing public services and the extent to which they allow local governments to levy their own taxes. The perennial example of state practices in this regard contrasts #2 Hawaii, which funds K-12 education at the state level, with #50 New Hampshire, which funds almost all of K-12 spending at the local level. However, New Hampshire is currently considering ways to increase the state’s share of education funding as a result of a state supreme court decision that ruled its education finance system unconstitutional.

There is a tendency for small states to be fiscally centralized, that is, for the state to collect a high percentage of total tax revenue. The three most centralized states-Delaware, Hawaii and New Mexico-are among the 15 lowest in total population. Conversely, states with large populations tend to be fiscally decentralized. New York and Texas are examples of this.

In most states, the property tax is the mainstay of local government finance. States that allow local governments to levy additional types of taxes tend to rank lower on the list. About a dozen states allow counties, cities or school districts to levy local income taxes.

Local income taxes account for approximately 9% of combined state and local income taxes. Local income taxes are widely used in some of the lower-ranking states, including #34 Pennsylvania, #37 Maryland, #42 Ohio and #49 New York. Local income taxes make up 28% of total income taxes in Pennsylvania, 34% in Maryland, 14% in Ohio and 20% in New York.

Many states also allow local jurisdictions to levy sales taxes, but at rates considerably lower than the state rate. Exceptions to this rule include #49 New York, where local sales tax rates equal or exceed the state rate; #32 Louisiana, where New Orleans levies a 5% local rate on top of the 4% state rate; and #48 Colorado, where some local rates exceed the state rate. Twelve states have a state sales tax but not a local general sales tax: Connecticut, Hawaii, Kentucky, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, Rhode Island, Vermont and West Virginia.

States ranking high on the list are those that bear most responsibility for funding and delivering state and local government services. For example #1 Delaware is a small state that funds many programs (and issues debt) which are handled by local governments in larger states. In #7 Michigan, a successful effort in the mid-1990s resulted in reduced reliance on local property taxes to fund schools and increased the state-levied sales tax to make up the difference.

State-Local Tax Burdens

The most common comparisons of state and local tax burdens relate total tax collections to population and to personal income. The following table shows the most recent per capita comparisons.

From year to year, there are substantial changes in the ranking of the states in the middle of the table, but the per capita differences are quite small. Since 23 states are within 10% of the average, the changes in ranks are not particularly important. Among the outliers, there are only a few changes from year to year; however, these changes are most closely watched.

Those seeking tax cuts and spending constraints use the data in high-tax states to argue their case. Among the top-ranked states, Connecticut displaced New York (now #2) for the top spot. Minnesota (now #5) switched places with #7 Hawaii. At the bottom, Alabama remains last, but Mississippi displaces Tennessee (now #47) for the #49 spot. Louisiana drops from #46 to #41 and South Dakota moves from #45 to #48.

Only 17 states exceed the U.S. average of $2,743, reflecting the fact that four populous states rank near the top (New York, New Jersey, Illinois and California) and two populous states rank immediately below the average (Michigan and Pennsylvania).

The next table shows state and local tax collections as a percentage of personal income. Relating tax collections to personal income introduces the notion of ability-to-pay, since richer states will rank lower than poorer states even if they collect exactly the same amount of tax revenues from exactly the same number of taxpayers.

The table shows that most states have similar tax burdens. Thirty-five states have tax burdens ranging between 12.1% and 10.1% or within one percentage point of the national average. Among the remaining 15 states, nine have tax burdens that exceed the national average by more than 1% and six have tax burdens that are more than 1% below the national average.

Regional patterns are apparent. The Northeast generally has higher tax burdens than other regions, and the Southeast generally has lower tax burdens. These differences reflect both a historical preference for more government services in one region than in the other, as well as a greater ability to pay for these services. However, there are exceptions. For example, New Hampshire (#49) ranks substantially lower than other northeastern states and Kentucky (#16) and West Virginia (#15) rank above the national average.

Four states-Alabama, South Carolina, South Dakota and Tennessee-rank among the bottom ten on both tables. These states have the most flexibility to deal with perceived problems of a particular tax being too high because they have room to raise other taxes without being out of line with other states. Louisiana was included last year, but it moved to #30 from #43 on the preceding table relating taxes to personal income. South Carolina is included this year because both measures decreased slightly relative to other states.

The following six states rank in the top ten on both tables: Alaska, Connecticut, Hawaii, Minnesota, New York and Wisconsin. In Alaska, tax cuts are not a serious topic among taxpayers because most burdens are borne by oil companies. Further, Alaska residents pay no personal income tax, and state residents receive an annual dividend from the state’s Permanent Fund. Among the highest-ranking states, all have reduced taxes in recent years.

In some ways, the most interesting states are those that rank high on one table but not on the other. For example, New Jersey ranks high on taxes per capita (#4) but not as high on taxes relative to personal income (#26). This reflects New Jersey’s high level of wealth. At the other end of the wealth spectrum, West Virginia and Mississippi rank low on taxes per capita but much higher on taxes relative to income.

Property Taxes

The next tables show the new data on per capita state and local property taxes and state and local property taxes as a percentage of personal income. New Hampshire remains at the #1 spot for property taxes as a percentage of income and #2 for property taxes per capita. New Jersey still ranks first on a per capita basis and #4 on property taxes relative to personal income. Alabama (#50) and New Mexico (#49) remain at the bottom on both tables.

New Hampshire and Vermont rely heavily on property taxes to finance schools. In Vermont, the state supreme court ruled that the disparities among municipalities in per-pupil spending violated the state constitution and it required the legislature and governor to fix the situation. In FY 1998, Vermont enacted a controversial two-tiered funding system that equalizes the burden of the property tax relative to school spending levels. Also, a statewide property tax was enacted.

In New Hampshire, the court ruled that the state constitution’s proportionate taxation clause mandates that education-specific property tax rates must be equal for all taxpayers in the state. In April 1999, the governor signed a law that increases the state’s share of public education funding from 8% to more than 60%. However, a state superior court ruled the main mechanism to increase the state share (a statewide property tax) unconstitutional. Since then, the state has been unable to settle on a plan to solve the funding crisis. Recent proposals include a 1% tax on gross business receipts and a 2.5% sales tax.

Indiana moved from #25 to #14 on the table showing state and local property taxes as a percentage of personal income. It is the only state that increased its rankings by more than three notches. South Dakota dropped from #15 to #23. In FY 1996, South Dakota reduced property taxes by 20% on single-family, owner-occupied dwellings and on land.

State and Local Property Taxes as a Percentage of Personal Income
Fiscal Year 1997

Rank

State

Percent

Rank

State

Percent

1

New Hampshire

6.00%

26

Ohio

3.16%

2

Maine

5.76

27

Arizona

3.12

3

Vermont

5.52

28

Virginia

3.09

4

New Jersey

5.18

29

Pennsylvania

3.01

5

Rhode Island

4.92

30

Colorado

2.97

6

Montana

4.86

31

Idaho

2.94

7

New York

4.54

32

Georgia

2.86

8

Connecticut

4.48

33

California

2.86

9

Wyoming

4.37

34

South Carolina

2.75

10

Alaska

4.37

35

Maryland

2.73

11

Wisconsin

4.28

36

Utah

2.72

12

Nebraska

4.02

37

Mississippi

2.57

13

Illinois

4.00

38

Nevada

2.30

14

Indiana

3.83

39

West Virginia

2.27

15

Texas

3.81

40

North Carolina

2.27

16

Washington

3.74

41

Missouri

2.26

17

Massachusetts

3.67

42

Hawaii

2.00

18

Iowa

3.58

43

Tennessee

1.96

19

Minnesota

3.50

44

Kentucky

1.95

20

Kansas

3.48

45

Delaware

1.76

21

Florida

3.47

46

Arkansas

1.68

22

North Dakota

3.42

47

Oklahoma

1.65

23

South Dakota

3.36

48

Louisiana

1.63

24

Oregon

3.35

49

New Mexico

1.58

United States

3.35

50

Alabama

1.19

25

Michigan

3.24

Sales Taxes

The following tables list state and local sales tax collections relative to population and personal income. Even though state and local governments have been reducing taxes in general over the past several years, there has been little activity to reduce sales taxes. Only four states-Colorado, Maine, Nebraska and Utah-have reduced total sales tax rates since FY 1996. Two states-Arkansas and Nebraska-have raised the general sales tax rate since FY 1996. Nebraska reduced its sales tax rate from 5% to 4.5% in FY 1999 and then raised it back to 5% in FY 2000.

The only major movement to reduce the sales tax has been to eliminate food from the sales tax base in some states (see Reports, Vol. 19, Issue 4). States that have either eliminated or reduced the sales tax on food since FY 1996 include: Georgia, Louisiana, Missouri, North Carolina, South Carolina and Virginia. In FY 2000, Louisiana re-imposed 1 percent of its 4 percent sales tax on food.

The rest of the tax reductions have taken the form of new exemptions. Examples of new sales tax exemptions include manufacturing processes, gas and electricity, snack food, Internet access services fees and non-prescription drugs. Wyoming and Utah are the only states in recent years to reduce or eliminate an exemption. Wyoming removed the sales tax- exempt status of cigarettes in FY 2000. Utah reduced the 100% exemption for manufacturing machinery and equipment to 80%.

State and Local Sales Taxes Per Capita
Fiscal Year 1997

Rank

State

Amount

Rank

State

Amount

1

Nevada

$1,851

26

Michigan

$917

2

Washington

1,762

27

Nebraska

904

3

Hawaii

1,699

28

New Jersey

901

4

Connecticut

1,404

29

Oklahoma

873

5

Florida

1,289

30

North Carolina

868

6

New Mexico

1,268

31

Kentucky

863

7

Tennessee

1,227

32

Rhode Island

862

8

Louisiana

1,187

33

West Virginia

857

9

Texas

1,145

34

Wisconsin

852

10

New York

1,107

35

Iowa

826

11

Arizona

1,071

36

Ohio

815

12

Minnesota

1,055

37

Pennsylvania

791

13

North Dakota

1,012

38

Idaho

789

14

Arkansas

1,011

39

Maine

786

15

South Dakota

1,009

40

Maryland

780

16

California

1,007

41

South Carolina

771

17

Mississippi

1,006

42

Virginia

765

18

Colorado

1,005

43

Indiana

718

United States

986

44

Massachusetts

705

19

Missouri

968

45

Vermont

702

20

Utah

961

46

New Hampshire

395

21

Georgia

957

47

Alaska

390

22

Wyoming

953

48

Delaware

353

23

Illinois

945

49

Montana

316

24

Kansas

943

50

Oregon

260

25

Alabama

941

States also have increased their use of sales tax holidays-where items are exempt from the sales tax for a set period-on items such as clothing and footwear (see Reports, Vol. 18, Issue 15). Examples include New York, Florida, Texas, Connecticut, Iowa, Pennsylvania, South Carolina and Maryland.

Not only have sales taxes not been reduced, they have become a preferred method of raising local revenue. This partly reflects their relatively high level of acceptability among the public, which consistently rates the sales tax as the least disliked form of tax. Most states now permit local option sales taxes for at least some purposes. Only four states have no state or local general sales taxes: Delaware, Montana, New Hampshire and Oregon. However, Montana is considering a local option sales tax to prevent a statewide sales tax.

Five high sales tax states have no personal income tax: Florida, Nevada, Tennessee, Texas and Washington. In Florida and Nevada, tourists bear a large share of the sales tax burden. Because of the strong opposition to an income tax in these states, there is little discussion of major sales tax reductions. New Mexico has high sales tax collections, reflecting its very broad sales tax base, but its income taxes are lower than the national average.

In contrast, Hawaii, Connecticut and New York have high sales taxes and high income taxes. All three states have enacted several sales tax cuts in recent years.

State rankings on sales tax collections reflect both tax bases and tax rates. Some states, like New Mexico, Hawaii, South Dakota, Washington and Delaware, have extremely broad sales tax bases and, therefore, collect a large amount of revenue because they tax a full array of goods as well as many services. Conversely, some states exempt most services and even some goods from their tax bases. For example, Massachusetts exempts most clothing from its tax base, and more than half the states exempt food. Six states-Colorado, California, Nevada, New Hampshire, Alaska and Oregon-apply the sales tax to fewer than 15 services. Alaska, New Hampshire and Oregon do not have a state sales tax but California and Nevada have relatively high sales tax rates.

The combined state-local sales tax rate averages between 6% and 7%, but the range is large. The combined state-local rate ranges from 9% in parts of Alabama and Louisiana to 4% in Hawaii. Generally, states without an income tax impose relatively high sales tax rates. These include Washington, with a combined state-local rate that exceeds 8% in many places, Texas where the combined rate ranges from 7.75% to 8.25% and Tennessee where the combined rate is 8.25%.

State and Local Sales Taxes as a Percentage of Personal Income
Fiscal Year 1997

Rank

State

Percent

Rank

State

Percent

1

Washington

6.98%

26

Idaho

3.87%

2

Nevada

6.83

27

Colorado

3.83

3

Hawaii

6.64

28

North Carolina

3.79

4

New Mexico

6.52

29

New York

3.78

5

Louisiana

5.86

30

South Carolina

3.78

6

Mississippi

5.58

31

Nebraska

3.76

7

Tennessee

5.46

32

Michigan

3.75

8

Florida

5.24

33

Maine

3.68

9

Arkansas

5.20

34

Iowa

3.64

10

Texas

5.08

35

Wisconsin

3.62

11

Arizona

4.96

36

Illinois

3.49

12

Utah

4.82

37

Ohio

3.45

13

North Dakota

4.78

38

Rhode Island

3.43

14

South Dakota

4.68

39

Pennsylvania

3.18

15

Alabama

4.63

40

Indiana

3.15

16

West Virginia

4.62

41

Vermont

3.15

17

Oklahoma

4.34

42

Virginia

3.00

18

Wyoming

4.31

43

New Jersey

2.93

19

Kentucky

4.29

44

Maryland

2.80

20

Missouri

4.19

45

Massachusetts

2.38

21

Connecticut

4.19

46

Montana

1.63

22

Kansas

4.06

47

New Hampshire

1.52

23

Georgia

4.06

48

Alaska

1.50

24

Minnesota

4.02

49

Delaware

1.32

United States

4.00

50

Oregon

1.10

25

California

3.94

Personal Income Taxes

The next table shows per capita personal income tax collections. The variation among states in the imposition of personal income taxes is much greater than the variation in taxes based on property or sales.

The following seven states have no taxes on personal income: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. New Hampshire and Tennessee do not tax earned income but do tax some earnings on investments.

The average state with an income tax collects about $600 per capita. New York, Massachusetts, Maryland, Minnesota and Oregon collect more than $1,000 per capita while Mississippi and North Dakota collect less than $300. Regionally, eastern and midwestern states tend to rank higher on the table and southern and western states tend to rank lower.

State and Local Individual Income Taxes Per Capita
Fiscal Year 1997

Rank

State

Amount

Rank

State

Amount

1

New York

$1,213

United States

$598

2

Massachusetts

1,181

27

Kansas

585

3

Maryland

1,132

28

Nebraska

569

4

Minnesota

1,028

29

Vermont

552

5

Oregon

1,024

30

Illinois

529

6

Delaware

959

31

South Carolina

517

7

Connecticut

913

32

Oklahoma

515

8

Wisconsin

877

33

Arkansas

498

9

Hawaii

823

34

Montana

463

10

Ohio

802

35

New Mexico

438

11

North Carolina

747

36

West Virginia

432

12

California

733

37

Alabama

410

13

Indiana

716

38

Arizona

376

14

Kentucky

716

39

Louisiana

360

15

Virginia

709

40

Mississippi

292

16

Colorado

671

41

North Dakota

254

17

Michigan

658

42

New Hampshire

45

18

Pennsylvania

648

43

Tennessee

24

19

Rhode Island

647

44

South Dakota

0

20

Georgia

646

45

Texas

0

21

Maine

624

46

Wyoming

0

22

Missouri

616

46

Washington

0

23

Iowa

613

46

Nevada

0

24

Utah

612

46

Florida

0

25

New Jersey

606

46

Alaska

0

26

Idaho

600

Beginning in 1994 and continuing to this day, personal income tax reductions have been the main focus of state tax-cutting activity. Cuts in personal income taxes accounted for well more than half of all state reductions made for both FYs 1998 and 1999 and slightly less than half of all reductions in FYs 2000 and 2001. In fiscal year 2001, seven of the top ten states on the table enacted personal income tax reductions. The exceptions are #7 Connecticut, #6 Delaware and #9 Hawaii. Overall, 18 states reduced personal income taxes in FY 2001, with # 12 California, #2 Massachusetts, #10 Ohio and #8 Wisconsin enacting the most significant cuts. Three states enacted net personal income tax increases-#39 Louisiana, #14 Kentucky and #31 South Carolina.

The following table lists state and local individual income tax collections in relation to personal income. The range of collections relative to income is not large, with 22 of the 43 states that levy some type of personal income tax collecting between 2% and 3% of personal income from those taxes. States at the top of the list tend to be those with the most progressive personal income tax systems.

State and Local Individual Income Taxes as a Percentage of Personal Income
Fiscal Year 1997

Rank

State

Percent

Rank

State

Percent

1

Oregon

4.33%

27

Arkansas

2.56%

2

New York

4.14

28

South Carolina

2.53

3

Maryland

4.07

29

Kansas

2.52

4

Massachusetts

3.98

30

Vermont

2.47

5

Minnesota

3.91

United States

2.43

6

Wisconsin

3.72

31

Montana

2.39

7

Delaware

3.60

32

Nebraska

2.37

8

Kentucky

3.55

33

West Virginia

2.33

9

Ohio

3.39

34

New Mexico

2.25

10

North Carolina

3.26

35

Alabama

2.02

11

Hawaii

3.21

36

New Jersey

1.97

12

Indiana

3.14

37

Illinois

1.95

13

Utah

3.07

38

Louisiana

1.78

14

Idaho

2.94

39

Arizona

1.74

15

Maine

2.92

40

Mississippi

1.62

16

California

2.86

41

North Dakota

1.20

17

Virginia

2.78

42

New Hampshire

0.17

18

Georgia

2.74

43

Tennessee

0.11

19

Connecticut

2.72

44

South Dakota

0.00

20

Iowa

2.70

45

Texas

0.00

21

Michigan

2.69

46

Alaska

0.00

22

Missouri

2.67

46

Florida

0.00

23

Pennsylvania

2.61

46

Nevada

0.00

24

Rhode Island

2.58

46

Washington

0.00

25

Oklahoma

2.56

46

Wyoming

0.00

26

Colorado

2.56

Distribution of Taxes

The table below shows the percentage of total state and local tax revenue from each of the three major tax sources covered in this issue. Since 1992, property taxes have decreased in relative share while sales and personal income taxes have increased.