High Personal Income Tax Reliance and Current Unemployment


The current economic recession continues to hammer away at state economies. States across the country face increases in unemployment and decreases in tax revenue. These dynamics are particularly troublesome for states that rely heavily on personal income taxes.
 
The following table shows the 10 states that rely most heavily on personal income tax revenue and their current unemployment rates. 
 
Unemployment and Reliance on Personal Income Taxes
State
Personal Income Tax Revenue as a Percent of TotalState Tax Revenue
(FY 2008)
Unemployment
(March 2009)
Rate
National
Rank
Oregon
68.5%
12.1%*
2
Massachusetts
57.2%
7.8%
25
New York
55.9%
7.8%
26
Virginia
54.9%
6.8%
36
Colorado
52.7%
7.5%
29
Connecticut
52.4%
7.5%
30
Georgia
48.6%
9.2%*
14
North Carolina
48.3%
10.8%*
5
California
47.5%
11.2%*
4
Maryland
47.2%
6.9%
34
United States
35.9%
8.5%
 
*Note: Current unemployment rate is at a historic high.
Sources: NCSL calculations based on data from the Bureau of the Census and Bureau of Labor Statistics, 2009. 
 
Three of the five states with the highest unemployment rates lean heavily on personal income taxes for revenue. This convergence of high reliance on personal income taxes with high unemployment is particularly evident in Oregon. As the most income tax dependent state in the union, Oregon currently has the second highest unemployment rate (see footnote 1). California, Georgia and North Carolina are in similar positions, as shown in the table above.
 
The most recent data on personal income tax collections is quite disconcerting for many states, including six of the 10 states highlighted above. California, Connecticut, Georgia, Massachusetts, North Carolina and Oregon each recently reported to NCSL that personal income tax revenue is currently coming in below forecast. In four of these states (Georgia, Massachusetts, North Carolina and Oregon) collections have failed to meet a forecast that had already been revised downward (see footnote 2).
 

Unemployment rates have risen quickly and significantly this year. In the last 12 months, some states have seen their unemployment rates more than double. Twenty-nine states have experienced unemployment rate increases of at least 3 percent since March 2008. Unemployment rates in seven states, four of which rely heavily on the personal income tax, are currently at historic levels. The national unemployment rate of 8.5 percent is the highest it has been since the recession of the early 1980s when unemployment was in double digits for 10 consecutive months, peaking at almost 11 percent (see footnote 3).   Unemployment rates are a lagging indicator of overall economic performance and tax collections generally trail the larger movement of the economy even further. Lawmakers across the country are likely to continue to grapple with these compounding economic and fiscal challenges for the near future. This may be particularly difficult for states that depend heavily on personal income taxes for revenue generation.
 


1.  Michigan's unemployment rate in March, 2009 was highest at 12.6. South Carolina's rate of 11.4 was third, behind Oregon
2.  See NCSL's State Budget Update: April 2009 for details on state collections; actual and forecast. For additional information on state finances, also see the Nelson A. Rockefeller Institute of Government's resources on state finances.
3.  Unemployment reached 10.8 percent in November 1982. See the following web pages from the Bureau of Labor Statistics: changes since 2008 by state "Table 3. Civilian labor force and unemployment by state and selected areas;" historic levels of unemployment by state "Current Unemployment Rates for States and Historical Highs/Lows;" and this database with national unemployment history.