State Tax Reliance
By Erica MacKellar | Vol . 23, No. 28 | July 2015
Did you know?
- Five states do not levy a general sales tax.
- Seven states do not levy a personal income tax.
- More than 70 percent of Alaska’s revenues come from severance taxes.
State revenues are obtained from a variety of sources. Nationally, about two-thirds of state revenues come from taxes on personal income and general sales. Personal income collections make up a slightly larger share. However, tax structures vary greatly across the states, and several states rely more heavily upon one of these tax sources than on others.
Compared to other states, Oregon relied most heavily on personal income taxes in FY 2014; 68 percent of its total tax collections came from personal income taxes. Florida and Washington rely heavily on sales taxes for state revenue; more than 60 percent of total tax collections come from their sales taxes. These states rely largely on either personal income tax or sales tax collections because they levy only one of these major taxes. Five states—Alaska, Delaware, Montana, New Hampshire and Oregon—do not levy a general sales tax. Seven states—Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming—do not tax personal income.
Of the 38 states that levy both of these major taxes, personal income taxes make up the largest share of total tax collections in Virginia—at 57.4 percent—and Hawaii relies on sales taxes for nearly 47 percent of its total tax collections. It is important to note that a state’s tax reliance is not the same as a state’s tax burden—or the effect of a tax structure and rates on taxpayers—which is not addressed here.
Other taxes levied in the states include corporate income, selective sales taxes on goods such as cigarettes and alcohol, and property taxes, among others. These taxes make up a small share of revenues in most states, but represent a significant revenue share in a few. For example, property taxes account for just 1.6 percent of state total tax collections nationally, but account for 33 percent of tax revenue in Vermont. Severance taxes, which are levied on the extraction of natural resources, make up a more significant share of revenue in many resource-rich states such as Alaska and Wyoming.Severance tax collections make up more than 70 percent of Alaska’s total tax collections and nearly 40 percent of Wyoming’s.
Nationally, the taxes states rely on has shifted over time. During the second half of the 20th century, personal income taxes began to increase as a share of total tax collections. Today, personal income taxes and general sales taxes each account for about one-third of total state revenues. Personal income tax collections were negatively affected by the Great Recession, which, among other things, pushed up unemployment rates and reduced states’ ability to rely on the personal income tax.
In the last few years, several legislatures have enacted tax reforms that shift their state’s tax reliance. In 2012, the Kansas Legislature approved a tax reform package that began a series of income tax cuts. North Dakota reduced personal income tax rates in 2013. Ohio and North Carolina also began phasing down personal income tax rates in 2013, and Minnesota raised state individual income tax rates on some income earners.
States also have altered sales taxes during the last few years. In 2013, Maine and Virginia raised sales tax rates, and a few other states expanded the sales tax base to include previously tax-exempt items. Other states, such as Arizona and Kansas, reduced sales tax rates. It remains to be seen how tax changes in the last few years will change states’ overall reliance on major tax sources.
Source: U.S. Census Bureau, State Government Tax Collections, FY 2014.