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Where Do State and Local Governments Get Their Tax Revenue?

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Fiscal Fact No. 242


Newly released Census data show how different the 50 states' fiscal systems are. Their reliance on various sources of tax revenue differs widely because they have different endowed resources and policy priorities. These differences are reflected in state-local tax collections no matter how large or small a fraction of the residents' income state and local governments have decided to take in taxes.

States heavily endowed with valuable natural resources, such as Alaska and Wyoming, will usually exploit those tax revenue sources, which they can do without much fear of driving the activity out of state, given that those natural resources are largely immobile. States with more tourism like Nevada and Florida rely more heavily on sales taxes so that they can forgo taxing income. A calculated decision by a state to concentrate taxation in a few sources is a plus for the state's taxpayers, significantly lowering the administrative burden for government and taxpayers and making the state tax climate conducive to economic growth. Of course, that means relying more heavily on the remaining tax sources for revenue.

Tables 1-4 are "top ten" tables,

highlighting the states that rely heavily on each of four major categories: property taxes, individual income taxes, general and selective sales taxes,[1] and licenses and other taxes.[2] The data are the latest available for states and localities, fiscal year 2008, which stretched from July 1, 2007, to June 30, 2008. Combined state-local data is best for interstate comparison because what some states accomplish with local taxes is accomplished in other states with state-level taxes. In particular, several states have converted traditionally local property taxes that fund public schools into state-level taxes in response to court decisions.

New Hampshire is an outlier on property tax dependence (see Table 1) because it is the only state with neither a wage tax nor a state or local general sales tax. In addition, New Hampshire has no substantial mineral resources that would generate severance tax revenue. Florida and Texas are also more reliant on property taxes because they have chosen not to tax personal income. All of the other states especially dependent on property taxes are in the northeast and Midwest.

Table 1

In Which States Do Governments Rely Most on Property Taxes?

Category: Taxes

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