April 4, 2007
Special Report No. 153
Executive Summary
State and local taxes will consume a record-setting 11 percent of the nation's income in 2007. Since 1986, the state-local tax burden had never fallen below 10 percent or risen above 10.9 percent.
This estimate of state-local tax burdens at an all-time high comes at a time when personal and corporate incomes have risen for almost four consecutive years, sometimes at a remarkable pace. Along with low unemployment, these rising incomes have boosted tax collections substantially and helped most states meet their revenue expectations with ease since 2004.
Economists would expect states with the most steeply graduated income tax rates to experience big revenue surges when good economic times push individual and corporate incomes up into higher tax brackets. Many states have multiple-rate personal income taxes, or they mirror the progressivity of the federal system by taking a percentage of federal tax liability.
However, even as the economy has thrived and progressive income taxes have increased the tax burden, some states have accelerated the trend by enacting new or higher state-level tax rates. Meanwhile, other states have taken advantage of the good economy by cutting tax rates or allowing temporary tax hikes to expire.
Property tax collections have risen significantly for several years, as local government officials apparently did not ratchet down rates enough to prevent a surge of revenue as the value of real estate soared between 2001 and 2006.
Of course, every state has a different mix of taxes and a different fiscal picture. Some states operate large government programs with state-level taxes that are funded by local taxes elsewhere. As a result, states' tax burdens should only be compared by combining the different levels of government, counting every tax and comparing those totals to a proper measure of income, as do the burdens presented here.
Click here for a discussion of this paper's methodology.