Where Does The Government Get The Money It Spends?

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Where Does The Government Get The Money It Spends?

Americans are equal before the law – but not before the taxman. That’s because more than one comes knocking at your door. While the federal tax system is the same for everybody, local and state taxes vary greatly. As this map shows, local and state authorities have vastly different ways of filling their coffers.

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States and local authorities basically have five different tax categories to generate the bulk of their income: property and sales taxes, personal and corporate income taxes, and a vast array of 'other' taxes (including, apparently, a blueberry tax in Maine, and a mosquito tax in Alabama).

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The national average for these state and local taxes is shown next to the legend near the top of this data visualization: the largest part (31%) is raised by property taxes (in blue), equal parts (23%) by taxes on sales (in pink) and on individual income (in green), just under a fifth (19%) by 'other' taxes (in orange), and the smallest part (4%) by taxes on corporate income (in purple). But research published this July by the Tax Foundation shows great deviations between the federal average and the average at a State level. As shown on this map, some states rely more heavily on one particular tax category, and/or not at all on others.

The differences between states can be traced to differences in the demography, geography and even the ideology of the various states. The Tax Foundation lists a few extremes:

  • “Oregon derives over two-thirds of state tax revenue from income taxes, while North Dakota raises less than a tenth of its revenue that way. In New England, only 1.4% of local government tax revenue comes from sales and gross receipts taxes, compared to 34% in the Southwest”.
  • “In 'Live Free or Die' New Hampshire, 23.7% of state tax revenue is generated by corporate taxes, whereas such taxes are responsible for a mere 2.1% of state revenue in Hawaii”.
  • “A state with an abundance of natural resources, like North Dakota, might turn predominantly to severance taxes, while one with a high volume of tourists, like Florida, can see value in relying heavily on sales taxes”.

Let's have a look at the various tax categories to examine some of those extremes a bit more closely.

Top 10 States with HIGHEST Property Tax

1. New Hampshire - 66.1%

2. New Jersey - 47.5%

3. Rhode Island - 44.6%

4. Virginia - 42.2%

5. Texas - 40.4%

6. Maine - 39.9%

7. Connecticut - 38.3%

8. Montana - 38.2%

9. Illinois - 36.5%

10. Maryland - 36.3%

On average, property taxes are extremely popular at a local level, where they represent 72.5% of collections, with a high of 98.8% for local authorities in Maine. Property taxes used to be quite popular at a State level, representing an average of 52.6% in fiscal revenue 1902. That share had dropped to 1.6% in 2014, the latest year for which data is available.

New Hampshire has the nation's highest share of property taxes of local (98.7%) and state (16.8%) collections combined: 66.1%. Other high-property tax states in the Northeast are New Jersey, Rhode Island, Maine and Connecticut.

Top 10 States with LOWEST Property Tax

1. Nevada - 11.5%

2. Hawaii - 17.2%

3. Alabama - 17.4%

4. Oklahoma - 17.5%

5. Arkansas - 18.0%

6. New Mexico - 18.4%

7. Delaware - 18.8%

8. Kentucky - 20.4%

9. Washington - 21.5%

10. Louisiana - 21.6%

At the other end of the spectrum, only 11.5% of Nevada's state and local tax collections come from property taxes. In regional terms, New England states have the highest property taxes at state and local level (44.6%), with the Southeast relying least on property taxes (26.2%).

Top 10 States with HIGHEST Sales Tax

1. West Virginia - 45.4%

2. Tennessee - 40.9%

3. South Dakota - 40.4%

4. Arizona - 39.6%

5. Louisiana - 38.3%

6. North Dakota - 38.1%

7. Hawaii - 37.6%

8. Arkansas - 37.5%

9. New Mexico - 36.8%

10. Texas - 36.0%

Based on U.S. Census data, sales taxes, in this case, includes both general sales taxes (levied on all goods) and certain gross receipts taxes (business taxes levied on the entire receipts of a firm), but generally exclude excises (levied on special categories of goods like alcohol or tobacco).

West Virginia leads the nation, with over 45% of its revenue coming from sales taxes. Tennessee and South Dakota also derive more than 40% of their income from the tax on sales. In compensation, these three states have no tax on individual income (Tennessee is phasing out a tax on interest and dividend income).

Top 10 States with LOWEST Sales Tax

1. New Hampshire - 0.0%

=. Delaware - 0.0%

=. Montana - 0.0%

=. Oregon - 0.0%

2. Alaska - 3.9%

3. Virginia - 10.5%

4. Massachusetts - 12.5%

5. Maryland - 13.6%

6. Vermont - 13.7%

7. Illinois - 14.2%

Local sales taxes are collected in 38 states, while five states charge no sales tax – resulting in four states being entirely sales-tax-free: Delaware, Oregon, Montana and New Hampshire. States with low or no sales tax generally look to severance taxes or miscellaneous business taxes for an outsized share of revenue rather than leaning more heavily on income taxes.

In general, sales taxes generate 12.1% of local government and 31.4% of state income. The Southwest is the region where states and local government rely most heavily on sales taxes (36.4%), New England the least (12.5%).

Top 10 States with HIGHEST Personal Income Tax

1. Oregon - 40.8%

2. Massachusetts - 37.4%

3. Maryland - 32.6%

4. California - 32.2%

5. New York - 32.1%

6. Kentucky - 31.3%

=. Minnesota - 31.3%

7. Vermont - 31.1%

8. Connecticut - 29.8%

9. Nebraska - 28.9%

Personal income taxes represent an average of 22.9% share of total state and local tax revenue but are much more important to state tax collections (35.9%) than to local governments (4.8%).

This is because most states do not allow localities to levy their own income taxes. In all, only 14 states (and DC) feature personal income tax collections by local governments. Of these, Maryland’s local governments gather most (32.7%) of their collections from this tax, followed by those in Kentucky (25.7%) and Ohio (21.2%). Combining state and local features, DC’s tax system derives 26.3% from personal income tax.

Top 10 States with LOWEST Personal Income Tax

1. Alaska - 0.0%

=. Wyoming - 0.0%

=. Florida - 0.0%

=. Texas - 0.0%

=. North Dakota - 0.0%

=. South Dakota - 0.0%

=. West Virginia - 0.0%

2. Tennessee - 1.2%

3. New Hampshire - 1.6%

4. Nevada - 6.9%

Seven states do not tax personal income – on top of that, Tennessee and New Hampshire only tax interest and dividend income. No other state relies more on personal income tax than Oregon (40.8%), which has no sales tax. Other states heavily reliant on this type of tax are Massachusetts (37.4%), Maryland (32.6%), California (32.2%) and New York (32.1%). Personal income taxes are favored most by the Mideast (28.2%) and Great Lakes states (24.5%), and least by the states in the Southwest (13.1%).

Top 10 States with HIGHEST Corporate Income Tax

1. New Hampshire - 9.4%

2. Alaska - 7.3%

3. New York - 6.9%

=. Delaware - 6.9%

4. D.C. - 6.5%

5. Illinois - 6.3%

6. Tennessee - 5.8%

7. Maryland - 5.4%

8. Kentucky - 5.1%

9. Mississippi - 5.0%

Corporate taxes represent no more than 3.7% of combined state and local tax collections – 5.4% at a State level, 1.3% of local government revenue. State and local governments together rely most on corporate taxes in New Hampshire (9.4%), followed by Alaska (7.3%), New York (6.9%) and Delaware (both 6.9%). The effective corporation tax is zero or less than one percent in six states: North Dakota, Wyoming, West Virginia, Texas, Ohio and South Dakota

Top 10 States with LOWEST Corporate Income Tax

1. North Dakota - 0.0%

=. Wyoming - 0.0%

=. West Virginia - 0.0%

=. Texas - 0.0%

2. Ohio - 0.6%

3. South Dakota - 0.8%

4. Hawaii - 1.6%

5. Montana- 2.0%

6. South Carolina - 2.1%

=. Vermont - 2.1%

In all, five states forego corporate income tax; but seven states have municipalities that do charge corporation tax, nowhere more than in New York, where they account for 7.5% of local revenue (mainly in New York City). Corporate income taxes feature most heavily in the Mideast, where they represent 5.3% of combined state and local tax takings. At 2.0%, the Southwest region relies least on the tax.

Top 10 States with HIGHEST Share of Other Taxes

1. Nevada - 57.1%

2. Alaska - 53.8%

3. Delaware - 47.7%

4. North Dakota - 37.3%

5. Wyoming - 37.1%

6. Washington - 34.8%

7. Montana - 31.0%

8. Alabama - 27.4%

9. New Mexico - 26.6%

10. Florida - 26.0%

The four previous categories represent over 80% of combined state and local government tax yield. The remainder is made up of a wide range of taxes. Excises (on fuel, tobacco, alcohol and other products) make up nearly half and are levied in all states, albeit to varying degrees. Another significant type are severance taxes, which for some states are relatively important income sources. Less prominent are license fees for vehicles and businesses, taxes on inheritances and estates, etc.

Top 10 States with LOWEST Share of Other Taxes

1. Maryland - 12.1%

2. New Jersey - 12.2%

3. Georgia - 12.7%

4. Arizona - 13.0%

5. New York - 13.7%

6. Kansas - 14.1%

7. Connecticut - 14.2%

8. North Carolina - 14.5%

9. California - 15.3%

10. Wisconsin - 15.5%

Nevada has the combined state and local tax revenue most reliant on the 'other' category (57.10%), which in the case of the Silver State includes prostitution and gambling. Alaska (53.8%) and North Dakota (37.3%) are both resource-intensive states, and have adapted their tax collection accordingly. Delaware (47.7%) atypically collects a lot of tax from business licensing. Maryland (12.1%), New Jersey (12.2%) and Georgia (12.7%) rely least on 'other' taxes. In all, New England relies the least on this tax category (17.8%), and the resource-rich Far West states the most (29.3%).

As this map shows, there is great variation in the way state and local governments choose to fill their coffers. As the Tax Foundation points out, higher-income states (e.g. New England) tend to rely more heavily on property taxes, while lower-income states (often in the South) go or sales and gross receipt taxes. However, over the years, property tax reliance has declined, while income taxes have risen. These variations and evolutions are not merely academic: they reflect different economic choices and create different economic realities.

Some states choose not to tax certain categories – personal income, corporate income, or sales – with the aim of stimulating growth. The flipside is that they must rely more heavily on other tax categories, which may render tax revenue more volatile, and has a negative effect on its own. Other states divide their collections more evenly over the various categories, but then lack a particular tax incentive to distinguish them from their neighbors.

The result is a patchwork of tax burdens that varies greatly throughout the land – and that makes it worthwhile or both individuals and corporations to wonder: Would I be better off next door?

Sources: Table 1.1

Article by HowMuch

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