With the unveiling of President Trump’s new tax plan, federal taxes are in the news. Most of us are more familiar with what happens to our taxes at the national level – but what is going on with our state taxes? Nearly one third of tax revenue goes to to the state governments. As taxpayers, we should know how this money is collected.
Some of the tax revenue collected at the federal level is passed down to the state level, and some is passed down from the state level to the local level. (Around 40% of the budgets of some states – including Mississippi, Louisiana, Tennessee, and Montana – rely on federal funds.)
There is one aspect of state tax collection that we are all too familiar with: sales tax. Unlike income taxes, which taxes the money we earn, sales tax is a consumption tax, and taxes the money that we spend. With the exception of five states that do not have a sales tax – Alaska, Delaware, New Hampshire, Montana, Oregon – states rely heavily on tax revenue from sales tax. Some states receive as much as 60% of their budget from sales tax, though it is not the largest source of income for most states. California has the highest sales tax at 8.75%, and Colorado has the lowest at 2.9%. Economic troubles have often led to sales tax increases, and while those increases have sometimes been rolled back the overall trend has been towards higher percentages.
Some states with sales tax have instituted sales tax holidays to encourage shopping and give taxpayers a break on important items such as hurricane preparedness or back to school supplies, and to stimulate economic growth in the retail industry, with so many people shopping online nowadays to avoid sales tax. (Technically consumers in states with sales tax are supposed to pay tax on what they buy whether the seller collects it or not, but this is rarely enforced.) Others have instituted exemptions or lowered tax percentages on those or other items, such as food, prescription medication, and clothing. Traditionally only goods have been taxed, but with the growing importance of services such as phone services and cable TV, states are trying to move towards a sales tax on these items too.
Sales tax is important, but states have other sources of tax revenue as well. One of the smaller sources is property taxes. Property taxes are the main source of income at the local level, but at the state level it is not as significant. 14 states don’t collect state-level property taxes at all and for the remaining states it made up ¼ or less.
Percentages vary from state to state, but other sources of tax income include personal income tax (7 states do not levy a personal income tax, but the other 43 states rely heavily on it as a source of income), corporate income tax, taxes associated with vehicles, and a variety of other taxes that make up small percentages of tax revenue.
This graph provides further information about personal income tax percentages:
Although there are some trends, states have had the freedom to design their own tax plans and have made some dramatically different decisions.