State & Local Revenue

Taxes represent the largest single source of revenue for state and local governments. Additional sources of state and local government revenue include intergovernmental transfers from the federal government, or from state to local governments, selective sales taxes, and direct charges for utilities, licenses, or entities such as higher education institutions and insurance trusts. Since 1996 state and local governments derived approximately 45 percent of revenues from taxes, 18 percent of revenues from the federal government, and approximately 25 percent from service and utility charges.

State and local governments collect tax revenues from three primary sources: income, sales, and property taxes. Income and sales taxes make up the majority of combined state tax revenue, while property taxes are the largest source of tax revenue for local governments, including school districts. Tax revenues fluctuate in response to changes in economic conditions and tax policies. 
 

State and local tax revenue by source, 1992-2010

Source: U.S. Census Bureau & Rockefeller Institute of Government, compiled by NASRA

State and local government reliance on tax revenues vary: between 70-75 percent of local government tax revenues, including those of school districts, are sourced from property taxes. Most state tax revenues are sourced from sales and income taxes. Proceeds from these different tax levies vary, and each of these revenue sources generally responds differently to changing economic conditions. Sales and individual and corporate income tax revenue, which reflect near-term activities of consumers, workers, and firms, tend to be more immediately responsive to recessions, while changes in property tax revenue tend to lag due to differences in the timing of real estate valuations, tax assessment, and collections. 

Sales and income tax revenue are highly correlated, as evidenced by their corresponding growth or decline during periods of economic expansion or contraction, respectively. Sales tax revenue is less sensitive to economic conditions due in large part to fiscal and monetary policies (i.e. provision of unemployment benefits, and changes to tax and interest rates) designed to boost or slow spending, following broader macroeconomic objectives. 
 

Relative change in the inflation-adjusted, four-quarter rolling average 
state and local government tax revenue by source, 1997-2024
Source: U.S. Census Bureau, Rockefeller Institute of Government
Inflation data sourced from Federal Reserve Bank of Minneapolis,
See Also
 
 
 

 


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What's New at NASRA: Updated Cost of Living Issue Brief

Cost-of-Living Adjustments (COLAs) play a significant role in public pensions. They help retirees keep up with rising prices, but they also add costs to pension plans. Policymakers and plan sponsors are tasked with balancing three things: benefits adequacy, plan sustainability, and affordability for members and plan sponsors.
The recent increase in inflation caused many policymakers and, in some cases pension trustees, to review how benefits are designed and paid for, including the way COLAs are granted and funded. NASRA’s recently updated issue brief on the lates trends in COLAs is available in the NASRA Research Center.