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. For the 20-year period 1996-2015 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.
For the past 20 years, property taxes have accounted for approximately 31 percent of all state and local government tax revenue, with sales and income taxes each accounting for approximately one-quarter of total revenues. Other levies, which includes selective sales taxes, such as for alcohol and tobacco, and licenses, such as for hunting and motor vehicle operation, account for nearly 18 percent. These percentages may be different for a given year within the period. Property taxes are the most volatile, ranging from 25 percent to nearly 57 percent, and sales taxes are the least volatile, ranging from 21 percent to 35 percent. Income taxes ranged from 21.5 percent to 44 percent.
Source: U.S. Census Bureau & Rockefeller Institute of Government, compiled by NASRA
Inflation-adjusted state and local tax revenues are 149 percent higher in 2017 relative to 1997. On a per capita basis, which adjusts for population growth, growth in tax revenues has been slower, at 126 percent compared to 1997. Taxes, which in a given year account for approximately 40-50 percent of all state and local revenue, are collected primarily to fund government services that are consumed by residents, which renders a per-capita analysis of their relative growth especially useful in determining the level of government services supported by revenues.
Source: U.S. Census Bureau, Rockefeller Institute of Government
Inflation data sourced from Federal Reserve Bank of Minneapolis,
compiled by NASRA
State and local government reliance on tax revenues varies: 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 respond 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 timing of real estate valuations, tax assessment and collections.
On a national basis, property tax revenue rose through the FY 07-09 recession, and fell sharply thereafter before resuming growth around FY 14. Since FY 14 property tax revenue has grown by approximately 5.7 percent, and remains below its post-recession peak.
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, in accordance with broader macroeconomic objectives.
Both sales and income tax revenue declined precipitously following the FY 07-09 recession. Since bottoming out in FY 10, income tax revenue has increased by 11 percent while sales tax revenue has grown by 15 percent, and, on a national level, remains below its pre-recession peak.
Quarterly Summary of State & Local Tax Revenue, US Census Bureau
Sources of Revenue for Local Governments, Tax Policy Center
Sources of Revenue for State Governments, Tax Policy Center