State Taxes and the Tax Debate

July 20th, 2012 at 3:07 pm

You don’t win friends doing it, but I’ve been trying to amplify the point that if you look at federal taxation from any angle you want, you will be very hard pressed to make an argument that Americans are overtaxed.  Relative to our own past, to other advanced nations, to the optimal taxation literature…that argument is simply not in the data.

But what about state and local taxes?  Have they gone up enough to offset the decline in federal taxation since 2000?  Given all the different tax systems out there, it is of course not a simple question.  But the answer appears quite clearly to be “no.”  Sub-national tax analysts do not find consistent evidence of either higher tax rates or greater revenue collection appreciation over the past decade (outside of cyclical increases in property tax revenues associated with the housing bubble, which have, of course, evaporated).

First, by way of some background, CTJ provides this point-in-time look at state and local taxes showing that where fed taxes are progressive—effective rates rise with income—state/local taxes are regressive.  Think of sales taxes, for example, which are much more important in sub-national systems, and you’ll get the picture. 

In fact, once you add state+local+federal together, you find that the share of total taxes paid by households is pretty close to their share of national income, a strong data point against argument that the bottom 50% don’t have any skin in the tax game.  That’s only true if you’re considering federal income taxes.

But more to the point, what’s happened over time?  Unfortunately, we don’t have a time series of the CTJ-type effective rate analysis shown above.  Fortunately, we have the recent analysis by a non-partisan task force on the state budget crisis (and “crisis” in that sentence is a hint that states haven’t much ratcheted up their revenue demands), a group of experts chaired by Richard Ravitch and Paul Volcker.  Their conclusions re state and local tax collections:

The capacity to raise revenues is increasingly impaired:

–Untaxed transactions are eroding the sales tax base. Gasoline taxes are eroding as well, making it more difficult for states to finance roads, highways, and bridges.

–Income taxes have become increasingly volatile, particularly during and after the recent economic crisis.

On the first point, an interesting factor hurting state tax systems is that the sales tax base has been eroding (see figure):

The sales tax base – that is, the value of taxed goods and services – declined from 55 percent of personal income in 1970 to 35 percent in 2010, because of consumer spending shifts toward lightly taxed services, the difficulty of collecting taxes on Internet-related transactions, and state choices that narrow their tax bases.

(See my CBPP colleague Michael Mazerov’s take on the internet sales issue.)

Source: Report of the State Budget Crtisis Task Force (link above)

To be clear and fair, some states and towns have raised tax rates over these years.  State sales taxes, for example, have crept up a few percentage points over the last few decades in an effort to partially offset the eroding tax base.  And post-recession, most states raised some taxes or fees to deal with their very sharp revenue shortfalls.  But by no means does the magnitude of these recent changes contradict the key finding here: including sub-national taxes does not alter the conclusion that by any reasonable measure, Americans are not overtaxed.

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4 comments in reply to "State Taxes and the Tax Debate"

  1. Ted Boettner says:

    How much of the growth in state personal income tax collections is due to the rise of S corporations? This could certainly skew the results. That said, I agree the economy has shifted from goods to services and the state tax code has yet to catch up.

  2. pjr says:

    Just a question regarding the table. Federal taxes here include FICA, to include the employer contribution. This would be nearly 12 percent of income for most wage-earners, but the table shows that the lowest 20 percent and second 20 percent are paying less than this. Is this outcome caused by a large number of people in these categories who are living off Social Security benefits–non-wage income–or what? (I am curious because the use of averages may be masking the high federal tax rates paid by working stiffs, until they retire and pay much lower federal tax rates.)

  3. davesnyd says:

    I think you’re misunderstanding the complaints.

    When people say “we’re overtaxed” you think they mean “we’re overtaxed”.

    They don’t. What they mean is “we’re under-disposable-incomed”.

    You know– better than me or anyone else reading your blog– why that is: incomes have stagnated, structural expenses (“healthcare”) have risen dramatically, and the employment picture has gone sour.

    But one way to increase the disposable income is to decrease the taxes.

    Hence: “we’re overtaxed”.