What are the sources of revenue for state governments?
State governments collected more than $1.7 trillion of general revenue in 2014. Revenue from income, sales, and other taxes totaled nearly $870 billion—half of all general revenue (figure 1).
Intergovernmental transfers—primarily from the federal government—totaled $551 billion in 2014. The largest were federal grants for public welfare programs, predominately for Medicaid.
Revenue from state sales and gross receipts taxes (including taxes on general purchases and selective taxes on products such as alcohol, cigarettes, and motor fuels) was $412 billion in 2014, or 24 percent of state general revenue. Revenue from individual income taxes totaled $312 billion—18 percent of general revenue—while revenue from other taxes (including license fees, estate taxes, and severance taxes) was $97 billion—6 percent of general revenue. Charges and fees—notably tuition paid to state universities, payments to public hospitals, and tolls on highways or bridges—provided another $322 billion, —19 percent of state general revenue in 2014.
General revenue does not include revenue collected by states from “business-like” enterprises, such as state-run liquor stores, utilities, and pension funds.
Since 1977, the shares of state general revenue from intergovernmental transfers as well as charges and users fee have increased, while the share from taxes has declined (figure 2). The change in the charges and user fee category was especially striking, with its share rising by 8 percentage points (from 11 percent to 19 percent) from 1977 to 2014, as states sought to broaden their revenue bases.
Over the same period, the share of general revenue from state taxes declined by 10 percentage points, from 60 percent to 50 percent. The portion from individual income taxes rose slightly over the period, while the share from all other taxes declined.
State revenue grew slightly faster than the national economy between 1977 and 2014, rising from 8 percent of GDP in 1977 to 10 percent in 2005 and staying there for the next decade (figure 3). State revenues peaked at 11 percent of GDP in 2011 before falling back to 10 percent in 2014, largely because of a decline in federal transfers in the wake of the economic recovery.
Revenue from charges and miscellaneous fees as well as individual income taxes grew a small amount relative to GDP from 1977 to 2014, while sales tax revenue remained fairly constant at about 2.5 percent of GDP (figure 4). Intergovernmental transfers grew the most over that period, rising about 1 percent of GDP. The American Recovery Reinvestment Act of 2009 created a sharp uptick in federal transfers to state governments from 2009 to 2011, hitting a peak of 3.8 percent of GDP in 2010 and 2011. Federal transfers to the states dropped as a share of GDP in 2012 as spending on economic stimulus programs receded.
US Department of Commerce, Bureau of Economic Analysis. BEA National Economic Accounts: Current-dollar and ‘real’ GDP.
Tax Policy Center. State and Local Finance Data Query System. Urban Institute and Brookings Institution, Washington, D.C.
Brunori, David. 2005. State Tax Policy: A Political Perspective, 2nd ed. Washington, DC: Urban Institute Press.