The State of State (and Local) Tax Policy

State governments collected $2.0 trillion of general revenue in 2017. General revenue from income, sales, and other taxes totaled $946 billion—nearly half of all general revenue (figure 1). About one-third came from intergovernmental transfers.

INTERGOVERNMENTAL TRANSFERS

Intergovernmental transfers to state governments—primarily from the federal government—totaled $659 billion in 2017. The largest were federal grants for public welfare programs, predominately Medicaid.

OWN-SOURCE REVENUE

Revenue from state sales and gross receipts taxes—including both general sales taxes and selective taxes on products such as alcohol, cigarettes, and motor fuels—was $457 billion in 2017, or 23 percent of state general revenue. Individual income taxes provided $352 billion (18 percent of state general revenue) and corporate income taxes accounted for $45 billion (2 percent of state general revenue). Revenue from all other taxes (including license fees, estate taxes, and severance taxes) was roughly $93 billion—5 percent of state general revenue. Charges and fees—notably tuition paid to state universities, payments to public hospitals, and tolls on highways or bridges—and other miscellaneous revenue provided $371 billion, or 19 percent of state general revenue in 2017.

General revenue does not include revenue collected by states from “business-like” enterprises, such as state-run liquor stores, utilities, and pension funds.

CHANGING SOURCES

Since 1977, the share of state general revenue from intergovernmental transfers, as well as charges and user fees, has increased, while the share from taxes has declined (figure 2). Revenue from charges, user fees, and miscellaneous sources increased significantly from 11 percent in 1977 to 18 percent in 2002, as states sought to increase revenue from non-tax sources, including large increases in public university tuition. Charges as a percentage of revenue has been fairly flat since 2002, however.

Over roughly the same period, the share of state general revenue from taxes declined from 60 percent to 50 percent. Revenue from taxes as a percentage of state general revenue has also been roughly flat since 2002. Among specific taxes, the portion from individual income taxes rose slightly from 1977 to 2017, but the share from sales (general and selective) and corporate taxes declined.

LONG-TERM REVENUE GROWTH

State revenue grew slightly faster than the national economy between 1977 and 2001, rising from 8 percent of gross domestic product (GDP) to 10 percent. However, state revenue as a percentage of GDP has stayed at roughly 10 percent since then (figure 3). State revenues grew above that level during the 2008 Great Recession and its aftermath because of an increase in federal transfer payments, peaking at nearly 11 percent of GDP in 2011 before falling back to 10 percent in 2012 as federal transfers abated in the wake of the economic recovery. In 2017 state revenue were just above 10 percent of GDP.

Revenue from individual income taxes grew from about 1 percent to 2 percent of GDP from 1977 to 2017, while sales tax revenue remained fairly constant at about 2.4 percent (figure 4). Revenue from charges and miscellaneous fees also grew from about 1 percent to 2 percent of GDP, while intergovernmental transfers grew from about 2 percent to more than 3 percent of GDP over the period.

Updated May 2020