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What Sources Do States Generate Their Tax Revenue From?

by
Bob Mason
on
5/10/2022
What Sources Do States Generate Their Tax Revenue From?

It’s been said that the only two certainties in this life are death and taxes. That’s especially true when it comes to state income tax sources, which are a bit of a trickier situation than most.

To be clear, no individual is typically very enthused about paying taxes. Yet at the same time, it’s a necessity – that money goes to repairing roads, bridges and other critical infrastructure, to empowering local school districts and more.

Of course, this demands the question – where, exactly, is that money coming from? As stated, the answer can be a bit on the complicated side as it all varies depending on exactly which state you’re talking about.

State Income Tax Revenue: Your Guide

Generally speaking, states will get the majority of their tax revenues from three different sources. The first of these comes down to income taxes, which are paid for by individual taxpayers. The second is sales tax, which is an amount of money added to the price of a purchase you’ve made at a local store.

The third is property taxes, which as the name suggests are paid for by people who own property or land in a particular state.

What makes things complicated is that all of these factors can vary significantly depending on which state is in question, the state tax code and other elements. Only 38 states collect sales taxes as of 2022, for example. Some – like Montana, New Hampshire, Delaware, and others don’t proceed on this path.

Likewise, while all states collect property taxes, the rates will be dramatically different from county to county or even city to city.

Some states – with California being the primary example – are in an even more precarious situation. Despite the large population of California, its budget essentially depends on a select few hyper-wealthy individuals. In other words, California’s ability to function as a state is literally dependent on the wealthy generating high income or investment returns.  

All of this was highlighted recently thanks to Governor Gavin Newsom’s massive $227 billion spending plan. On the one hand, the plan – which, keep in mind, has been approved by lawmakers – has its proverbial heart in the right place. The vast majority of that money is being earmarked for helping to solve poverty issues, fight eviction (something that is especially important in the wake of the COVID-19 pandemic), help curb K-12 education loss, and more.

But at the same time, California tax revenue is predominantly paid by the wealthy. The roughly top 100,000 California taxpayers generate 40% of the state tax revenue.  The Governor echoed these sentiments in a quote to the press where he said “Folks at the top are doing pretty damn well, but I don’t begrudge that success, I admire and respect it.”

All of this is also underlined by the fact that the last recession caused a significant decline in state tax revenue – not just in California, but around the country. Therefore, it has not been uncommon to see lawmakers look for any way to make up for some of that lost money.

Indeed, California is a prime example of a state with a tax structure that naturally lends itself to “boom and bust” cycles. When it is doing well, it is doing very well. When it isn’t, there tends to be no such thing as a “small problem.”

This is also something that was seen during The Great Recession many years ago. During that time, the capital gains taxes that had at that point propped the state up suddenly dwindled. As a result, it was estimated that school districts around the state laid off as many as 30,000 teachers. This is something that happened in other states, too – but it was particularly on display here.

In the end, just know that state taxes in particular are more than just a “minor inconvenience” for individual taxpayers. They do make up a significant portion of the state’s budget, which can have a lasting impact when applied properly. It’s just that the situation is often a lot more complicated than people realize and this is one of those situations where a little understanding certainly goes a long way. Based on your path in life, state tax policy might be a factor where you decide you call home. 

If you want to see how your state sales tax compares, check out the Tax Foundations’ latest data for 2021. 

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Bob Mason

Bob Mason

Bob Mason is the founder of Coast Financial Services Inc. servicing both the Santa Cruz, and San Jose areas. Bob Mason is a skilled financial professional who is fully equipped to assist any of your accounting needs. Founding his firm in Santa Cruz, Bob understands the importance of small businesses and how they form the backbone of the area. Coast Financial Services, Inc. has been dedicated to the growth and profitability of businesses in Santa Cruz for 17 years. To learn more about Bob Mason and the rest of his team, visit their website.

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