NCPA - National Center for Policy Analysis


May 5, 2009

In a historic first, Uncle Sam has supplanted sales, property and income taxes as the biggest source of revenue for state and local governments, says USA Today.

The shift shows how deeply the recession is cutting.  Federal stimulus money aimed at reviving the economy and a sharp drop in tax collections have altered, at least temporarily, the traditional balance of how states, cities, counties and schools pay for their operations.

Here are the top revenue sources for state and local governments in the first quarter, compared with the same period last year:

  • Federal grants increased 15 percent.
  • Income taxes declined 11 percent.
  • Property taxes increased 2 percent.
  • Sales taxes declined 2 percent.
  • Other taxes increased 2 percent.

The sales tax had been the primary source of state and local revenue since the mid-1970s, according to the Bureau of Economic Analysis (NBER).  Before that, property taxes were the primary source.  That changed in the first three months of 2009, says USA Today:

  • Sales taxes started falling at the end of 2008 for the first time since the NBER first reported data in 1958; the drop in sales of automobiles and construction materials has taken a big bite out of sales tax revenue.
  • Property taxes -- the most stable taxes -- are generating increasing revenue, mostly for schools, despite plunging property values; one reason is that 46 states limit how fast property taxes rise or fall.
  • Income taxes -- the most volatile taxes -- produce big increases during boom times and giant declines during hard times; California, New York, Oregon, Connecticut and other states that depend heavily on taxing year-end bonuses and capital gains on investments have been hardest hit by the worst income tax drops since 2002.

Source: Dennis Cauchon, "Federal aid is top revenue for states," USA Today, May 5, 2009.

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