The Center's work on 'State Budget and Tax' Issues

The Center’s State Fiscal Project works with state officials and state-based nonprofits to develop responsible budget and tax policies that take the needs of low-income families into account. We provide information and technical assistance on a variety of issues, including strengthening state tax systems, state budget priorities, and making low-income programs more effective. We also help state nonprofits understand how federal budget and tax decisions affect states and their residents.


Tax Day Roundup, 2014

April 14, 2014 at 4:56 pm

The Top 5 (Okay, 6) State Tax Charts

April 14, 2014 at 1:51 pm

As we approach Tax Day, here are six charts focusing on state taxes.

More than half of state tax dollars go to fund education (K-12 and higher education) and health care, as the chart below shows.  State tax dollars also fund other critical services such as transportation, corrections, public assistance, care for residents with disabilities, police, state parks, and general aid to local governments.

State revenue losses from the Great Recession were both deeper and longer lasting than in previous recessions, as the chart below shows.  Not until the end of 2013 did revenues finally return to pre-recession (2007) levels, after adjusting for inflation.  But, the steady revenue increases of recent years offer states an opportunity to reinvest in education and other services that sustained unprecedented cuts during the recession.

While revenues have slowly recovered in most states, Kansas has moved in the opposite direction, as the chart below shows.  Kansas slashed income taxes, especially for businesses and wealthy Kansans, even as needs — like the number of K-12 students — have grown.  Revenues fell by more than 9 percent in Kansas in 2013.  Meanwhile, there is no evidence that the tax cuts have boosted the Kansas economy.

Five of the seven states that have made the deepest cuts to K-12 education since the beginning of the recession have also enacted major income tax cuts, as the chart below shows.  These tax cuts eliminated revenue that could have helped states reverse the deep funding cuts from the recession and invest in promising education reforms.

As the chart below shows, low-income families pay significantly more of their income in state and local taxes than very wealthy families.  State and local taxes push many families into — or deeper into — poverty.

A state Earned Income Tax Credit (EITC) is one powerful tool to prevent state and local taxes from pushing low-income working families deeper into poverty.  Twenty-five states and Washington, DC, have their own EITCs, as the map below shows.  A state credit builds on the federal EITC’s proven effectiveness in helping low-income working families make ends meet.  States looking to encourage work and reduce poverty, especially among children (the federal EITC lifts more children out of poverty than any other program), should considering enacting or expanding an EITC.

Just the Basics: Where Our State Tax Dollars Go

April 11, 2014 at 9:40 am

As Tax Day approaches, we’ve updated several backgrounders that explain how the federal government and states collect and spend tax dollars.  As policymakers and citizens weigh key decisions on how best to shape our future government, it’s helpful to examine where the dollars that comprise the budget come from and where they go.

The final installment in our series of revised “Policy Basics” backgrounders explains where our state tax dollars go.

In total, the 50 states and the District of Columbia spent a little more than $1 trillion in state revenues in fiscal year 2012, according to the most recent survey by the National Association of State Budget Officers.  (This figure does not include the federal funds that states also spent that year.)

By far the largest areas of state spending, on average, are education (both K-12 and higher education) and health care.  But states also fund a wide variety of other services, including transportation, corrections, pension and health benefits for public employees, care for persons with mental illness and developmental disabilities, assistance to low-income families, economic development, environmental projects, state police, parks and recreation, housing, and aid to local governments (see chart).

The figure above shows how states spend their tax dollars on average for the entire country.  But the specific mix of spending varies from state to state, depending on such factors as how the state and its localities share funding responsibilities for public services and how much state policymakers choose to invest in health care, education, and other areas.

Click here to read the full backgrounder.

“Tax Freedom Day” Analysis Can Give a Misleading Impression of Tax Burdens

April 7, 2014 at 5:01 pm

We explain the problems inherent in the Tax Foundation’s annual “Tax Freedom Day” analysis in a new paper.  Here’s the opening:

The Tax Foundation released its annual “Tax Freedom Day” report today that, once again, can leave a strikingly misleading impression of tax burdens — showing an average federal tax rate across the United States that’s likely higher than the tax rate that 80 percent of U.S. households actually pay (see chart).

To project the day when “the nation as a whole has earned enough money to pay its total tax bill for [the] year,” the Tax Foundation calculates the average tax rate by measuring tax revenues as a share of the economy (similar to estimates of total revenues as a share of Gross Domestic Product, or GDP).

In a progressive tax system like that of the United States, only upper-income households on average pay federal tax at rates that are equal to or above federal revenues as a share of the economy.  Estimates from the nonpartisan Urban-Brookings Tax Policy Center show that low- and middle-income households (about 80 percent of all households) will pay a smaller share of their income in federal taxes this year than the Tax Foundation’s average tax rate.

The Tax Foundation acknowledges this issue in a methodology paper accompanying its report, noting that its estimates reflect the “average tax burden for the economy as a whole, rather than for specific subgroups of taxpayers.”  Consequently, those who report on Tax Freedom Day as if it represents the day until which the typical American must work to pay his or her taxes are misinterpreting these figures and inadvertently fostering misimpressions about the taxes that most Americans pay.

Click here to read the full report.

States’ Sluggish Recovery Continues

April 4, 2014 at 3:06 pm

State tax collections have finally reached their pre-recession levels, according to new data from the Census Bureau.  Those collections are now 0.4 percent higher than six years ago, after adjusting for inflation.  This news is welcome, but not cause for celebration.

The recession of 2007-09 caused deep, sustained and unprecedented revenue losses. Revenue fell a record 12 percent in the average state, even deeper in states with the hardest-hit economy.  And the recovery has been the slowest in decades (see graph).

These drastic revenue losses have prompted many states to make serious cuts to K-12 education, public colleges and universities, libraries, human services, and other public services.  The sluggish recovery means that states are serving larger populations, including more school kids and more seniors, with the same amount of money as six years ago.