State tax collections are hot, hot, hot. The taxman rustled up 16 percent more in state income taxes for the second quarter of 2011 compared to the same period in 2010. Where is this phenomenal growth coming from?
Based on the most recent data collected by the Rockefeller Institute, states are raking in about $900 billion a year from their three major tax categories: the sales tax, personal income tax and corporate income taxes. Revenues from these three taxes total about 6.25% of U.S. GDP.
But it’s the personal income tax (PIT) that’s really driving the show. In the state of New York the PIT makes up about 60 percent of total tax revenues. In Oregon the PIT is an astonishing 72 percent of the state’s tax haul. Although the national employment level improved slowly the PIT was up on average 11.4 percent across the country year over year, according to Rockefeller. This contrasts sharply with the 4.6 percent national increase in state sales tax collections, especially given that 21 states cut their PIT tax rate while only 12 states cut their sales tax rates.
Robert Ward of the Rockefeller Institute tried to explain this counterintuitive phenomenon in a presentation earlier this month. He pointed out that some states have significant PIT revenues from capital gains. Unlike the federal tax code, twenty-one states treat capital gains as regular income. All the states in the chart above treat income earned from labor in the same way as income earned from capital. And in some states the amounts can be significant: In 2007, 13 percent of New York taxpayers’ annual gross income and 8 percent of New Jersey’s came from capital gains. That is a lot of bond and derivative trading on Wall Street.
Ward also pointed out that states are increasingly relying on personal income taxes. In 1978 PIT was about 25 percent of state tax revenues nationally versus 35 percent in 2008.