State Tax Revenue Trends 2013: Income Tax

State tax revenues fell during the Great Recession, but have been making a slow recovery. Income taxes also have partially recovered, returning to their prerecession levels in nominal terms in 2012. When adjusted for inflation, however, income taxes remain below their prerecession levels.

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Taxes are the largest single source of general revenues for states. In 2011, taxes made up 45.9 percent of general state revenues, totaling $757.9 billion, or $2,432 per capita. In 2012, tax revenues increased 4.8 percent over 2011 in nominal terms, or 2.8 percent when adjusted for inflation. The largest component of tax revenues is sales and gross receipt taxes—47.2 percent—with corporate and personal income tax revenue coming in second at 40.5 percent. Other significant sources of state taxes include licenses at 6.8 percent of tax revenue; severance at 1.9 percent; and property at 1.9 percent.

Income taxes come from two sources—individual and corporate—with the majority of revenue coming from individual income taxes. Individual income taxes make up 35.3 percent of all tax revenue, compared to corporate income taxes, which make up 5.3 percent.

After dropping during the recession, income taxes have recovered partially, returning to their prerecession levels in nominal terms in 2012. Income tax collections fell significantly during the recession, dropping by 13 percent in 2009 and by 4 percent in 2010. But income tax collections started to increase in 2010-11, rising by 9.3 percent and by another 7.6 percent in 2011-12.

When adjusted for inflation, however, income taxes remain below their prerecession levels. In 2012 dollars, states hit a high of income taxes collected in 2007 at more than $353.8 billion—9 percent more than the amount collected in 2012.

During and following the recession, income taxes as a percent of total taxes collected actually decreased, primarily because tax collections in that category fell more dramatically than other categories, like sales taxes. Sales taxes and income taxes in 2009 and 2010 were actually mirror opposites when it came to their changing contributions to total tax revenue.

For example, income taxes as a percentage of total tax revenue fell from in 2009 and 2010 collectively by 3.13 percentage points, while sales taxes increased by 2.8 percentage points over the same period. In 2003, sales taxes represented 50 percent of total tax revenue and income taxes represented 38.3 percent—a 12 percentage point gap. That narrowed significantly during the recession, reaching a low of 4 percentage points in 2008. Since then, the gap has increased again, hitting 6.63 percentage points in 2012.

Individual Income

From 2011 to 2012, individual income tax collections grew by 8.2 percent nationwide. Seven states—Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming—did not levy a statewide tax on individual income in 2012. Only four of the 43 states that taxed individual income in 2012—Tennessee, New Hampshire, North Dakota and Wisconsin—saw individual income tax collections fall from 2011 to 2012. Among the remaining states that experienced year-over-year increases, seven had percentage increases in the double digits. Illinois saw the biggest jump, increasing collections by 39.8 percent, followed by Delaware with an increase of 36.3 percent and Hawaii with an increase of 23.5 percent.

Reliance on individual income taxes for revenue in those states varies significantly. Three states—Tennessee at 1.5 percent, New Hampshire at 3.7 percent and North Dakota at 7.7 percent—get less than 10 percent of total tax revenue from individual income taxes. Tennessee and New Hampshire tax only dividends and interest income. Four states—Massachusetts, New York, Oregon and Virginia—get 50 percent or more of their tax revenue from individual income taxes, with Oregon leading the pack at 67 percent.

Corporate Income

From 2011 to 2012, corporate income tax collections grew by 3.8 percent nationwide. Five states—Nevada, South Dakota, Texas, Washington and Wyoming—did not levy a statewide tax on corporate income in 2012. Fifteen of the 45 states that did tax corporate income in 2012 saw their collections fall from 2011 to 2012. Ohio corporate income taxes fell the most from 2011 to 2012—50.5 percent—in large part due to changes in the way that state calculates the tax and who is covered by the tax.

Among the remaining states that experienced year-over-year increases, Massachusetts saw the smallest increase at 3.5 percent, followed by Utah at 4.4 percent and Wisconsin at 4.6 percent. Illinois saw the biggest increase at 88.8 percent, followed by Iowa at 70.1 percent and Nebraska at 51.2 percent.

Some of these changes may be due to changes in state tax rates. Between 2008 and 2012, three states—Illinois, Oregon and West Virginia—raised corporate income tax rates, while five states— Kentucky, New York, North Dakota, Massachusetts and Maryland—lowered rates.

Reliance on corporate income taxes for revenue in those states varies significantly. Three states—Ohio at 0.5 percent, Hawaii at 1.5 percent and Michigan at 2.5 percent—get less than 3 percent of total tax revenue from corporate income taxes. New Hampshire collects the most corporate income taxes as a percent of total tax revenue of any state at 23.6 percent, followed by Tennessee at 10.2 percent and Illinois at 9.6 percent.


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State Tax Revenue Trends 2013: Income Tax