- The Washington Times - Sunday, August 10, 2008

A slow economy may carry a hidden benefit for taxpayers: State and local tax collections have decreased across the board this year, according to a new report.

After rising by an average of more than 10 percent during the previous three years, individual income-tax receipts at the state and local level increased by only 2.7 percent in 2008, according to the report by the Tax Foundation, a D.C. advocacy group that lobbies for lower taxes.

Sales-tax revenues, which increased by an average of 6 percent over the three previous years, have risen only 1.7 percent this year. Corporate income-tax receipts, which had been growing by 20 percent per year during the 2005-07 period, declined by 6.6 percent in 2008, the report found.

The big reason for the decline in state and local tax collections: The economic slowdown depressed the growth of tax revenue more than it dampened gains in income, the report said.

The national average of state and local tax burdens for fiscal 2008, which ended June 30, declined to 9.7 percent of per-capita income. That was down 0.2 percentage points from the average tax burden of 9.9 percent that prevailed in 2006 and 2007.

“Tax burdens are down from 2007 to 2008, mostly because income growth outpaced tax growth as the economy slowed,” explained Gerald Prante, author of the study.

Total income increased 4.4 percent last year, failing to keep up with a 5 percent increase in consumer prices but outpacing total state and local tax increases by 2 percent, the study found.

At 11.8 percent, New Jersey had the highest state-local tax burden in the nation. New York (11.7 percent) and Connecticut (11.1 percent) were the only other states to exceed the 11 percent threshold.

Marylanders, who paid 10.8 percent of their income in state and local taxes, bore the fourth-highest state-local tax burden in the country. Virginia (9.8 percent) ranked 18th. Had it been listed with the states, the District of Columbia’s tax burden of 10.3 percent would have been eighth-highest in the nation.

Rather than focus attention on the amount of state and local taxes that are collected in a state, the annual Tax Foundation study concentrates on taxpayers. It seeks to answer the question: What percentage of income are residents paying in state and local taxes?

Thus, when Connecticut residents working in New York City pay both income and sales taxes to New York jurisdictions, the Census Bureau allocates those state and local tax receipts to New York. The Tax Foundation model, however, counts those tax payments as part of Connecticut’s tax burden.

The study also assumes the economic burden of the sizable oil-extraction taxes paid in Alaska (and other mineral-extraction fees paid in other states) is borne by the states whose residents consume the products refined from Alaskan oil.

Because of its ability to “export” its tax load to other states, Alaska had the lowest state-local tax burden (6.4 percent) in the country. The huge tourism industries in Nevada (6.6 percent) and Florida (7.4 percent) and oil and mining in Wyoming (7 percent) allowed those states to export substantial portions of their state and local taxes to residents of other states. Rounding out the bottom five was New Hampshire, which has neither a general state sales tax nor an income tax.

“In fact,” Mr. Prante said, “none of the eight states with the lowest state-local burdens has an income tax.” That list includes the tax havens of Texas, Tennessee and South Dakota.

Major revisions to its income figures over the years caused the Tax Foundation to retreat from a claim it made last year, when its report declared that “state and local tax burdens hit a 25-year high.” The average state-local tax burden reported last year for 2007 was 11 percent. The latest study revised that downward to 9.9 percent.

“In the current report, the Tax Foundation says state and local taxes in 2007 were lower than in the mid-1990s and about the same as in several other periods of the past,” said Nicholas Johnson, director of the State Fiscal Project at the Washington-based Center on Budget and Policy Priorities.

“The fact that the Tax Foundation revises its results with such frequency calls into question how robust its methodology is - and how seriously the estimates should be taken,” Mr. Johnson said.



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