Federal tax policy is not made in a vacuum. Small policy changes
reflect current political winds. Congress enacts larger policy
changes in reaction to broader budgetary or economic developments.
More fundamental changes occur when theoretical perspectives and
national views realign along key policy fault lines. And all the
while, state and local tax policy developments provide often
ignored context for the evolution of federal policy.
In the post-World War II era, the federal government has played
the preeminent role in the evolution of tax policy. Yet in some
respects, changes in tax policy at the state and local level have
been every bit as dramatic as those at the federal, perhaps never
more so than today with the growing appetites of state and local
governments for tax revenue. Consequently, to the extent that the
American people have a limited tolerance for taxation, federal
policymakers will face new pressures to restrain and even reduce
federal tax burdens.
Federal policymakers should also be cognizant of the fact that
state governments receive significant amounts of federal funding
through grant programs and other payments. Whether by intent or
not, in important respects the federal government has become a
major auxiliary revenue source in support of state and local
spending. To pay for tax relief and higher-priority spending at the
federal level, policymakers should acknowledge the rising state and
local taxes by paring back federal grants to the states.
The Continuing Rise of State and Local
The national media and Washington-based analysts naturally focus
most of their fiscal policy attention on the federal government's
tax and spending habits due to its size and scope. Yet together,
state and local governments collected $1.258 trillion in taxes in
2006, more than half the amount collected by the
federal government that year. With such a large fiscal footprint,
state and local tax policies have a significant influence on the
long-term strength of the American economy as well as on the
pocketbooks of American taxpayers.
The federal government's tax share is expected to reach about
18.8 percent of gross domestic product (GDP) in 2007, somewhat
above the 40-year historical average of 18.3 percent and well
within the band of between 17.5 percent and 20 percent representing
the post-war norm. In contrast, state and local governments
have steadily increased their collective tax share over this
period. The state and local tax share rose from 5.7 percent of GDP
in 1950 to 9.4 percent in 1972-an increase of almost two-thirds.
The state and local tax share fell for some years and then resumed
its steady rise to hit a new all-time high of 9.5 percent in 2006.
(It is important to note in making these comparisons that the
figures are free of inflationary effects because inflation is
captured in both the level of tax collections and the level of
The tax share calculation is a useful means of presenting
information on tax levels because it helps to relate tax levels to
the level of income from which taxes are extracted. In important
ways, however, the tax share calculation can give a misleading
impression. The tax share does not measure the weight of the tax
burden on the individual taxpayers who pay the taxes. An
alternative measure called the American taxpayer burden shows the
level and change in the tax burden on a per capita basis after
adjusting for inflation.
The per capita taxpayer burden of state and local taxes has been
rising rapidly throughout the post-war period even after adjusting
for inflation. In 1950, state and local governments collected $755
per taxpayer when measured in 2006 dollars. The taxpayer burden
peaked temporarily in 1972, at which time it had risen to $2,243-a
three-fold increase in just 22 years. The state and local taxpayer
burden rose slowly through the end of the last century, but
thereafter its rise accelerated. By 2006, the real per capita
taxpayer burden reached $4,203-another 17 percent increase in just
The combination of rising federal, state, and local tax burdens
means the American taxpayer is facing an unprecedented level of
taxation. In 2006, the total taxpayer burden hit a new high of
$12,401, surpassing by $689 the previous record set in 2005. The
combined real tax burden has been increasing at an average rate of
2.2 percent per year over the past 40 years.
Implications of Rising Total Tax Burdens for Federal Tax
The steady increase in the federal, state, and local tax burden on
a real per capita basis helps to answer one question while it
raises others. It may explain why American taxpayers report being
under increasing financial strain despite the significant tax
relief enacted in 2001 and 2003 and despite a strong economy that
is creating new jobs, raising real wages, and creating new wealth.
The federal tax share suggests to some observers that taxes are not
part of the problem. However, the per capita total tax share shows
that taxes are rising rapidly. Rising taxes are almost certainly a
major contributor to the financial strain being felt by many
The increasing tax burden also raises important questions. One
such question is the extent to which state and local tax policies
are adding to the economic distortions arising from federal tax
policy, thereby diminishing job growth, wage growth, and American
international competitiveness. State and local governments levy
their own individual income taxes, corporate income taxes, gross
receipts taxes, property taxes, and taxes on productive capital-all
of which diminish economic performance.
Another question is whether and when taxpayers will reach a
point of deep resistance toward the taxes being collected and the
governments levying those taxes. The recent surges in both federal
taxes and state and local taxes have likely set the stage for a
taxpayer backlash. One consequence is likely to be a heightened
tension between the levels of government as they seek to preserve
their own tax bases.
In the intergovernmental contest for tax receipts, it may be
easier to achieve significant tax relief at the federal level than
through 50 state governments and thousands of local governments. On
the other hand, individual state and local governments may prove
more responsive to taxpayer demands for relief. In this regard, the
steady upward trend in the state and local tax share as compared to
the relatively flat trend in federal taxes may be telling. State
and local governments are often considered to be more responsive to
citizens' demands. For example, those jurisdictions that have
experienced especially rapid tax receipts growth due to rapidly
rising property taxes may be forced to lower property tax rates. In
other jurisdictions, citizens may well decide the services they are
receiving for their higher state and local taxes are more valuable
than what they are receiving from the federal government.
The contest over revenues also means federal policymakers will
need to reconsider their spending priorities in the years ahead. In
particular, the federal government sends enormous sums to the
states each year. The Office of Management and Budget projects that
the federal government will send $372 billion to the states in
2008, of which the largest portion will be $207 billion for
Medicaid. The balance of these grants will help
states pay for scores of programs in education, agriculture,
homeland security, transportation, and other areas. In light of the
states' own rapidly rising tax levels, these state grants should be
on the table as federal policymakers seek offsets for either
federal tax relief or increased spending in other areas.
Federal tax policy is the product of numerous competing forces.
One factor often overlooked is the steady increase in state and
local taxes. Whether measured in nominal terms, as a share of the
economy, or on a per capita basis, federal taxes are rising
rapidly. Combined with steadily increasing state and local tax
burdens, the resulting pressure on family finances increases the
likelihood of a taxpayer backlash. It remains to be seen whether
the backlash will be directed primarily at federal taxes, state and
local tax levels, or all of the above. To make room for tax relief
at the federal level, and given that the source of much of the
pressure is the rise in state and local taxes, federal policymakers
should look carefully at cutting back on grants to the states.
JD Foster, Ph.D., is
Norman B. Ture Senior Fellow in the Economics of Fiscal Policy in
the Thomas A. Roe Institute for Economic Policy Studies at The
Figure reflects receipts collected by
state and local entities and does not include federal transfers.
National Income and Product Accounts, Table 3.1, Bureau of Economic
Analysis, Department of Commerce.
 For a discussion of the federal and total
national tax share, see JD Foster, Ph.D., "Rising State and Local
Tax Burden Crowds Federal Tax Policy," Heritage Foundation
WebMemo No. 1628, September 21, 2007, at www.heritage.org/Research/Taxes/wm1628.cfm.
 For a discussion of the rising per capita
federal tax burden, see JD Foster, Ph.D., "Taxpayers, Beware:
Record Tax Burden Is Rising," Heritage Foundation WebMemo
No. 1639, September 26, 2007, at www.heritage.org/Research/Taxes/wm1639.cfm.
"Aid to State and Local Governments," Chapter 8, Analytical
Perspectives, Budget of the United States Government, 2007.