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# Sources of Revenue for State Government

BREAKING NEWS: "The state government has just announced that they will be building a new highway that will connect three different states. The project will cost not two million, three million, or even four million but a whopping five million dollars."

As you sit there listening to the news anchor ramble on about the new highway project, you wonder what you would do if you had six million dollars. But then you wonder, "how would I get six million dollars in the first place?" Where does the state government get all this money from? Is it from all the taxes that you pay? These questions come to mind when trying to understand state government revenue sources. Keep reading to learn about where the state governments get their revenues from!

## Sources of Revenue for Most State Governments

Economies consist of governments contributing significantly to economic activities and the economy's health. Whether it be the federal, state, or local governments, they all play a key role in the economy. Governments, just like businesses and you and me, require sources of revenue to run their operations. Sources of revenue are similar for both federal and state governments for the most part, with minor differences. The following are the main sources of revenue for most state governments.

### Intergovernmental Revenue

Intergovernmental revenue is the revenue that one level of government passes on to another, usually in the form of funding. The federal government collects and transfers these funds to the state government. You may wonder, what happens next? Well, then the state government uses the transferred funds towards its expenditures. The types of expenditures that the state government use this type of revenue for include healthcare, education, infrastructure, and welfare payments. The state government also passes intergovernmental revenue on to local governments.

### Sales Taxes

Sales tax is a source of revenue that is received through a tax levied on consumer purchases. This type of tax is a percentage of the purchase price of the good or service that is added to the final price that the consumer then pays. Interestingly enough, this tax doesn't go straight to the state government. Rather, the tax is collected on behalf of the government by businesses at the time of the sale, which then gets turned over to the government periodically.

The sales tax was originally introduced by one state, Mississippi, back in 1930 during the Great Depression. It was introduced as a strategy to lower property income tax within the state, which was the primary source of revenue for the state during that time. Soon after, sales tax was adopted by many other states throughout the nation. Today, most states levy a sales tax.1

Let's take a look at an example of sales tax:

## Largest Source of Revenue for State Government

Depending on the state, there are two large sources of revenue for the state government.

The majority of the states receive their largest source of revenue through intergovernmental revenue. Intergovernmental revenue is funds that are transferred by the federal government to the state government for its expenditures. This source of revenue is in the form of shared revenue, reimbursements for conducting government functions and services for the federal government, and grants from the federal government.

The other largest source of revenue for other state governments is taxes. This includes general sales tax, income tax, selective sales tax, corporate tax, and property tax. We have discussed sales and income taxes, so let's take a closer look at corporate tax and property tax.

### Corporate Income Tax

Corporate income tax is a tax that is paid by businesses on the profit they have earned. Just like how individual income tax is deducted from an individual's taxable income, corporate income tax is deducted from a business's taxable income. The rate of corporate tax rate today varies from state to state, and many states have options for tax deductions.

### Property Tax

Property tax is a tax levied on properties such as real estate and automobiles that can be owned by businesses or individuals in the economy. In most states, the type of property tax implemented is known as the ad-valorem tax. Ad-valorem tax is a type of tax where the tax rate is dependent on the assessed value of the property or any other.

### Stats For The Largest Sources Of Revenue For State Government

Let's look at some stats that showcase the percentage of revenue generated through the largest sources of revenue.

Figure 1. Sources of State Revenue 2020, StudySmarter Original. Source: Pew Charitable Trusts2

Figure 1 above shows the sources of state government revenue for the year 2020. In the year 2020, 45.8 percent of the revenue was generated through taxes. Whereas 36 percent of the revenue came from intergovernmental revenue.

Figure 2. Sources of State Revenue 2019, StudySmarter Original. Source: Urban Institute3

Figure 2 above shows the sources of state government revenue for the year 2019. In the year 2019, 49 percent of the revenue for states was generated through taxes. Whereas 32 percent of the revenue came from intergovernmental revenue.

Figure 3. Sources of State Revenue 2018, StudySmarter Original. Source: Tax Policy Center4

Figure 3. above shows the sources of state government revenue for the year 2018. In the year 2018, 58 percent of the revenue for states was generated through taxes. Whereas 36 percent of the revenue came from intergovernmental revenue.

### Examples Of Revenue Sources For State Government

So far, we have discussed the main and largest revenue sources for state governments. Now, let's look at some other examples of revenue sources for state governments. Other sources of revenue for state governments include employee retirement and insurance and service charges.

### Employee Retirement and Insurance

State revenue through employee retirement and insurance includes employee and employer contributions to employee pension plans, which also serve as a source of revenue for the state government.

### Service Charges

State revenue through service charges includes a list of things that are part of daily economic activity. For example, highway tolls and tuition and educational fees, to name a few.

## Principal Sources Of Revenue For Texas State Government

The Texas state government's principal revenue sources are property tax and sales tax. The state of Texas does not have any income tax (sounds great, right?). However, the state is known to have a high rate of property tax in particular. In addition, the property tax is known to be the source that funds the local elementary and secondary schools.

Property tax rates in Texas are based on the county an individual lives. The average county tax rate is 1.80 percent in Texas, whereas the average property tax rate across the nation is approximately 1.10 percent.

The sales tax rate in Texas is 6.25 percent, but it comes with a twist. Local jurisdictions such as cities, counties, transit authorities, and other districts can also impose another 2 percent sales tax. As a result, one can end up paying 8.25 percent in sales taxes in some parts of Texas.

## State Government Revenues Sources - Key takeaways

• Intergovernmental revenue is funds that one level of government passes on to another.
• The majority of the states receive their largest source of revenue through intergovernmental revenue.
• The other largest source of revenue for other state governments is taxes which includes general sales tax, income tax, selective sales tax, corporate tax, and property tax.

## References

1. Holzhauer, B. (2021, September 3). Here are the 5 states that don't have sales tax, and what you need to know about each. CNBC. Retrieved August 1, 2022, from https://www.cnbc.com/select/states-with-no-sales-tax/
2. Maynard, M. (n.d.). Where states get their money, FY 2020. , FY 2020 | The Pew Charitable Trusts. Retrieved July 14, 2022, from https://www.pewtrusts.org/en/research-and-analysis/data-visualizations/2022/where-states-get-their-money-fy-2020
3. State and local revenues. Urban Institute. (n.d.). Retrieved July 14, 2022, from https://www.urban.org/policy-centers/cross-center-initiatives/state-and-local-finance-initiative/state-and-local-backgrounders/state-and-local-revenues#state
4. What is the breakdown of revenues among federal, state, and local governments? Tax Policy Center. (n.d.). Retrieved July 14, 2022, from https://www.taxpolicycenter.org/briefing-book/what-breakdown-revenues-among-federal-state-and-local-governments

## Frequently Asked Questions about Sources of Revenue for State Government

Sources of revenue such as taxes and charges, to name a few, are for both federal and state governments.

The main sources of revenue for state governments are:

1) Intergovernmental revenue

2) Sales tax

3) Individual income tax

The two main sources of revenue for state governments are intergovernmental revenue and sales taxes.

The primary source of revenue for state government is intergovernmental revenue, which are funds passed over by the federal government.

The top four sources of state revenue are:

1) Intergovernmental revenue

2) Sales taxes

3) Individual income taxes

4) Employee retirement and insurance

## Final Sources of Revenue for State Government Quiz

Question

Intergovernmental revenue is revenue received from one government from the other, usually in the form of -----------------.

funding

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Question

How would you define sales taxes?

Sales tax is a source of revenue which is received through a tax levied on consumer purchases.

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Question

Different states levy sales taxes at different rates

False

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Question

How would you define individual income tax?

Individual Income Tax is a tax levied on the income of those employed in the labor force.

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Question

Income tax is collected through the -------------------- ---------------------------- system, which is a system designed to deduct taxes from employee pay by the employer, which then is sent to the Internal Revenue Service (IRS).

payroll withholding

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Question

------------------------- income tax is a type of income tax where the percentage of income tax increases as the level of income increases.

Progressive

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Question

------------------------- income tax is a type of income tax where the percentage of tax-paid income remains the same despite the level of income.

Proportional

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Question

All states that have income tax have the same rate.

False

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Question

What are the two largest sources of revenue for state governments?

The two largest sources of revenue for state governments are intergovernmental revenue and taxes.

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Question

Corporate tax is a tax that is paid by businesses on the -------------------- they have earned.

profit

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Question

In most states, the type of property tax implemented is known as the --------------------  tax.

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Question

What are some other examples of sources of state revenue?

Employee Retirement and Insurance and Service Charges.

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Question

The state of Texas has income tax as its primary source of revenue.

False

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Question

What are the primary sources of revenue in Texas?

Property tax and sales tax

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Question

You can end up paying 8.25 percent in sales tax in Texas.

True

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