Why Are State Taxes Declining?
One reason for the revenue decline is the economic downturn. The sales tax and the income tax are the main sources of state tax revenue. The job losses of the recession and continued weak economy resulted in reduced incomes for families and reduced spending which, in turn, depressed sales tax collections. The decline in incomes had a direct effect on state income tax collections. In addition, most states tax the realization of capital gains and the decline in income tax revenues was particularly pronounced because of the dramatic stock market decline that accompanied the recession. Another reason for the revenue decline is the ongoing erosion of state tax bases. Sales tax collections make up about one-third of state tax revenues. Most states mainly tax the consumption of goods, not services. Sales tax collections have lagged economic growth as untaxed services have become an increasing portion of overall economic activity. The tax cuts of the 1990s also played a role in reducing state
