One topic I have been interested in for a long time is how different states collect taxes.
We have some great resources in the United States to understand how taxes are collected by state government. With the rich data available to us, someone could build a career studying how taxes are collected by the states.
One important statistic we can use to understand how taxes are collected by U.S. states is the percentage of GDP collected in state taxes.
We can easily calculate this statistic by using data from the U.S. Census of State and Local Finance and the Bureau of Economic Analysis. Below are the 50 states, their 2021 state taxes collected according to the Census of State and Local Fiance, their 2021 GDP according to the Bureau of Economic Analysis, and the ratio of their taxes to state GDP.
A few things stand out to me here. First, the states at the top are not necessarily all Democratically-controlled high-tax states. Arkansas, Mississippi, and West Virginia are also in the top 10 for highest percentage of GDP collected by the state government in the form of taxes. These three states, along with fellow top-10 state New Mexico, are four of the poorest states in the country. This means that the top 10 states are a mixture of blue states with high taxes and high-poverty states.
Looking at the bottom of the list, the trend that stands out to me is the prevalence of states without income taxes. Six of the nine states without income taxes are also in the ten states with the lowest percentage of GDP collected in state taxes. Alaska, which only collected 1.8% of GDP in taxes, the lowest in the United States, has neither state income nor state sales taxes, depending mostly on oil revenues to raise state taxes.
Living in Ohio, I am of course always looking to Ohio to see how it stacks up regionally. Interestingly enough, Ohio ranks lower than all of its neighboring states, only collecting 4.6% of state GDP in taxes. The next closest is Pennsylvania, which collects 5.9% of GDP in taxes. Indiana (6.3%), Kentucky (6.1%), Michigan (6.0%), and West Virginia (7.0%) each collect more. This is especially notable because members of the Ohio General Assembly are working right now to eliminate the state income tax.
What I take away from this quick analysis is that the percentage of taxes collected compared to GDP is a function of both policy and economic landscape. Some states, like Hawaii, Minnesota, and Vermont, have high state taxes that lead to higher collection of taxes compared to state GDP. Others, like Arkansas, Mississippi, and West Virginia, have fewer resources to collect in the first place. There are states like New Mexico that have relatively high taxes and low resources. Then there are states like Alaska, New Hampshire, and Texas, that decline to raise revenue at all.
What this analysis does not tell us, however, is what good policy looks like. Do these taxes drag the economy? Do they reduce poverty and inequality? Do they fund effective and efficient programs? More detailed analysis is necessary to answer all or even any of these questions. But it is valuable to get this sort of big-picture idea to help us understand how states are utilizing their economic resources.