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States, Taxes and the Burdens That Matter

There are two ways to look at the impact of taxes, and states that rank high on both scales have a lot to worry about.

On April 2, the Tax Foundation issued its annual "State-Local Tax Burden" calculations for each state. Every year, Truth in Accounting's "Financial State of the States" report includes a calculation called "Taxpayer Burden." While a "tax burden" sounds like a "taxpayer burden," these statistics are calculated very differently. It's a difference that public officials who set tax policy need to pay attention to, especially if high burdens cause people and businesses to seek friendlier jurisdictions.

Across the 50 states, the share of revenue coming from local and state taxes varies significantly, as does the mix of property, sales and income taxes. Addressing these issues, the Tax Foundation estimates the total state and local tax burdens arising from all sources as a share of state income. The Tax Foundation calls this statistic the "State-Local Tax Burden." In the Tax Foundation's most recent study, covering fiscal 2011, the "State-Local Tax Burden" ranged from a low of 6.9 percent (Wyoming) to a high of 12.6 percent (New York).

In the short run, there are at least two ways to finance government: taxes and debt. In the long run, taxpayers will be burdened with their state's debt service. Truth in Accounting (where I am director of research) estimates state debt loads arising from all sources, both on-balance-sheet and off-balance-sheet. After subtracting the money available to pay those bills, Truth in Accounting calculates "Taxpayer Burden" -- the per-taxpayer share of the money needed (or available) to pay bills. In fiscal 2011 (the same year as the latest Tax Foundation results), the "Taxpayer Burden" ranged from a low of minus-$34,100 (a surplus, in Alaska) to a high of $50,900 (in Connecticut).

An income statement captures the performance of an entity over a period of time, while a balance sheet takes a "snapshot" at a point in time. These two frames of reference help describe the difference between the Tax Foundation's Tax Burden and Truth in Accounting's Taxpayer Burden. The former is an income-statement measure, while the latter comes from a balance-sheet perspective. The Tax Burden compares states based on the current burden of taxes on income, from year to year. The Taxpayer Burden highlights the long-term consequences facing future taxpayers from long-term obligations.

Are states with high Tax Burdens better off on Taxpayer Burdens? Or do the two tend to run together? The chart below shows the 50 states, ranking them on the Tax Foundation's State-Local Tax Burden (from left to right, on the dark regression line). The states are also ranked on the basis of Truth in Accounting's Taxpayer Burden calculation (from low to high, on the left or 'y-axis,' with each data point representing the results for an individual state). As the chart indicates, states with higher Tax Burdens also tend to have higher Taxpayer Burdens.

Tax and Taxpayer Burden chart


As a general rule, states shouldering high Tax Burdens tend to labor under high Taxpayer Burdens as well. This suggests that states with high debt may not have a lot of capacity for raising taxes.

There is more than a double whammy operating here. States that rank high on both Tax Burden and Taxpayer Burden face another challenge. The third whammy is that citizens in these states are leaving for other states, taking their taxable spending, property and income with them. It seems reasonable to suspect that their choice to leave may be directly or indirectly related to state fiscal conditions.

The chart below is based on the average ranking for the 50 states on both Tax Burden and Taxpayer Burden (on the bottom or 'x-axis') and the latest results from the annual United Van Lines (UVL) migration survey (on the left or y-axis). The UVL study delivers valuable, timely information on migration trends, based on the share of outbound shipments in UVL's interstate shipments, state by state.

Outbound Moves and Tax Burdens chart


As the chart shows, states with low tax burdens are experiencing net immigration, and states with high tax burdens are experiencing high net outmigration. The 15 states with high Tax Burdens and Taxpayer Burdens are, ranked from highest to lowest, Connecticut, New Jersey, New York, California, Illinois, Massachusetts, Maryland, Hawaii, Rhode Island, Delaware, Vermont, Kentucky, Michigan, Pennsylvania and West Virginia.

In the federal scheme called the United States of America, the states are often called "laboratories of democracy." In the 15 states above, many of the lab rats seem to have had enough.

Bill Bergman is director of research for Truth in Accounting, a Chicago-based nonprofit working to promote truthful, timely and transparent government financial reporting.
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