Filing your state and federal income tax returns is an often complicated process that can take money out of your pocket. There’s little to like about tax preparation and, in a lot of cases, the outcome. Consequently, the development of new income tax proposals seems inevitable and is ongoing, consisting of ideas that range from minor tweaks to major and radical revisions.
Perhaps the one constant is that paying income taxes supports state and/or federal government programs that benefit some, or the majority of, U. S. citizens. But what benefits are provided? In general, the answer to that question is the same whether the conversation is centered on state or on federal taxes.
Federal and State Tax Revenue
Federal tax receipts in 2018 amounted to about $3.3 trillion. Close to $1.7 trillion of that amount came from individual income taxes, while around $205 billion came from corporate income taxes and the rest came from employment, estate, gift and excise taxes. In contrast, 2018 state income taxes amounted to about $1.07 trillion.
Federal and State Tax Goals
The primary goal of both federal and state income taxes is to raise the revenue necessary to fund government services and public goods in a way that’s fair, equitable, pro-growth and which avoids unnecessary complexity. Income taxes not only fund these legislated policies, but also the "mechanical" increases in the federal and state budgets that occur over time.
By 2018, individual federal income taxes amounted to 49.8 percent of the federal receipts, while state income taxes accounted for about 39 percent of state tax receipts. These receipts fund public goods, including national defense such as that provided by the U. S. Army and Air Force, and state defense such as that which state police and the United States National Guard provide.
Read More: Tax Return Changes in 2020
Increasing Federal and State Budgets
Based on three "mechanical" factors – demographics, inflation, debt service, and rising health costs – federal and state revenues must increase over time. In 2016, Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, gave testimony before the Joint Economic Committee that addressed:
- Population Growth and Inflation. He notedthat even if real spending per capita is held constant, population growth and inflation will require a 40 percent increase in revenues over the next decade.
- The Increase in the Cost of Health Care. He said another source of pressure on future revenues is health-care cost growth, which has outpaced overall growth, thus absorbing an increasing share of the gross domestic product (GDP).
- The Rise in Interest Rates on Debt. Bernstein added that the CBO expects interest payments on government debt to rise from 1.4 to 3 percent of the GDP over the next decade.
Federal and state tax systems raise the revenue needed to fund government services and goods, such as defense, state and federal court systems as well as schools, parks and libraries, which Americans want and need. Equally important, these tax systems must do so in a way that’s fair and equitable and that avoids unnecessary complexity.
Read More: Tax
- Congressional Budget Office: Revenues in 2018
- Center on Budget and Policy Priorities: Meeting the Goals of the Federal Tax System
- Statista: State Government Tax Revenue in the United States in the Fiscal Year of 2019, by State
- Tax Foundation: Federal Tax Revenue by Source, 1934-2018
- Federation of Tax Administrators: 2018 State Tax Collection by Source (Percentage of Total)
- 2018 Quarterly Summary of State and Local Tax Revenue Tables
Billie Nordmeyer is an IT consultant of 25 years standing. As a senior technical consultant for SAP America and Deloitte Touche DRT Systems, a business analyst, senior staff, and independent consultant, Billie has worked across the retail, oil and gas, pharmaceutical, aeronautics and banking industries. Billie holds a BSBA accounting, MBA finance, MA international management as well as the Business Analyst and Software Project Management certificates from the Cockrell School of Engineering at the University of Texas at Austin.