State Sales and Income Taxes: An Economic Analysis

State Sales and Income Taxes: An Economic Analysis

State Sales and Income Taxes: An Economic Analysis

State Sales and Income Taxes: An Economic Analysis


As state governments grapple with increased revenue needs or demands for state tax reform, they typically must choose between relying on an income tax system or utilizing a sales tax, perhaps in conjunction with a corporate franchise tax. Choosing between these two tax options is often a contentious process, and many arguments can arise in the debates surrounding this issue.

In this study of small, open economic systems, George R. Zodrow addresses the relative advantages and disadvantages of state sales and income taxes from an economic perspective. He evaluates the two options in terms of the criteria commonly used in the public finance literature, including economic efficiency, fairness, administrative simplicity, and tax exportability. Zodrow's study emphasizes how the comparison of state sales and income taxes is critically affected by the details of the alternative tax structures being considered, as well as by the nature of the interactions between the economy of a state and the rest of the nation and world, and by the interactions between the state and federal tax systems in the United States. He also considers briefly two alternatives to state sales and income taxes -- increased utilization of user charges and the adoption of a state tax based on mildly progressive taxation of individual consumption rather than income.

In the final chapter, Zodrow applies his analysis to the current Texas tax system as well as proposals for the introduction of a state income tax. This provocative case study will serve as an informative contribution to the continuing public policy debate over the state tax structure.


The primary sources of tax revenue for state governments in the United Statesare retail sales taxes and individual and corporate income taxes. Most states use a mix of these two tax instruments, although five states do not have a sales tax, and five other states have neither an individual nor a corporate income tax. in some sense, all states must continually choose between sales and income taxes, as they always have the option of changing the mix of the two taxes utilized (including introducing a new tax for those states that use only one of the two tax options). Moreover, many states face this choice in a very immediate sense, as they are under considerable pressure to find additional tax revenues -- either to increase state expenditures in order to meet a wide variety of needs, including those related to declines in federal expenditures, or to reduce the extent of statewide reliance on the increasingly unpopular local property tax.

The purpose of this book is to draw on the academic literature in economics -- including some fairly recent studies in the field of public finance that have addressed various issues particularly relevant to the choice of a state tax structure -- to provide information that will, I hope, be useful in evaluating the relative desirability of state sales and income taxes. the analysis examines the main arguments typically made both for and against these two approaches to state taxation and evaluates them in the context of this literature. the analysis is thus relevant for any state considering reforms that involve either state sales or income taxes, including the increasingly common need for increased state funding of education coupled with property tax relief.

Policymakers who contemplate the reform of a state tax structure typically face an extremely difficult problem. the pressures for some type of reform are often considerable. in some cases, demands to change the mix of revenue sources used to finance the current level of state expenditures may provide the impetus for reform. in other cases, the need for additional revenues may prompt a re-examination of the state tax structure. in particular, public demands for reductions in property taxes accompanied by greater state financing of local expenditures, especially those for education, are common. in addition, demands for government expenditure increases -- either to meet increased service demands, including those attributable to recent reductions in federal expenditures, or to satisfy judicial or federal mandates -- are often significant.

Search by... Author
Show... All Results Primary Sources Peer-reviewed


An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.