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Which Level of Government Relies the Most on Income Tax Revenue?
In a tricky multi layered system of government, taxes are considered as the main source of providing funding to the public services and infrastructure of the community. In the United States, tax are provided at several levels of government which includes federal, state and local levels of government. In all of these levels of government income tax is considered as the primary source of revenue. Getting a grasp on which level of government relies the most on income taxes demands a deeper understanding of income tax structures at the federal, state and local levels. These taxes contribute significantly to the total revenue of governments at each level.
This article tends to look at the significance of income tax as a crucial part of the tax foundation at all levels of government. This includes federal, state and local governments and the assessment of their requirements from the income tax in terms of revenue.
Federal Income Tax Revenue
The federal government relies a lot on income taxes for funding most of its operations. The U.S. federal income tax system is ruled by the Internal Revenue Code and formulated by the Internal Revenue Service.
Federal Income taxes constitute the max portion of federal tax revenue. Individual income taxes were responsible for approximately 50% of total federal revenue in 2024.
Federal government also gathers taxes from corporations on their revenue. But, corporate income tax is a partial contributor as putting it in contrast with individual income tax. According to the Tax Cuts and Jobs Act of 2017, the corporate income tax was lowered from 35% to 21% which has put an affect on the net share of federal revenue extracted from corporate tax transactions. However, corporate income taxes still play a significant role for federal income revenue generation.
To what extent does the Federal Government Depend on Income Taxes
According to the Congressional Budget Office (CBO), the individual income taxes on their own contribute to the 50% of total federal revenue. This reliance on income tax differs from state and local governments which can have other revenue mediums like sales tax, property tax, etc.
It is also important to know that where does the federal government use this income tax revenue.
The U.S. military is the recipient of a large portion of federal tax revenue collected from various tax rates. Furthermore, social security and medical care programs that provide benefits to elders and disabled people are also funded by income taxes.
Federal income taxes also facilitate a lot of transportation, education, and healthcare initiatives, which are essential for government revenue.
Revenue from State Income TaxÂ
Many states in the United States also have their income taxes, even though the tax rates and structures differ significantly from state to state. States depend heavily on income taxes for their budget funding, but income tax revenue is not the main source of funding for state budgets compared to the federal government. There are at least 40 states that have a state income tax, and the intensity of budgets depends on income tax, which can differ a lot in tax rates.
State Income Taxes: According to state priority
Many states like New York, California, and Oregon have a lot of progressive income tax systems that depend heavily on high-income bracket earners for generating a significant portion of government revenue. In these states, income taxes are required to contribute more than 50% of the total revenue.
Some states like Florida, Texas or Washington, have no concept of state income tax. Instead these states have a heavy reliance on sales taxes, property taxes and business taxes as well. This is because in these states income tax is balanced out by taxation rules and regulations.
On an average income taxes contribute about 30%-40% of state revenue. The states where there is a progressive tax systems, this number can contribute to as much as 60%-70%. But in states where there is no state income tax, income taxes are not considered a source of state revenue.
Contrasting between Federal, State and Local Income Tax Dependency
Federal government is the most dependent on income taxes. They utilize the income tax about 50% from their federal revenue and a lot of that comes from individual income taxes as they are the main source of income for federal government.
In the second position, state governments are a little bit less dependent on income taxes. This is because states that have a progressive income tax systems, income tax can only contribute to some portion of the total state budget.
Local government use the least amount of income taxes. In cities local taxes are considered as a supplement source of income. These are only contributing to about 10%-20% of the total government budget. Instead, property taxes and sales taxes contribute the most to local revenue streams, forming a significant part of the tax collection.
Final Words
As you can see the federal government depends the most on income tax revenue. Federal income tax coming from individuals is used as the largest contribution to the federal budget. Making almost half of the total federal revenue. State governments come in second place when relying on income tax revenue for their budget. Lastly, local governments that depend mostly on property taxes and sales taxes face challenges in diversifying their revenue sources.
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