Economic Conditions and State Tax Policy

Brief

Economic Conditions and State Tax Policy

Experience over the Last Decade and Implications for the Future
July 1, 2000

Abstract

States responded to economic recessions by legislating increased sales and income taxes. When the economy improved, states rolled back much of the income tax increases while leaving the sales tax increases in place. Despite this pattern, sales tax revenues grew less than income tax revenues because of long-term declines in the sales tax base resulting from, among other things, increased Internet and catalog sales. In the future, pressure on the income tax may increase, since the importance of sales tax is diminishing as a source of revenue and sales tax rates are already high.

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