Taxes as a Source of State Revenue

Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, we'll discuss the three sources of state revenue: income, sales and property taxes. We'll discuss how states use their revenue, and you'll also learn how each tax is calculated.

What Is State Revenue?

Have you ever been to a state park, been a patient in a state hospital, or been arrested and sent to a state jail? Maybe you answered 'yes' to one of the questions and hopefully 'no' to another.

When we think about a state park, there are benches, green grass and beautiful waterfalls. In a hospital, of course, there are doctors, nurses, beds and medicine. Lastly, a jail needs to feed the inmates and have security. So, where does the money come from to run the park, hospital and jail?

State government pays for park maintenance and other services by generating revenue from levying taxes. A tax is a required sum of money imposed by state government on businesses and individuals. For the rest of this lesson, we'll explore three different types of state tax: income, sales and property.

Income Tax

Sue owns a computer company, and last year was her first year in the business. While she's a whiz with technical gadgets, she knows little about the end of year reporting required by the state. She hires an accountant who explains the computer company made $500,000 in profit last year, and based on their prior meetings, the company will distribute $100,000 to her.

Sue is so excited and tells the accountant she's ecstatic about receiving $100,000, because she wants to pay cash for a new home and it costs exactly $100,000. The accountant tells Sue she will not receive the full $100,000 because a percentage will be paid in state taxes. He goes on to say that the business will need to pay state taxes as well.

The accountant explains to Sue that the state imposes a tax on business profit and individual income and that this tax is considered revenue for the state. In sum, the accountant usually prepares and files state taxes using software specifically for that state since each state has different tax bases. The business or individual pays the owed taxes on the due date set by the state.

It's important to note that not all states impose income taxes. Some states simply earn their revenue from sales and property taxes.

Sales Tax

Income taxes are paid if a company makes profit or if an individual has income; however, sales tax is not dependent on profit or income. If you purchase a taxable product or service, you must pay taxes. Sales tax is calculated as a percentage of the purchase price, and like with income taxes, sales tax rates vary by location, and some states don't have the taxes.

For example, if Sue purchased a flat-screen TV at her local electronics store for $1,000 and the sales tax rate was 8%, the total sales tax would be $80 ($1,000 x .08). The total price would be equal to the purchase price plus the sales tax, which would be $1,080. The electronics store collects the sales tax from Sue and other customers, completes a quarterly or annual sales tax form, and sends the money to the state.

Property Tax

Now, let's explore another revenue source for the state: property tax.

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