Which Level of Government Relies the Most on Income Tax?
Discover which level of government depends most on income tax revenue and how this reliance shapes public funding and services.
Governments at different levels—federal, state, and local—collect revenue through various taxes to fund public services. Income tax is a key source, but its significance varies. Some governments rely on it heavily, while others depend more on sales or property taxes.
Federal Income Tax Dependence
The federal government relies more on income tax than any other level, with individual income taxes making up the largest share of its revenue. According to the Congressional Budget Office (CBO), these taxes accounted for about 50% of total federal revenue in fiscal year 2023. They apply to wages, salaries, business income, and investment earnings, with rates ranging from 10% to 37% under the Internal Revenue Code. The progressive structure means higher earners pay a larger percentage of their income, making it a primary funding source for federal programs.
Corporate income taxes contribute as well, though to a lesser extent, making up roughly 9% of federal revenue in 2023. This share has declined due to rate reductions, deductions, and credits. The Tax Cuts and Jobs Act of 2017 lowered the corporate tax rate from 35% to 21%, and some provisions are set to expire in 2025, which could impact future revenue.
Federal income tax funds Social Security, Medicare, defense, and infrastructure. While payroll taxes directly support Social Security and Medicare, general income tax revenue helps cover shortfalls. Tax credits like the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) reduce tax liabilities for lower-income households, affecting total collections.
State Income Tax Dependence
State governments vary in their reliance on income tax. Among the 41 states that levy a broad-based individual income tax, it is often a primary revenue source for education, healthcare, and public safety. In California, personal income tax generated about 65% of the state’s general fund revenue in 2023, largely due to its progressive tax structure, with rates from 1% to 13.3%. New York and Oregon also derive more than half of their general fund revenue from income taxes.
Some states, including Texas, Florida, and Tennessee, do not impose a personal income tax, relying instead on sales and excise taxes. Florida has a 6% statewide sales tax, while Tennessee’s is 7%, which can disproportionately affect lower-income residents who spend a larger share of their earnings on taxable goods. The absence of income tax can also influence migration patterns, with some individuals relocating to states with lower tax burdens.
Corporate income tax plays a smaller role in state budgets, typically accounting for less than 10% of total revenue. Many states, including North Carolina and Missouri, have lowered corporate tax rates to attract businesses. Some, like South Dakota and Wyoming, do not levy a corporate income tax at all, instead using alternative business taxes such as Ohio’s Commercial Activity Tax or Texas’ franchise tax.
Local Income Tax Dependence
Local governments rely far less on income tax than federal or state governments, but in certain cities and municipalities, it plays a significant role in funding services. Local income taxes are typically imposed at the city or county level and often target residents, workers, or businesses. These taxes help fund public transportation, emergency services, and infrastructure, particularly where property tax revenue is insufficient.
Cities such as New York, Philadelphia, and Columbus impose local income taxes, with rates varying based on residency and employment. New York City levies a progressive income tax ranging from 3.078% to 3.876%, on top of state and federal obligations. Columbus, Ohio, applies a flat 2.5% tax on earned income, affecting both residents and non-residents who work within city limits. These taxes are often withheld from paychecks, similar to federal and state withholdings, though enforcement varies.
Business income is also subject to local taxation in some areas. Detroit, for example, imposes a 2% corporate income tax on businesses operating within city boundaries. Some municipalities use gross receipts taxes or payroll taxes as alternative revenue sources.