Kentucky's Recent Income Tax Experience

Abstract

Despite rising federal income tax rates, verging on pre-emption of the income tax field during the war years,' state governments have been able to report a gradual increase in personal and corporate income tax revenue since 1933. State income from this source has risen from $153 million in 1932 to $1,084 million in 1948. The income tax has bettered its position in relation to all other state taxes. In 1932 income tax collections contributed 8 per cent of the total state tax revenue; by 1948 personal and corporate income taxes provided 14 per cent of total state tax revenue (including the unemployment compensation tax). A partial explanation for the increase in revenue derived from income taxation is the fact that 13 states adopted personal or corporate income taxation or both between 1933 and 1938.2 The steady growth of the national income since 1933, however, is primarily responsible for the advance in state income tax collections. It is against this background of rising national income that the comparatively insignificant role of the state income tax and the growing federal domination of the income tax field are most sharply revealed. (See Chart 2.) Any analysis, therefore, of recent trends of state income tax revenue must of necessity take into account the relationship to the federal income tax. In striking contrast to federal income tax experience the increase in state income tax since 1933 has barely kept pace with the growth of the national income. In fact, from 1942 to 1945 state income tax collections declined in relation to national income payments. Downward revisions of the personal income tax contributed to this relative decline of state income tax revenue. Confronted with treasury surpluses during the war, several state legislatures acceded to demands for tax relief in view of the mounting federal income tax rates. New York led the way with a 25 per cent personal income tax reduction in 1942. West Virginia and South Dakota repealed their personal income tax laws in 1943. In the same year the Wisconsin state legislature failed to extend the temporary 60 per cent surtax on individual income; California and Oregon reduced personal rates substantially; and Iowa and Maryland decreased the taxpayer's liability by granting liberal tax credits.3