State Budgets and Taxes

Nearly every state is required by its constitution or statutes to balance its operating budget, with Vermont the main exception, unlike the federal government, which can run deficits. States can still borrow for capital projects such as roads and buildings, and most keep rainy day funds to cushion recessions. Most states begin their fiscal year on July 1, and about twenty adopt two-year budgets. Governors propose budgets and legislatures enact them, often after intense bargaining, and missed deadlines can lead to state government shutdowns.

States rely mainly on sales taxes and personal income taxes, along with corporate taxes, fees, and federal funds, which make up roughly a third of total state spending. Forty-five states levy a statewide sales tax, while Alaska, Delaware, Montana, New Hampshire, and Oregon do not. Nine states do not tax wage income, including Florida, Texas, Nevada, Tennessee, and Washington. The Supreme Court's 2018 decision in South Dakota v. Wayfair allowed states to require online sellers without a physical presence to collect sales tax.

The largest category of state spending, counting federal funds, is Medicaid, while elementary and secondary education is the largest use of states' own general funds. Higher education, corrections, transportation, and pensions follow. Since 2021 many states have cut income taxes or moved to flat rates, citing competition for residents and businesses, while others have raised taxes on high earners. Supporters of low-tax states point to population growth, while critics say low taxes can mean weaker services and more regressive systems that fall harder on lower-income residents.