States can’t solve - only federal government taxes can reduce inflation.

Table 1 shows the amount of money received by the US Federal government from the various types of taxes that we discussed above. It makes quite clear the largest category of taxes paid to the Federal government is the personal income tax, which is followed closely by social insurance taxes. The third largest source of Federal tax is the corporate income tax. These three categories of taxation are all taxes on incomes (either individual income or corporate profits). Together they overwhelm all the other sources of Federal government revenue by a factor of around 30. The majority of Federal government taxes reduce income directly. As a result, they reduce spending and demand in the entire economy. This puts downward pressure on prices.

Table 2 looks at the revenue sources of state and local governments. It should be noted at the outset that the tax collected at these lower levels of government in the US is close to the amount collected by the Federal government. Table 2 shows that the largest categories of state and local government receipts are state income taxes and sales taxes. Two large Federal taxes—corporate income taxes and employment taxes (primarily state unemployment insurance)—are relatively small contributors to state and local government revenues. So, unlike the Federal government, whose main tax is primarily income taxes, state governments rely nearly equally on taxes that are imposed on incomes and taxes that are imposed on the sales of goods and services. Also unlike the taxes imposed by the Federal government, these tax revenues usually lead to greater spending by state and local governments; so state and local government taxes typically return tax revenues to the local economy and to the flow of consumption and income. So, they do not have a large deflationary effect. This is one reason that fiscal policy in the US is usually conducted at the Federal level.