The federal government owns significant amounts of land and resources. These assets are exempt from state and local taxation. Congress has established a plethora of payments as compensation for this tax-exempt status. Some payment programs are based on the number of Indian children or children of federal employees, some on federal receipts, and some on federal acreage. In addition, some of the payments are permanently authorized and have mandatory spending authority, while others require periodic reauthorization and/or annual appropriations. The mandatory spending authority for the Secure Rural Schools and Community Self-Determination Act (SRS Act) program expired at the end of FY2011, and that for the Payments in Lieu of Taxes (PILT) program will expire at the end of FY2012. As Congress debates reauthorization of the SRS Act, the mandatory spending authority of the PILT program, and other payment programs, it might consider the broader questions of what is fair and consistent compensation to state and local governments for the tax-exempt status of federal lands. The U.S. Constitution generally prohibits state and local governments from imposing any tax on the federal government, absent Congress's clear consent. This prohibition is rooted in the Supremacy Clause, which states that the Constitution and federal laws are "the supreme Law of the Land." While the clause does not expressly declare that the federal government is immune from state and local taxation, the U.S. Supreme Court has long recognized that it implicitly provides for such protection. As the Court explained in one of its earliest decisions, "the power to tax involves the power to destroy," and therefore state taxation of the federal government is inconsistent with the theory of federal supremacy required by the clause . This immunity is implicated when the tax's legal incidence (who must pay) falls on the U.S. government. While some argue that the federal government cannot and/or should not own land, the federal government does, in fact, own about 640 million acres of land in the United States, about 28% of all land in the country. If these lands were privately owned, the states and local governments would receive tax payments of various sorts from the lands and the economic activity that is generated from the lands—property taxes, sales taxes, income taxes, and more. The question is: does the federal government have a responsibility to compensate state and local governments for the tax-exempt status of its lands and resources? This report describes existing state and local taxation, presents basic information on issues of fairness and consistency for possible federal compensation, and summarizes existing federal payment programs. State and local governments provide a wide variety of services—education, social services, public safety, transportation facilities, utilities, and much more. In 2008, total state and local government expenditures exceeded $2.8 trillion, divided nearly equally between state and local expenditures. The various levels of government emphasize different services. State governments spent the most on public welfare (20.4%), higher education (10.8%), and highways (5.2%). In contrast, local governments emphasized elementary and secondary education (35.0%), utilities (electricity, water, sewerage, and solid waste; 10.3%), and public safety (police, fire, and correctional facilities; 9.0%). State and local governments fund these services in many ways. The federal government provides significant funding—$481 billion (nearly 20%) in 2008. Other funding is from various fees and other charges, such as college tuition, utility revenues, and more. Half of total state and local government funding (50.01% in 2008) comes from taxes—property taxes, sales taxes, income taxes, and other taxes. In 2008, property taxes provided 72.3% of local government tax revenues. In contrast, individual income taxes provided 35.6% of state tax revenues, while general sales taxes provided 30.8% of state tax revenues. For a discussion of the various types of state and local taxes, see Appendix A . State and local taxation patterns vary widely across the country, as shown in Table 1 . Property taxes are the most important in aggregate, but vary widely, ranging from 11% of state and local taxes collected in Alaska to more than 61% of state and local taxes collected in New Hampshire. General sales taxes and income taxes each provided nearly 23% of state and local taxes collected in 2008, but their importance in each state differs substantially. Four states (Delaware, Montana, New Hampshire, and Oregon) have no general sales taxes, while 48% of state and local taxes in Washington were from general sales taxes. Similarly, seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) have no income taxes, while more than 40% of state and local taxes collected in Maryland are from income taxes. Other taxes, including excise and severance taxes, also vary widely, accounting for less than 20% of taxes collected in many states, but nearly 87% of taxes collected in Alaska. State and local tax rates also vary widely across the country, as shown in Table 2 . Property taxes are the most important for local governments, but rates vary widely, ranging from 0.40% of assessed value in Hawaii to 2.57% in Texas. Similarly, state and local sales taxes vary substantially, with four states (Delaware, Montana, New Hampshire, and Oregon) having no general sales taxes, and Tennessee's rate the highest at 9.43%; in most states, the average general sales tax rate is between 6% and 9%. State income tax rates also vary, with seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) having no income taxes, and the highest marginal income tax rate at 11% in Hawaii and Oregon. Many have discussed whether the federal government should compensate state and local governments for the tax-exempt status of federal lands, and if so, how. Two primary approaches have been proposed: (1) tax equivalency, and (2) cost basis. Private lands owned by some nonprofit organizations are also exempt from state and local taxation, raising questions about the need and legitimacy of federal compensation for the tax-exempt status of federal lands. Two additional issues affecting federal payments also are discussed in this section: consistency in payments, and the lands for which payments might be made. Many have suggested that federal payments should approximate what private landowners would have paid in taxes. Most of the suggestions focus exclusively on property taxation. In 1979, the U.S. General Accounting Office (GAO, now the Government Accountability Office) reviewed the existing federal land payment programs and concluded that the then-existing payments were inconsistent and inequitable, and provided payments significantly greater than equivalent tax payments. GAO then recommended tax equivalency to replace the existing payment programs. Another study was conducted in 1999 by U.S. Forest Service researchers at the request of the Department of the Interior. This study reported that federal payments were significantly less than equivalent property taxes overall, although the payments equaled property taxes in 62% of the counties examined. In 2010, an independent research group offered tax equivalency as an option for replacing expiring federal payment programs; it found that total property tax-equivalent payments would increase total payments, but that two-thirds of the counties would actually receive lower payments. Under a complete tax equivalency system, federal payments would replace the state and local taxes that a private landowner would have made. This would best reflect the theoretical economic opportunity costs to state and local governments of federal, as opposed to private, ownership of lands. However, there are four major, interrelated difficulties or limitations to providing federal tax-equivalent payments to state and local governments. One difficulty in determining tax equivalency is the multiplicity and variability in taxes among jurisdictions. Property taxes seem most relevant for federal lands, since income and sales are not particularly relevant to federal government operations, and tax equivalency recommendations have typically focused on property taxes. However, as shown in Table 1 and Table 2 , property tax rates and collections vary greatly, with tax rates ranging from 0.4% (HI) to 2.57% (TX) and tax collections ranging from 11.0% of total taxation (AK) to 61.6% of total taxation (NH). Furthermore, the method of valuing property for tax purposes varies. The three most common valuation approaches are replacement cost, sales comparison, and income, and some lands are taxed under current use (e.g., agricultural lands), while others are taxed at their current market value (e.g., residential property), and still others are taxed at their "highest and best" potential use (e.g., development properties). Thus, determining property tax equivalency is difficult, and calculating complete tax equivalency is substantially more complicated. A related difficulty in determining tax equivalency is called the "fiscal blood pressure." This idea captures two variable aspects of taxation: tax capacity and tax tolerance. One aspect is the variability among the citizens of different states and localities in their tolerance of higher taxes to provide for more public goods and services. Citizen demands for public goods and services vary among the states, and in some places, citizens are willing to bear higher taxation to provide those goods and services. In addition, the types of taxes citizens are willing to bear vary, depending on perceptions of fairness. The second aspect of fiscal blood pressure is that the different states and localities vary in their capacity to collect taxes that are based on the personal income of their citizens and in their ability to "export" taxes to other states through special situations (e.g., significant oil production or other conditions that allow for special uses, such as desirable tourist destinations or certain agricultural products). States and localities where incomes are low or without "exportable" taxes have less capacity to impose and collect taxes.