Local taxes are assessments imposed by states, counties, or municipalities to fund public services such as education, garbage collection, and sewer maintenance. These taxes come in various forms, including property taxes, payroll taxes, sales taxes, and licensing fees, and can vary widely from one jurisdiction to another.
Municipal Taxes Contribution: Taxes levied by cities and towns are often referred to as municipal taxes.
Key Takeaways
- Many states impose an income tax that is typically withheld from employee paychecks.
- States and some municipalities levy sales taxes on goods and services.
- For most homeowners, property taxes are their largest local tax expense.
Delving Deeper into Local Taxes
The U.S. Constitution grants the federal government authority and states the right to impose taxes on their residents. Local taxes finance services such as police, fire departments, education, and road maintenance. These critical services also receive federal support via grants.
Local vs. Federal Taxes: Local taxes are distinct from federal taxes, as their benefits are mostly seen at the community level. Municipalities face a balancing act: high taxes may pushback, while low taxes may compromise essential services.
Common Tax Types: These include personal income tax, corporate income tax, estate tax, fuel tax, and sales tax.
Varieties of Local Taxes
The Property Tax
The largest tax bill for most people is their local residential property tax, calculated based on the home’s assessed value. Each state sets the guidelines for property taxes imposed by local governments.
Miscellaneous Local Taxes
Some states and cities impose a local income tax, withheld from wages. These wage taxes are rare, with only 16 states permitting them. Additionally, some states, like Ohio, have school district taxes to fund education costs.
- Sales Tax: Levied on goods and services sold within a state or municipality. Sales tax is a regressive tax, meaning every customer pays the same percentage regardless of income. Higher “sin taxes” may be imposed on items like cigarettes and liquor.
- Use Tax: Imposed on major items purchased out-of-state, notably vehicles.
Other Government Funding Sources
Local authorities often issue bonds to finance capital projects. Investors buying municipal bonds lend money to the government, which is returned with interest. Local governments may issue new or raise existing taxes to service bond debt.
Financing Local Initiatives
Local taxes cover the salaries of public service employees, education, social programs, and local infrastructure. These funds also pay off municipal and state government debts.
California’s Tax Landscape
California has the highest state income tax, with a top rate of 13.3% for top earners as of 2021.
States Without Personal Income Tax
As of 2023, Wyoming, Texas, Tennessee, South Dakota, Nevada, Florida, and Alaska have no personal income tax. New Hampshire taxes interest and dividend income but not wages, while Washington taxes only the capital gains of high-income earners.
Final Thoughts
State and local governments lean on taxes to fund public services and infrastructure, benefiting their communities. Beyond sales and property taxes, many also impose income taxes on residents’ wages.
Related Terms: property tax, sales tax, income tax, municipal bonds, regressive tax
References
- Constitution Annotated. “ArtI.S8.C1.1.1 Overview of Taxing Clause”.
- Constitution Annotated. “Amdt14.S1.7.2.1 State Taxing Power”.
- Tax Foundation. “Local Income Taxes: A Primer”.
- Tax Foundation. “State and Local Sales Tax Rates, 2023”.
- U.S. Securities and Exchange Commission. “Municipal Bonds”.
- Tax Foundation. “State Individual Income Tax Rates and Brackets for 2023”.
