What Is a Local Tax?
A local tax is an assessment by a state, county, or municipality to fund public services ranging from schools and highways to garbage collection and sewer maintenance. Local taxes come in many forms, from property taxes and payroll taxes to sales taxes and licensing fees. They vary widely from one jurisdiction to the next.
Taxes levied by cities and towns are also referred to as municipal taxes.
Key Takeaways
- All but eight states impose an income tax, which is withheld from employee paychecks.
- Most states and some cities and towns impose sales taxes on goods and services.
- For most homeowners, the property tax bill is the biggest single local tax they pay.
Understanding Local Taxes
The U.S. Constitution gives the federal government the authority, and the states the right, to impose taxes on their residents.
Local taxes fund services including police and fire departments, education and health services, libraries, road maintenance, and other programs and projects that benefit the community at large. Many of these services offset some of these costs with federal funds in the form of grants.
Unlike federal taxes, the benefits arising from local taxes are generally apparent at the community level. Municipalities face a constant balancing act on tax policy since high taxes meet with resistance while low taxes require cutbacks in essential services.
Among the common types of taxes that many states impose are personal income tax, corporate income tax, estate tax, fuel tax, and sales tax.
Types of Local Taxes
Property Tax
The largest single tax bill that is received by homeowners is the local residential property tax. This is generally based on the assessed value of the home.
Each state establishes the guidelines under which local governments can impose property taxes.
Miscellaneous Local Taxes
States and cities that impose an income tax on their residents withhold the tax from employee wages. Local wage taxes are relatively rare. Only 16 states permit them.
In addition, municipalities in some states, like Ohio, impose local levies known as school district taxes to help fund the costs of education. These costs are folded into the local property tax in most jurisdictions.
A sales tax may be imposed on goods and services sold to residents of a state. A municipality may add to that. For example, New York City charges an 8.875% combined state and city sales tax on many products and services. Of that, 4% is the state tax.
The sales tax is known as a regressive tax rather than a progressive tax because every customer pays the same percentage regardless of income.
Education, public safety, and road maintenance are among the priorities of local governments.
All but five states have sales taxes (Alaska, Delaware, Montana, New Hampshire, and Oregon). Many have complex sales tax laws that exclude some goods like food and reduce the percentage charged on other products, such as cars. A number of states impose higher "sin taxes" on cigarettes and liquor.
Many states have a use tax, which is due on major items purchased outside of the state, most notably vehicles bought in one state but registered in another.
Other Government Funding Sources
Municipal authorities typically issue bonds to fund some capital projects in the community.
Investors who purchase municipal bonds are lending money to the government which promises to pay a set amount of interest over time and repay the principal on a future date.
To service the debt, that is, to fulfill interest and principal repayment obligations on the bonds, a municipal government may issue a new tax or raise existing local taxes.
What Do Local Taxes Pay for?
Local taxes are used by municipal and state governments to pay for public services and the people who deliver them. Local taxes pay the salaries of police and fire personnel and other public employees. They keep the schools and libraries running, run public transit systems, build and repair local roads, and maintain public parks and recreation facilities.
Which State Has the Highest Income Tax?
California has the highest income tax of any state, with a rate as high as 13.3% for the top earners as of 2023. New York, Hawaii, and New Jersey also have double-digit income taxes.
Which State Has the Lowest Income Tax?
There are seven states with no personal income tax, as of 2023. They are: Wyoming, Texas, Tennessee, South Dakota, Nevada, Florida, and Alaska. In addition, New Hampshire has a tax on interest and dividend income, but not wages, and Washington has a tax on the capital gains of high-income earners only.
The Bottom Line
State and local governments use taxes to pay for public services and infrastructure that benefit their residents.
In addition to sales and property taxes, many states and municipalities also levy income taxes on the wages of their residents.
