Understanding Local Taxes
Local taxes are assessments by states, counties, or municipalities meant to support public services such as education, garbage collection, and sewer maintenance. These taxes come in various forms like property taxes, payroll taxes, sales taxes, and licensing fees, with variations based on each jurisdiction.
Municipal taxes, imposed by cities and towns, are also referred to as local taxes.
Key Takeaways:
- Most states withhold income tax from employee paychecks.
- Sales taxes are imposed by most states, cities, and towns.
- Property taxes are typically the largest local tax for homeowners.
Understanding Local Taxes
Local taxes finance services like police, fire, education, health, libraries, road maintenance, and other community projects. These services often receive federal grants, and the benefits of local taxes are primarily visible within the community.
State, county, and municipal taxes collectively constitute local taxes distinct from federal taxes.
Balancing local taxes is crucial for municipalities, as high taxes can meet resistance while low taxes may result in reduced essential services.
Common types of state-imposed taxes include personal income tax, corporate income tax, estate tax, fuel tax, and sales tax.
Types of Local Taxes
The Property Tax
The local residential property tax, based on the home’s assessed value, is the most significant tax for many homeowners.
States set guidelines for local governments to levy property taxes.
Miscellaneous Local Taxes
Local income taxes are rare but withheld from employee wages in some states. Sales taxes are regressive, impacting all customers similarly regardless of income.
Local governments prioritize education, public safety, and road maintenance.
Most states have sales taxes, with variations in laws and exclusions for certain goods. Some impose extra taxes on items like cigarettes and liquor.
Certain states may add city taxes to state taxes, and utilize taxes like use tax for items purchased outside the state.
Other Government Funding Sources
Municipalities often issue bonds to fund community projects.
Investors in municipal bonds lend money to the government, expecting repayment with interest at a future date.
Governments may raise local taxes to service bond debt obligations.
What Do Local Taxes Pay for?
Local taxes fund public servant salaries, government operation costs, education, social programs, local infrastructure, and government debt repayments.
Which State Has the Highest Income Tax?
California has the highest income tax rate among states, with a top rate of 13.3% as of 2021, followed by Hawaii and New Jersey with double-digit income taxes.
Which State Has the Lowest Income Tax?
As of 2023, seven states have no personal income tax: Wyoming, Texas, Tennessee, South Dakota, Nevada, Florida, and Alaska. New Hampshire taxes interest and dividend income, and Washington taxes high-income earners’ capital gains only.
The Bottom Line
State and local governments rely on taxes to support public services and infrastructure, including sales, property, and income taxes.