Local Tax: What It Is and Types Communities Levy

What Is a Local Tax?

A local tax is an assessment by a state, county, or municipality to fund public services ranging from education 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 can vary widely from one jurisdiction to the next.

Taxes levied by cities and towns are also referred to as municipal taxes.

Understanding Local Tax

The U.S. Constitution gives the federal government the authority, and the states the right, to impose taxes on their residents.

Local taxes fund government services including police and fire services, education and health services, libraries, road maintenance, and other programs and projects which benefit the community at large. Many of these services also receive federal funds in the form of grants.

State, county, and municipal taxes may be referred to as local taxes, as opposed to federal taxes.

Key Takeaways

  • Most 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.

Unlike federal taxes, the benefits arising from local taxes are generally apparent at the community level. Municipalities face a constant balancing act with regards to levying local taxes, since high taxes meet with resistance while low taxes lead to 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

The Property Tax

The largest single tax bill that is received by most people is the local residential property tax imposed on homeowners. 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 a local income tax withhold the tax from employee wages. Local wage taxes are relatively rare. A total of 16 states permit them. In addition, Ohio and Pennsylvania impose local levies known as school district taxes to help fund education costs.

A sales tax is imposed on goods and services sold to residents of a state or municipality. This 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 others, such as cars. A number of states impose higher "sin taxes" on cigarettes and liquor.

In some states, a smaller city tax may be added to the state tax. Many states also have a use tax, which is due on major items purchased outside of the state, most notably vehicles.

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 repay a set amount of interest 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.

Article Sources
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  1. U.S. Department of the Treasury. "State and Local Taxes." Accessed Dec. 4, 2019.

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