Local Tax

What is 'Local Tax'

A local tax is tax assessed and levied by a local authority such as a state, county or municipality. A local tax is usually collected in the form of property taxes, and is used to fund a wide range of civic services from garbage collection to sewer maintenance. The amount of local taxes may vary widely from one jurisdiction to the next.

Local tax is also referred to as municipal tax.

BREAKING DOWN 'Local Tax'

Through the U.S. Constitution, the federal government has the authority and the states have the right to impose taxes on their residents. State taxes are collected to fund local government projects, such as water and sewer improvements, law enforcement and fire service, education and health services, road and highway construction, public servants, and other services which benefit the community-at-large.

State, county, and municipal taxes are referred to as local taxes given that they are levied at levels lower than the federal government. (Some publications don’t classify state taxes as local taxes). Unlike federal taxes, the benefits arising from local taxes are generally apparent at the community level. Municipalities have to face a constant balancing act with regards to levying local taxes, since raising taxes may lead to "taxpayer revolt," while low taxation levels may lead to a cutback of 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, but the largest example of a local tax is property tax. States that impose a local income tax withhold tax from employee wages. While most states impose a local income tax as a tax on wages, some levy it as a percentage of the state income tax. In the U.S., 14 states charge a local income tax including New York, Pennsylvania, Ohio, Maryland, New Jersey, and Michigan. Ohio and Pennsylvania also impose special local income taxes known as school district taxes to help fund education operating costs. So, an employee may find that taxes are withheld from his paycheck at the federal, state, and county level.

A sales tax is an established regressive tax imposed on residents of a state or municipal region on goods and services sold. No matter how much money residents earn, everyone pays the same percentage of tax. However, not all local regions have a sales tax. In addition to the sales tax, many states also have a use tax, which is applied to major items purchased outside of the state, such as automobiles.

A state establishes the guidelines under which local governments can impose property taxes. The amount of property tax to be paid is calculated on the total value of the property or on a certain percentage of the value. Property tax rates and the types of properties taxed vary by jurisdiction.

To fund some capital projects in the community, municipal authorities typically issue bonds. Investors that purchase these municipal bonds lend funds to the government which promises to repay the principal investment on a predetermined day. Lenders are paid interest on the bond periodically until the bond matures. To service the debt, that is, to fulfill interest payment and principal repayment obligations on the bonds, a municipal government may issue a new tax or raise existing local taxes.