Local Tax: What It Is and Types

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.

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.

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.

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.