Have you ever wondered how a city funds its’ important services and programs? Services such as police, schools, and salaries for public servants. Those services are funded by local taxes - a group of taxes that’s at least $800 billion every year.
Key Takeaways
- City programs are funded by local taxes.
- Local taxes are imposed by states, counties, and municipalities.
- They differ from federal taxes because they fund programs for smaller communities.
This is a complete guide to understanding local taxes and how they fund city programs. We will also discuss the major local taxes and their impact with a few real-world examples across the United States.
What Are Local Taxes?
Local taxes are a group of taxes levied by a local government to fund operations, city programs, and public services.
This group of taxes includes property taxes, sales taxes, income taxes, and more we’ll discuss in more detail later. These taxes are a major source of revenue for local governments, making up one-seventh of all tax dollars in the United States, which amounts to approximately $800 billion annually.
Types of Local Taxes
While local taxes may differ in each locality, some types are more popular. We ranked local taxes according to their biggest impact on taxpayers’ finances.
1. Property Taxes
Property tax is the primary tool for financing local governments, contributing 72.2% of local tax collections in 2020, making it the largest single source of income for state and local governments.
By comparing states with the highest and lowest median property tax payments, you can find drastic differences in property tax bills.
Places with the highest median property tax, all exceeding $10,000 annually:
- New Jersey - Bergen, Essex, Hunterdon
- New York - Nassau, New York, Rockland
- Virginia - Falls Church
Places with the lowest median property taxes, all less than $200 a year, include:
- Alaska - Northwest Arctic Borough
- Louisiana - Allen, Avoyelles
- Alabama - Choctaw
2. State Income Taxes
State income taxes represented just 4.9% of local tax collections in 2020 however, 36.5% of total state collections. This tax is more important at the state-level than at the municipal.
This tax is charged on the money people earn from their jobs, investments, and other sources of income, and it is collected in different ways.
Local income taxes range from progressive to flat-rate tax. Most states opt for progressive tax brackets. However, the simple flat tax has been gaining more popularity and there are now 13 states with this approach.
As of 2024, seven states in the United States do not impose income tax at all, which are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming.
States with the highest top-income tax brackets in the U.S. as of 2024 are:
- California 13.3%
- Hawaii 11%
- New York 10.9%
- New Jersey 10.75%
- District of Columbia 10.75%
- Oregon 9.9%
- Minnesota 9.85%
3. Sales Taxes
Sales taxes are a significant source of revenue at the state and local levels. In 2023, they were responsible for 32% of state tax collections and 13% of local tax collections.
This tax occurs every time you buy something, the store charges you an extra amount, a percentage of the item's price set by the government. They later give this extra amount to the government.
In the United States, almost every state collects sales tax except for Delaware, Montana, New Hampshire, and Oregon.
Some states rely on sales tax much more than others. Here, we compared states with the highest and lowest average combined state and local sales tax rates:
Highest Sales Tax States
- Louisiana 9.55%
- Tennessee 9.55%
- Arkansas 9.46%
- Alabama 9.25%
- Oklahoma 8.98%
Lowest Sales Tax States
- Alaska 1.76%
- Hawaii 4.44%
- Wyoming 5.43%
- Maine 5.50%
- Virginia 5.75%
4. Corporate Income Taxes
In 2017, local taxes collected $45 billion from corporate income taxes, representing 3% of local taxes, and are determined based on the net income or profits that a company generates from its operations, investments, and other business activities.
We compared states with the highest and lowest Corporate Income Tax Brackets in 2023:
Highest Corporate Income Tax States
- New Jersey 11.5%
- Minnesota 9.8%
- Illinois 9.5%
- Alaska 9.4%
- Pennsylvania 8.99%
Lowest Corporate Income Tax States
- North Carolina 2.5%
- Missouri 4%
- Oklahoma 4%
- North Dakota 4.31%
- Colorado 4.4%
Corporate income taxes are present in every state except Texas, Ohio, Washington, Nevada, South Dakota, and Wyoming.
5. Charges and Fees
In 2017, charges and fees for services like water and garbage collection made up 23% of local taxes, generating $385 billion. Since 1985, these fees have increased from 15% to 23% and have remained at that level ever since.
Local authorities may charge fees for services, permits, and facility use. They are intended to cover the costs of providing these services:
- Utility Fees: residents are billed for services like water, garbage collection, and electricity.
- Permit and License Fees: expenses paid to obtain permits, licenses, or other documents.
- Recreational and Facility Usage Fees: access to community centers, pools, parks, etc.
How do Local Taxes Fund City Programs?
Local taxes are designed to support services exclusive to a location. These taxes are different from federal taxes, which generally apply everywhere.
They come in many forms and can vary dramatically from place to place. However, the most common taxes are property, personal income, sales, corporate income, and fees such as licenses.
There are also dramatic differences in how local taxes are collected. You can research information about specific tax rules by state or explore this list of local tax administrators responsible for tax collection. City programs receive their funding on a case-by-case basis.
Common Types of City Programs Funded by Local Taxes
Generally, the following City programs are funded by local taxes:
- Police and Fire Departments: Police are responsible for maintaining law and order, while fire departments control fire hazards and conduct rescues.
- Public Safety: includes emergency medical services, disaster preparedness, and crime prevention programs.
- Education: Funding public education from Kindergarten through 12th Grade.
- Road infrastructure: These initiatives aim to ensure mobility, connecting different parts of the city and providing access for residents and businesses.
- Parks Maintenance: This covers the management of public parks, green spaces, and recreational areas.
- Healthcare: Includes healthcare access, clinics, vaccination programs, health campaigns, and resources.
- Childcare: Assist working parents by providing childcare services.
- Cultural and Arts Programs: Cultural institutions and arts organizations. This can include services such as museums, theatres, and libraries.
- Environmental Initiatives: Some local taxes are earmarked for environmental and sustainability programs.
- Social Services: These can include funding for housing programs, homeless shelters, food programs, mental health services, substance abuse treatment, and senior services.
Let’s Recap
Now you know that Local taxes are responsible for funding common services like police, schools, and infrastructure. These taxes are diverse and vary widely in their importance and cost from location to location.
Depending on where you live, these taxes very in their impact. In New Jersey, it’s not difficult for property taxes to exceed $10,000. While in Tennessee, the massive average sales tax of 9.55% is an everyday concern. To the west, in Minnesota, corporations watch the 9.8% top tax bracket of their corporate income tax. Meanwhile, the top income tax earners in California are preoccupied with the highest individual state income tax rate of 13.3%.
Local taxes shape our everyday lives, seeking to fund the city programs many of us use every day. Now that you know how they work, you’re ready to learn more about how city programs near you are funded.