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Definition of Local Taxes

Updated: January 17, 2023

Have you been a regular taxpayer for years? Or are you just starting to pay your own taxes? Wherever you stand, there can be a lot to know and understand. There are various different types of taxes at the local, state, and federal levels. 

And on top of the different taxes, there are rules when it comes to tax returns and taxable income. Plus, there are differences for single taxpayers and married taxpayers. So how exactly do local taxes work and what is their main purpose? Keep reading to learn how local taxes work, how they’re calculated, and the pros and cons!

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    KEY TAKEAWAYS

    • Local taxes are taxes imposed by either a municipality, a county, or a school district.
    • Local taxes help fund various projects, such as sewer maintenance and garbage collection.
    • The property tax bill is often the biggest tax most homeowners have to pay.

    What Is a Local Tax?

    A local tax is a tax imposed by a local government, such as a city, county, or school district. The revenue from local taxes is typically used to fund local public services such as schools, roads, and police departments. 

    There are many different types of local taxes, including property taxes, sales taxes, and lodging taxes. Property taxes are the most common and are typically based on the value of a property. 

    Sales taxes are imposed on the sale of goods and services and are typically a percentage of the purchase price. Lodging taxes are imposed on businesses that provide lodging, such as hotels and motels. Local taxes can be a significant source of revenue for local governments. 

    Some people argue that local taxes are unfair because they disproportionately impact low-income families and businesses. Others argue that local taxes are necessary to fund vital public services. Ultimately, whether or not to support local taxation is a matter of personal opinion.

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    How Is Local Property Tax Calculated?

    Local property taxes are generally calculated as a percentage of the value of property located within the municipality. The tax rate is set by the municipality and may be different for residential and commercial properties. 

    Then, the tax is usually collected by the municipality on an annual basis. The amount of local tax that a property owner owes is typically based on the assessed value of their property. The assessment is conducted by the municipality and takes into account the size and location of the property, as well as any improvements that have been made to it. 

    The assessed value is then multiplied by the tax rate to determine the amount of tax owed. Some municipalities also offer discounts or exemptions for certain types of properties, such as those that are used for charitable purposes. There is also a consideration for different income tax rates for individual income.

    What Are the Types of Local Taxes?

    Most people think of property taxes when they think of local taxes, but there are actually several different types of local taxes. The three most common types of local taxes are:

    • Property taxes – Property taxes are levied on real estate by local governments. The tax is usually based on the value of the property, and it is used to fund public services like schools, roads, and police departments.
    • Sales taxes – Sales taxes are levied on the sale of goods and services by local governments. The tax is usually a percentage of the sale price, and it is used to fund public services like schools, roads, and police departments.
    • Income taxes – Income taxes are levied on individuals and businesses by local governments. The tax is usually a percentage of the income, and it is used to fund public services like schools, roads, and police departments.

    What Is Local Tax Levied On?

    A local tax is a tax levied by a local government on the residents of that area. The tax is usually based on the value of the property, income, or goods and services purchased in the area. 

    The purpose of the tax is to raise revenue for the local government to fund local services such as schools, police, and roads. Some people argue that local taxes are unfair because they are based on factors that are out of the control of taxpayers. 

    For example, property values can go up or down due to factors such as the local economy or changes in the real estate market. This can result in people who own property in a high-tax area paying more in taxes than they would in a low-tax area. Others argue that local taxes are necessary to fund vital services that benefit everyone in the community. 

    Without local taxes, many important services would not be able to be provided. For example, schools and roads would not be able to be maintained and public safety would suffer.

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    What Are the Advantages of Local Taxes? 

    Most Americans are unaware that they pay local taxes. In fact, according to a study, only 38% of respondents said they definitely pay local taxes, while another 30% said they probably pay local taxes. 

    This leaves a significant portion of the population who either don’t believe they pay local taxes or are unsure if they do. State and local taxes are imposed by state and local governments and are used to fund public services such as education, infrastructure, and public safety. 

    The advantage of state and local tax is that it allows state and local governments to tailor the tax to the needs of their constituents. For example, a state may impose a higher sales tax on alcohol to fund public safety initiatives, or a city may impose a higher property tax to fund schools. 

    Local taxes also tend to be more stable than other sources of revenue, such as federal grants. This is because the tax base is more diverse, meaning that if one sector of the economy declines, the others can make up the difference. 

    This stability is important for state and local governments because it allows them to predict revenue more accurately and plan for long-term projects. Finally, state and local taxes give state and local governments more control over their budgets. This is because they are not subject to the same restrictions as federal programs, which often come with strings attached. 

    For example, federal grant money must be spent on specific programs or it will be clawed back by the government. State and local taxes do not have this restriction, giving state and local governments more flexibility in how they use the funds.

    What Are the Disadvantages of Local Taxes?

    Despite the advantages of local tax, there are also some disadvantages to consider. One downside is that local taxes can be regressive, meaning that they disproportionately impact low-income households. 

    This is because lower-income households tend to spend a larger portion of their income on necessities, such as food and housing, which are subject to sales taxes. Another downside is that state and local tax revenue can be volatile, meaning it can fluctuate from year to year based on economic conditions, which can make it difficult for state and local governments to rely on this revenue stream for long-term planning. 

    Overall, local taxes are an important part of funding the services that make communities safe and strong.

    Summary

    A local tax is a specific type of assessment to help fund numerous local services, such as education, sewer maintenance, and garbage collection. The taxes are imposed by either a municipality, a county, or a school district. 

    Local taxes can come in a range of forms and they can include sales taxes, licensing fees, payroll taxes, and property taxes, for example. The federal government has the authority, as well as each state having the right, to impose these taxes on residents as it is outlined in the U.S. Constitution.

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    FAQs About Local Taxes

    What Happens if You Don’t Pay Local Taxes?

    If you don’t pay state and local taxes, you will have to pay additional interest on what you have not paid as well as other penalties. The rates of these penalties are set by each individual state.

    Do I Have to Pay Local Taxes?

    Yes, paying state and local taxes is mandatory and taxpayers must pay their personal income tax back to the government.

    What Is the Difference Between National Tax and Local Tax?

    The national tax has to do with various revenue taxes that get collected by the Bureau of Internal Revenue (BIR). Local taxes, on the other hand, are taxes imposed by local governments.

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