State and local governments rely on individual and corporate income taxes, sales taxes, and property taxes. Individual income taxes exist in 43 States, and, while the rates vary, they are less than Federal income tax rates. The average effective State income tax rate for all farmers was about 4 percent and was fairly constant across all income levels. Sales tax rates vary widely by location, but purchases of farm inputs are often exempt from retail sales taxes. While many States have reduced their reliance on property taxes, real estate taxes are the most important State and local tax for farmers.
Farmers have large investments in land, improvements and buildings which are subject to the tax.
These taxes vary widely based on local tax jurisdictions. All States currently have some form of preferential property assessment that taxes farmland based on its agricultural value rather than its fair market value. Such assessment is especially important where urban sprawl has raised land prices. Recommended readings Effects of Federal Tax Policy on Agriculture Analyzes the effects of Federal income, payroll, and estate taxes on different types of farms, and provides background data.