# Understanding Local Taxes: Types and Their Impact on Public Services

![Local Tax: A tax imposed by a state, county, or municipality on its residents to fund public services.](https://www.investopedia.com/thmb/f5bHrIEhrGhx0Tat94woAMK8LfI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Localtax_final-07cd7e1167594288bef734cdbb436158.png)

*— Investopedia / Michela Buttignol*

## What Is a Local Tax?

Local taxes, assessed by states, counties, or towns, fund essential community services, including schools, roads, and emergency services. These taxes vary widely in form, such as property, sales, and income taxes, providing direct benefits like improved infrastructure and public safety.

### Key Takeaways

*   Local taxes are assessments by states, counties, or municipalities to fund public services such as education, public safety, and infrastructure.
*   Property taxes, often the largest local tax burden for homeowners, are based on the assessed value of a home.
*   Sales taxes, which are levied on goods and services by most states and some localities, are considered regressive taxes.
*   Municipal authorities may issue bonds to fund capital projects, leading to new or increased local taxes to service the debt.
*   Local taxes generally provide benefits that are evident at the community level, unlike federal taxes.  
    

## How Local Taxes Impact Your Community

The U.S. Constitution allows the federal government and states to impose taxes on residents.

Local taxes fund services such as police, fire departments, education, health services, libraries, and road maintenance. Many of these services offset some of these costs with federal funds in the form of grants.

Unlike federal taxes, local tax benefits are usually visible in the community. Municipalities must balance taxes carefully—high taxes face backlash, but low taxes may cut essential services.

Among the common types of taxes that many states impose are personal income tax, [corporate income tax](https://www.investopedia.com/terms/c/corporatetax.asp), [estate tax](https://www.investopedia.com/terms/e/estatetax.asp), fuel tax, and sales tax.

## Exploring Different 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 sets guidelines for how local governments can impose [property taxes](https://www.investopedia.com/terms/p/propertytax.asp).

### Additional Local Taxes You Might Encounter

States and cities with [income taxes](https://www.investopedia.com/terms/i/incometax.asp) deduct them from employee wages. Local wage taxes are relatively rare. Only 16 states permit them.

Some states, like Ohio, have municipalities that impose school district taxes to help fund education. These costs are folded into the local property tax in most jurisdictions.

A [sales tax](https://www.investopedia.com/terms/s/salestax.asp) may be imposed on goods and services sold to residents of a state. A municipality may add to that. For instance, New York City has a combined state and city sales tax of 8.875% on many items. Of that, 4% is the state tax.

The sales tax is known as a [regressive tax](https://www.investopedia.com/terms/r/regressivetax.asp) rather than a progressive tax because every customer pays the same percentage regardless of income.

> **Important**
>
> Education, public safety, and road maintenance are among the priorities of local governments.

Only five states—Alaska, Delaware, Montana, New Hampshire, and Oregon—do not have sales taxes. 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](https://www.investopedia.com/terms/u/use-tax.asp), which is due on major items purchased outside of the state, most notably vehicles bought in one state but registered in another.

### Alternative Government Funding Methods

Municipal authorities typically issue bonds to fund some capital projects in the community.

Investors who purchase [municipal bonds](https://www.investopedia.com/terms/m/municipalbond.asp) 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.

## What Do Local Taxes Pay for?

Local taxes are used by municipal and state governments to pay for public services and the people who deliver them. Local taxes pay the salaries of police and fire personnel and other public employees. They keep the schools and libraries running, run public transit systems, build and repair local roads, and maintain public parks and recreation facilities.

## Which State Has the Highest Income Tax?

California has the highest income tax of any state, with a rate as high as 13.3% for the top earners as of 2023. New York, Hawaii, and New Jersey also have double-digit income taxes.

## Which State Has the Lowest Income Tax?

There are seven states with no personal income tax, as of 2023. They are: Wyoming, Texas, Tennessee, South Dakota, Nevada, Florida, and Alaska. In addition, New Hampshire has a tax on interest and dividend income, but not wages, and Washington has a tax on the capital gains of high-income earners only.

  

## The Bottom Line

Local taxes, whether assessed at the state, county, or municipal level, are crucial in funding essential public services like education, public safety, and infrastructure. These taxes take various forms, including property, sales, and, in some areas, income taxes.

Residents directly benefit from these taxes through improved community services and infrastructure, such as schools, libraries, roads, and emergency services. Understanding the different types of local taxes and their benefits helps taxpayers recognize their direct impact on community development and public well-being.  

> **Article Sources**
>
> 1.  Constitution Annotated. "[ArtI.S8.C1.1.1 Overview of Taxing Clause](https://constitution.congress.gov/browse/essay/artI-S8-C1-1-1/ALDE_00013387/)."
>     
> 2.  Constitution Annotated. "[Amdt14.S1.7.2.1 State Taxing Power](https://constitution.congress.gov/browse/essay/amdt14-S1-7-2-1/ALDE_00000164/)."
>     
> 3.  Tax Foundation. "[Local Income Taxes: A Primer](https://taxfoundation.org/research/all/state/local-income-taxes-2023/)."
>     
> 4.  New York City Department of Finance. "[New York State Sales and Use Tax](https://www.nyc.gov/site/finance/business/business-nys-sales-tax.page)."
>     
> 5.  Tax Foundation. "[State and Local Sales Tax Rates, 2023](https://taxfoundation.org/data/all/state/2023-sales-taxes/)."
>     
> 6.  U.S. Securities and Exchange Commission. "[Municipal Bonds](https://www.investor.gov/introduction-investing/investing-basics/investment-products/bonds-or-fixed-income-products-0)."
>     
> 7.  Tax Foundation. "[State Individual Income Tax Rates and Brackets for 2023](https://taxfoundation.org/data/all/state/state-income-tax-rates-2023/)."