What Are Local Taxes?

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Local taxes refer to any tax levied by a state, country or city government -- any government entity other than the federal government. The Constitution gives states the right to raise money to fund operations by taxing people and entities that reside or do business within their borders. Local taxes come in many different forms, such as income tax, sales tax, estate taxes and property taxes.

Local

  • The federal government is national in scope and provides national services to the population. It has the largest budget and receives most tax revenue, most of which goes to defense, Social Security and Medicare. States, counties and cities are local, they deal almost exclusively with the needs of residents in a small area and most of their income comes from taxes as well.

Local Taxes

  • States can collect income tax from their residents. In 2011, 41 states collected income tax ranging from 1 to 15 percent. Many states also collected sales taxes on some items -- especially alcohol, cigarettes and gasoline -- and they also tax large estates of people who have died. County and city governments can also charge taxes, and most city and county governments tax businesses, have a sales tax and collect property taxes.

Distribution

  • Most local tax dollars pay for human services to residents, especially public education. The Center on Budget and Policy Priorities reported in April 2011 that in most states, 40 percent of state revenue goes to education, including higher education institutions, such as state universities. Medicaid accounts for 13 percent of state tax dollars on average, whereas transportation takes 7 percent and corrections consumes 5 percent. Different states incur different costs, and the center has a 35 percent "other" category to account for those differences.

Collection

  • Every local government designates a department to handle taxes. The name of the department and the scope of collections changes depending on the tax and the jurisdiction. States with an income tax require residents to fill out a separate state income tax form with their federal return, whereas sales taxes are charged on every purchase and collected from retailers.

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