The ITEP Guide to State & Local Taxes
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How Do Real Property Taxes Work?
Property taxes on land and buildings are the oldest and still the largest major revenue source for state and local governments. They fund schools, health care, public safety, and other services. They are collected mostly by cities, counties, school districts, and other types of local government, but states typically make the rules for assessing the value of property and imposing the tax, with major implications for tax fairness and adequacy.
How Do Personal Income Taxes Work?
The personal income tax funds public education, health care, public safety, and other public services provided by state and local governments. If well-designed, it is the fairest major revenue source available to states.
What Principles Should Guide State and Local Tax Policy?
State and local taxes exist primarily to fund schools, roads, health care, and other services needed for communities to thrive. There are multiple ways to achieve this goal, so it can be helpful to evaluate different options based on a few core principles.
How Do State Corporate Income Taxes Work?
A robust corporate income tax ensures that profitable corporations help fund the public services they benefit from, just as working people do. It’s one of the few progressive taxes available to state policymakers.
How Do State and Local Tax Systems Affect Racial Justice?
State and local tax codes have the potential to either narrow or widen racial inequality created by historical and current injustices in public policy and in broader society. In general, tax codes that are more progressive across the economic spectrum do more to narrow racial inequality, while regressive tax policies exacerbate it.
Glossary
Ability to pay The principle that those with greater financial resources should pay a larger share of their income in taxes than less-wealthy individuals. Adjusted gross income (AGI) The amount of income subject to tax before subtracting deductions and personal exemptions. Federal AGI is typically the starting point for state income tax calculations. Adjustments Income […]
How Does Federal-State Tax Conformity Work?
Most states use the federal tax code as a starting point for their calculations of state personal income taxes, corporate income taxes, and estate taxes. Changes to the federal code and federal tax administration have the potential to affect state tax systems enormously, but to some extent states can pick and choose which of those federal changes to accept.
How Do State Tax and Expenditure Limits Work?
A Tax and Expenditure Limit (TEL) is a formula written into state law or into a state constitution that constrains government revenue and spending. These measures can undermine governmental accountability, degrade essential public services like health care and education, and create inequitable tax burdens.
What Are Local Governments’ Taxing Authorities?
Tens of thousands of local governments in the United States, from big cities like Los Angeles and New York to rural counties, school districts, and small towns, operate schools, roads, parks, public safety, and other services. To pay for it, they collect roughly $1 trillion in taxes annually and receive another $800 billion in grants from states. But states, not just localities, set many of the rules for local taxes, and sometimes use that authority to undermine local democracy.
How Do Personal Property Taxes Work?
The great majority of property tax revenue is based on the value of land and buildings, but states also apply property taxes to certain business equipment, machinery, and supplies, and sometimes also to automobiles. Collectively these taxes are known as “personal property taxes.”
How Do States Tax Investment Income?
State personal income taxes apply not just to wages and salaries but also earnings on investments, like stocks and bonds. Most investments are held by wealthy people, so when states tax investment income at a lower rate than wages, high-income households pay tax at lower rates than middle-income households. By contrast, states that strengthen taxation of investment income can raise substantial revenue while improving economic and racial equity of their tax code.
How Do States Tax Cannabis?
A growing number of states are legalizing and taxing cannabis. Cannabis taxes are raising revenue for education, health care, and addressing substance abuse while encouraging consumers to moderate their use. But high cannabis taxes also mean that low-income communities previously targeted for enforcement now pay a disproportionate share of tax.
How Do State Tax Credits for Workers and Families Work?
State-level Earned Income Tax Credits (EITCs) and Child Tax Credits (CTCs) help workers and families make ends meet by reducing their taxes and providing refunds. Research shows these credits are very effective at reducing poverty and creating more equitable tax systems.
How Do State and Local Excise Taxes Work?
Excise taxes are sales taxes that apply to specific goods (such as gasoline, tobacco, or alcohol) or services (such as hotel and car rentals). Sometimes it’s appropriate to ask consumers of a particular item to pay an especially high tax for various reasons. But even in those circumstances, many excise taxes are highly regressive.
How Do State Estate and Inheritance Taxes Work?
Estate and inheritance taxes are taxes on wealth passed on after someone’s death. They are a common way for states to tax the inheritances of wealthy individuals. These taxes ensure that those very large estates help pay for public services like schools, hospitals, and parks.
How Can Communities Collect Property Taxes from Exempt Nonprofits?
Payment in Lieu of Taxes (PILT or PILOT) programs allow local governments to collect revenue from nonprofits that otherwise would not be contributing to the cost of providing local services. Every state has chosen to exempt most non-profit entities from local property taxes. A building owned by a charitable organization may be exempt from tax […]
How Can Cities and States Reduce Property Taxes for Homeowners and Renters?
To reduce the cost of property taxes for homeowners and renters, many places offer homestead exemptions, circuit breakers, and deferrals. Such provisions are more cost-effective alternatives to broad tax cuts or tax limitations.
Do Tax Cuts Fuel Growth?
Tax policy is an important economic tool, but claims that tax changes will affect a state’s economy are often overstated. Such overstated claims are particularly common in discussions of taxes on wealthy individuals and profitable corporations, so careful assessment of such claims is an important part of shaping adequate and equitable revenue streams.
What’s Exempt from State and Local Sales Taxes?
State and local sales taxes are typically conceived as broad-based consumption taxes – that is, taxes on most things consumers buy. In practice, many purchases are exempt from sales taxes.
How Do State and Local Sales Taxes Work?
Sales taxes are the second largest source of revenue for state and local governments. In nearly every state they are an important way we pay for public education, health care, public safety, and other services. But they are also typically the costliest tax for low-income families.
ITEP Guide to State & Local Taxes
Tax Principles Learn More Income & Profits Learn More Property & Wealth Learn More Sales & Use Learn More Other Revenues Learn More Glossary Learn More Contributors Nick JohnsonSenior Fellow Sarah AustinSenior Analyst Kamolika DasLocal Policy Director Rita JeffersonLocal Analyst Brakeyshia SammsSenior Analyst
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