Anaya Nolan
The tax structure of a city is a complex interplay of various factors, including state laws, income levels, and the need to fund essential services. While the term general law cities is not a widely recognized classification, the taxation trends across different cities and states offer insights into the nuances of local taxation. Some cities, like Detroit, Louisville, and Philadelphia, are known for their high overall tax rates, which encompass a range of taxes, from income and property taxes to excise taxes on items like fuel. On the other hand, certain states, like Alaska, Florida, and Nevada, impose no income tax, leaving cities within these states without a municipal income tax. Local income taxes, implemented in about a third of all states, can be an effective way to raise progressive revenue, targeting higher-income households and easing the burden on lower-income residents. However, they may also lead to higher overall tax burdens if not carefully implemented and can be prone to the challenges of remote work arrangements. Ultimately, the tax landscape varies significantly across the country, and understanding the specific context of each city is crucial before drawing conclusions about the tax rates in general law cities.
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What You'll Learn
Local income taxes
In Colorado, five cities impose taxes on compensation, ranging from $2 to $10 per month. Indiana has a similar system, with all 92 counties levying an individual income tax, and rates ranging from 0.35% to 3.38%. In contrast, Kansas localities only tax interest and dividend income, with rates from 0.13% to 2.5%. Iowa has hundreds of school districts that levy income taxes, with surcharges ranging from 1% to 20% of state liability.
New York City is known for its high taxes, including its own income tax on top of state and federal systems. New York City's income tax rates range from 3.078% to 3.876%, while Yonkers has a rate of 16.75% of net state income tax. Similarly, high-income earners in Milwaukee face a steep graduated tax system, with total taxes of nearly 17.5%. Philadelphia, another high-tax city, has high state income taxes and property taxes, with fuel taxed at $0.31/gallon.
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Property taxes
While property tax rates can vary considerably within states, some states impose a statewide limit on the maximum rate. States and local governments may also use other limits, exemptions, deductions, and credits to lower a property's taxable value or the taxpayer's payment. For instance, assessment limits prevent a property's assessed value from increasing by more than a fixed percentage between assessments. In some states, laws provide for exemptions (typically called homestead exemptions) and/or limits on the percentage increase in tax, which prevent large yearly increases in property tax.
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Sales taxes
Some states exempt groceries from sales tax, while others tax groceries at a limited or the same rate as all other products. Some states exempt clothing or tax it at a reduced rate. The taxation of services and business-to-business transactions also varies widely by state. Tax experts generally recommend that sales taxes apply to all final retail sales of goods and services but not intermediate business-to-business transactions.
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Excise taxes
An excise tax is a type of tax levied on specific goods or services at the time of their purchase. Excise taxes are applied within the boundaries of a specific government and are usually imposed at the federal level, but they can also be applied by state and local governments. In the United States, common goods and services subject to excise taxes include motor fuel, tobacco, airline tickets, heavy trucks, highway tractors, indoor tanning, tires, and alcohol. Excise taxes are typically paid by businesses, but they are passed on to consumers in the form of higher prices. These taxes are separate from other taxes that corporations must pay, such as income taxes.
Businesses that are subject to excise tax must generally file a Form 720, Quarterly Federal Excise Tax Return, to report the tax to the IRS. This form can be filed electronically for faster processing. Excise taxes are independent of income taxes, and the revenue generated from excise taxes makes up a small portion of the total revenue for federal and state governments. Excise taxes are primarily intended for businesses and can be a progressive revenue raiser, as they ask more of higher-income households and are connected to the ability to pay.
The Inflation Reduction Act of 2022 made several changes to excise taxes. It created a new 1% excise tax on the repurchase of corporate stock by certain publicly traded corporations or their affiliates, effective for repurchases after December 31, 2022. The Act also reinstated excise taxes on certain chemicals and chemical substances, with modifications effective July 1, 2022. Additionally, it extended several excise fuel incentive credits through December 31, 2024, and made permanent higher tax rates under section 4121 of the Internal Revenue Code, which funds the Black Lung Disability Trust Fund.
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Payroll taxes
Local payroll taxes are levied by cities and counties, with the tax jurisdiction coinciding with the borders of that municipality or county. In some cases, a tax jurisdiction might be a school district or a district created specifically for taxation purposes, which can extend past local governmental borders to encompass multiple cities, towns, counties, etc. Local payroll taxes are imposed on residents of a jurisdiction and are based on income, with the funds specifically earmarked for the benefit of school districts. While many states require taxes for school districts in general, only some localities require a business to withhold these taxes on an employee's behalf. For example, Ohio and Pennsylvania are states with localities levying these taxes.
Local income taxes are imposed by localities in states with state income tax. They are imposed on individuals working or living in a specific area and are in addition to federal and state income taxes. Local income tax withholding requires employers to withhold the tax from employee wages and remit it. If the tax is an employer tax, the employer must pay it. Local income tax withholding requires employers to register with the income tax office of the school district or location where their business is located. Every time payroll is run, each employee's taxable wages must be calculated, and the amount to withhold must be determined using tax tables or by multiplying by the local rate.
Some states allow localities to impose additional local income taxes, which may be called earnings taxes or wage taxes. These taxes can vary widely from state to state, not only in their tax bases but also in their manner of collection and administration. While some states have a local tax in every jurisdiction, others do not. For example, only five cities in Colorado impose the tax, while Iowa has hundreds of school districts that levy income taxes. Most jurisdictions tax non-residents who work there at a lower rate.
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Frequently asked questions
It depends on the city and state. Some cities have no sales tax, while others, like Seattle and Long Beach, have a significant sales tax. Some cities have a higher income tax, like New York City, which ranges from 3.078% to 3.876%. Other cities, like Wilmington, Delaware, have a lower income tax rate of 1.25%.
Cities can levy a variety of taxes, including property taxes, sales taxes, and auto taxes. Some cities also have payroll taxes, also called earnings taxes or payroll expense taxes, which are taxes on the total wages a company pays.
Local income taxes can be an important progressive revenue raiser, with higher-income households contributing more. However, they can also lead to a higher overall tax burden for residents, especially when combined with other taxes like property taxes.
Working remotely may provide an opportunity to avoid municipal income taxes, particularly if you live and work in different cities. However, this also depends on the specific tax laws of the city and state in question.
