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Taxes: Local Taxation in the United States

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In general, there are three ways to think about taxes and how they work. First, there is the progressive tax approach: a tax that takes a larger percentage of income from high-income groups than from low-income groups. Secondly, there is the proportional tax approach: a tax that takes the same percentage of income from all income groups. Third, there is the regressive tax approach: a tax that takes a larger percentage of income from low-income groups than from high-income groups.

For example, in the USA, the income tax structure is considered a progressive form of taxation. The payment of Social security and property taxes in the USA are both regressive in nature. On the other hand, the payment of excise taxes and users fees are both only somewhat regressive. As such, when combined together, the overall impact ultimately results in a proportional system of taxation since approximately the same percentage of income is paid by taxpayers on their income.

It is a lot easier to see local tax dollars at work than state or federal taxes: we see construction on our roads, we see our parks, our libraries, our schools, our police and our firefighters. But we don’t file a county or city tax return, so where do our local governments get their money?

Local governments have several sources of tax income, but the main source is property taxes. Unlike income and sales tax, all states have property taxes. Property taxes work quite differently from these other forms of taxation. They are calculated with two factors in mind: how much money the local jurisdiction needs to continue its services, and the value of the property in that jurisdiction. The Mill Levy (Mill from the Latin word for “thousandth”) is the “assessed property tax rate used by local governments and other jurisdictions to raise revenue in order to cover annual expenses”. (Source) Local governments determine how much money they will need for the year, and then they divide that by the total value of all the property in that jurisdiction.

One woman in the State of Washington actually overpaid her property taxes for forty years!

Woman Overpaid Property Taxes For 40 Years

You don’t want to make the same mistake she made, do you?

However, it is slightly more complicated than that, because there may be several tax jurisdictions that all apply to one area – for example, county and city property taxes. The breaking down of this system is explained by Investopedia:

There can be several taxing authorities in one region, which could include school, county and city districts. As an example, suppose the entire property value in the area is $1 billion and the school district needs $100 million in revenue, the county needs $10 million and the city needs $50 million. The tax levy for the school district would be $100 million divided by $1 billion or 0.10. The tax levy for the county would be 0.01 (10 million/1 billion), and the tax levy for the city would be 0.05 (50 million/1 billion). Add all the tax levies up to get the mill levy of 0.16 or 160 mills. One mill = 0.001.

 

The mill levy on that area is then the combination of all the taxing jurisdictions for that area, and is based on the total value of property in that area. The value of the property is based on current real estate values in that area, a market which often fluctuates. When the value of a property is assessed, a number of things are taken into account, including the replacement costs (the cost to replace an asset – for example, a building – at equal value) for the property, maintenance costs for the property owner, any improvements that were made, income received from the property (rent, for example), etc. Fair market value is also determined by comparing sales of similar properties.2 There’s more information here about how properties are appraised and real estate values are estimated. It’s important to know how values are assessed, so that you will know if you are paying a fair amount of property tax. You have the right to contest the assessed value of your property is you disagree with it.

A property’s taxable worth is usually a “percentage of a property’s fair market value, determined by multiplying the property’s market value or appraisal value by an assessment ratio established by the local taxing authority.” 1

We’re not done with the word “mill” yet – there is also the mill or millage rate that factors into these calculations. One mill is equal to 1/1000th of the currency unit – dollars, in this case. So 1 mill is equal to 1/10th of 1 cent, or $1 per every $1000 of a property’s taxable worth.  So, for example, if a property has a taxable value of $150,000, and the mill rate is 7, then you multiply the taxable value of the property ($150,000) by the mill rate (7), and then you divide by 1000. In this example, the property taxes due on that property would be $1050. 1

Mill rates are usually not the same for different types of properties, such as residential vs. commercial or industrial properties.

The ten states that rely the most on property taxes are: New Hampshire (61%), Vermont, New Jersey, Texas, Rhode Island, Michigan, Connecticut, Illinois, Florida, and Wyoming (37%).5 There’s more data here about which form of tax income states rely on most.

The majority of funding comes from property taxes, but it is not the only source of revenue for local governments. Most cities and counties do not have an income tax, but they are “imposed by 4,943 jurisdictions in 17 states, encompassing over 23 million Americans”.3 These are generally low percentages – 1-3%, and are seen most often in the Northeast and the Midwest. This trend began during the Great Depression when property values were very low and districts needed more revenue. Local income taxation is applied to those who receive income in that area, which means non-residents of that area may also have to pay them, though often at a lower rate.3

There are a variety of local income taxes:

wage taxes, income taxes, payroll taxes, local services taxes, and occupational privilege taxes. They are generally paid by the employee but withheld by the employer, although in some cases (such as in San Francisco, California and Portland, Oregon), they are paid directly by the employer. Some are imposed as a percentage of salaries or wages, while others are stated as a percentage of federal or state tax, and still others are flat amounts charged to all workers. 3

Overall, local income taxation has been in decline – both in the number of jurisdictions that use it and in the percentage taxed.

There is more information here about which states and jurisdictions use local income taxes and how those taxes are levied.

Local governments also get a significant amount of their funding through federal and state taxes that get passed down. Because of different resources, this will vary from state to state and jurisdiction to jurisdiction. Some states, like California, get most of their local funding from state taxes.4 On average, about 37% of local revenue comes from transfers, 32% of that from the state (some of that indirectly from the federal government) and 5% directly from the federal government.7 Some federal grant money is limited in what it can be used for.6 To break it down a little, “aid to school districts account for more than half of all state government transfers to localities. Housing programs make up 40 percent of federal transfers to local governments.”7

Although transfers are not considered local tax revenue, much of that money does come from taxes paid at the state and federal levels.

Now when you hear sirens or get stopped for road work you will know where the money for that came from that what role you played in paying for it.

1.      http://www.investopedia.com/terms/m/mill-levy.asp

2.      http://www.investopedia.com/articles/tax/09/calculate-property-tax.asp

3.      https://taxfoundation.org/local-income-taxes-city-and-county-level-income-and-wage-taxes-continue-wane/

4.      https://www.marketplace.org/2013/04/12/life/where-do-taxpayer-dollars-go-anyway

5.      https://taxfoundation.org/where-do-state-and-local-governments-get-their-revenue/

6.      http://www.ushistory.org/gov/12b.asp

7.      http://www.taxpolicycenter.org/briefing-book/what-are-sources-revenue-local-governments

8.      https://en.wikipedia.org/wiki/Taxation_in_the_United_States

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