Local Income Taxes: City- and County-Level Income and Wage Taxes Continue to Wane

August 31, 2011

Tax Foundation Fiscal Fact No. 280

Introduction

Most U.S. cities and counties do not impose a local income tax, but they are imposed by 4,943 jurisdictions in 17 states, encompassing over 23 million Americans. Varying from minute amounts in several states to an average 1.55 percent in Maryland (see Table 1), these taxes provide a long-standing and significant source of revenue to many cities in "Rust Belt" states in the northeastern United States.

All counties in Indiana and Maryland impose a local income tax (see Table 2). In Ohio, 593 municipalities and 181 school districts have such a tax. 2,469 municipalities and 469 school districts in Pennsylvania impose local income or wage taxes. Many cities and school districts in Iowa and Michigan also have these taxes.

Table 1: Local Income Tax Collections as a Percent of State Personal Income, 2008

State

Average Local
Income Taxes
as a Percent of
Total Income

Alabama

0.070%

California

(a)

Colorado

(a)

Delaware

0.160%

Indiana

0.245%

Iowa

0.073%

Kansas

(a)

Kentucky

0.759%

Maryland

1.547%

Michigan

0.130%

Missouri

0.161%

New Jersey

(a)

New York

1.005%

Ohio

1.006%

Oregon

(a)

Pennsylvania

0.772%

West Virginia

(a)

Source: Tax Foundation calculations based on tax collections data from the U.S. Census Bureau and income data from the Bureau of Economic Analysis. Table and report do not include the District of Columbia, which has a top individual income tax rate of 8.5 percent.

(a) Collections from limited local income taxes in California, Colorado, Kansas, New Jersey, Oregon, and West Virginia are either not reported to the U.S. Census Bureau as local income taxes and/or amount to less than 0.01% of state personal income. San Francisco, California imposes a payroll tax of 1.5% on approximately 6,000 businesses with payrolls of larger than $250,000; the tax collected $342 million in 2010. In Colorado, Denver and two other municipalities impose charges of $2 to $4 per month per employee, again a modest amount compared with overall Colorado income. Kansas local income taxes are limited to interest, dividend, and securities transaction income. New Jersey has only one local income tax in Newark. Three municipalities in West Virginia impose service taxes of $2 to $3 per week per employee.

History of Local Income Taxes

Local income taxes arose during the Great Depression: declining property tax revenues caused by rising foreclosures forced local governments to look for other ways to raise revenue. The first local income taxes emerged in Philadelphia in 1939 as the city sought to avoid bankruptcy. They spread gradually to select cities in Ohio (1946), Kentucky (1947), Missouri (1948), and Michigan (1962). New York City and Baltimore adopted municipal income taxes in 1966.

Rationale for Local Income Taxes

Income and wage taxes are generally applied to those who live or work in a jurisdiction. They can complement or replace other local revenue sources like property, business, sales, or tourist taxes. Unlike property taxes, local income taxes can also be applied to nonresidents. If abused, however, local income taxes could enable a jurisdiction to export its tax burden to nonresidents who are not the primary beneficiary of city- and county-provided services such as schooling, policing, parks, and social services.

However, in most cases, cities understand this need to avoid taxation in excess of benefits provided, and impose a lower rate on nonresidents than residents. In Maryland, for example, county and city income taxes range from 1.25 percent to 3.20 percent, but nonresidents pay a uniform rate statewide set at the lowest county rate (1.25 percent). Cities in Michigan and Pennsylvania generally impose income and wage taxes on nonresidents at a lower rate than residents, although Ohio communities generally impose the same rates on both groups.

Types of Local Income Taxes

Local income taxes appear under a variety of designations: 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. Two West Virginia cities, for example, impose a flat charge of $2 or $3 per week on all those employed in the city. Appanoose County, Iowa-alone among Iowa counties-imposes a 1 percent emergency services surtax. Residents of Yonkers, New York pay 15 percent  of their state tax as a "piggyback" local tax.

Like federal and state income taxes, some local wage taxes have provisions for exemption, such as excluding military income or low-income individuals.

In Maryland and New York City, residents pay their local income tax when they file their state income tax. However, there are examples of extreme compliance burdens associated with local income taxes collected by local authorities. As one example, taxpayers in Albion, Michigan, must fill out a city income tax form of 16 pages, with instructions, separate from state and federal income tax forms.

Recent Changes in Local Income Taxes

Over the past few decades, the number of local income taxes has declined, and although there are exceptions, the rates at which these taxes are imposed have dropped as well. For example, Philadelphia's wage tax in 1995 was 4.96 percent for residents and 4.31 percent for nonresidents. It has gradually dropped to the current 3.928 percent for residents and 3.498 for nonresidents, and further cuts are expected in the medium to long term. In New York, the State Senate voted in June 2011 to exempt small businesses the city-wide 0.34 percent Metropolitan Transportation Authority (MTA) payroll tax and phase it out completely by 2014.

On the other hand, New York City is postponing a scheduled reduction in its city income tax, preserving the current level for an additional three years. Portland, Oregon's Tri-Met and Lane County districts have both increased rates to 0.6918 percent for residents and 0.67 percent for nonresidents. Residents in Reading, Pennsylvania saw their wage tax go from 2.7 percent to 3.6 percent over the past three years; the nonresident tax rose from 1.0 percent to 1.3 percent.

Conclusion

While most local income tax rates are low (1 percent to 3 percent), they generally have broad bases and are difficult to avoid. State and local officials need to ensure that these taxes do not discourage economic development or drive out mobile workers and businesses. Officials must also be careful not to impose excessive compliance costs associated with these taxes.

Table 2: Number of Local Income Tax Jurisdictions by State, 2011

State

Number of Local Income Tax Jurisdictions

Alabama

4

Alaska

none

Arizona

none

Arkansas

none

California

1

Colorado

3

Connecticut

none

Delaware

1

Florida

none

Georgia

none

Hawaii

none

Idaho

none

Illinois

none

Indiana

91

Iowa

297

Kansas

535

Kentucky

218

Louisiana

none

Maine

none

Maryland

24

Massachusetts

none

Michigan

22

Minnesota

none

Mississippi

none

Missouri

2

Montana

none

Nebraska

none

Nevada

none

New Hampshire

none

New Jersey

1

New Mexico

none

New York

4

North Carolina

none

North Dakota

none

Ohio

774

Oklahoma

none

Oregon

2

Pennsylvania

2,961

Rhode Island

none

South Carolina

none

South Dakota

none

Tennessee

none

Texas

none

Utah

none

Vermont

none

Virginia

none

Washington

none

West Virginia

3

Wisconsin

none

Wyoming

none

Total

4,943

Source: Tax Foundation calculations.

Table 3: Local Income Tax Rates by Jurisdiction, 2011

State

Resident Tax Rate

Nonresident Tax Rate

Alabama

Bessemer

1.00%

same

Birmingham

1.00%

same

Gadsden

2.00%

same

Macon County

1.00%

same

California

San Francisco

1.50%
(imposed on employer)

same

Colorado

Aurora

$2.00 per month on compensation over $250

same

Denver

$5.75 per month on compensation over $500

same

Greenwood Village

$4.00 per month on compensation over $250

same

Delaware

Wilmington

1.25%

same

Indiana

Adams County

1.124%

0.674%

Allen County

1.00%

0.55%

Bartholomew County

1.25%

0.5%

Benton County

2.29%

0.54%

Blackford County

1.36%

0.61%

Boone County

1.00%

0.25%

Brown County

2.2%

0.5%

Carroll County

1.55%

0.4%

Cass County

2.5%

0.5%

Clark County

2.00%

0.75%

Clay County

2.25%

0.25%

Clinton County

2.00%

0.75%

Crawford County

1.00%

0.5%

Daviess County

1.75%

0.75%

Dearborn County

0.6%

0.15%

Decatur County

1.33%

0.58%

DeKalb County

1.5%

0.75%

Delaware County

1.05%

0.6%

Dubois County

1.00%

0.55%

Elkhart County

1.5%

0.5%

Fayette County

2.37%

0.87%

Floyd County

1.15%

0.65%

Fountain County

1.1%

0.35%

Franklin County

1.25%

0.5%

Fulton County

1.93%

0.68%

Gibson County

0.5%

0.5%

Grant County

2.25%

0.75%

Greene County

1.00%

0.25%

Hamilton County

1.00%

0.25%

Hancock County

1.55%

0.4%

Harrison County

1.00%

0.5%

Hendricks County

1.4%

0.65%

Henry County

1.25%

0.5%

Howard County

1.6%

0.55%

Huntington County

1.75%

0.5%

Jackson County

1.6%

0.75%

Jasper County

3.05%

0.5%

Jay County

2.45%

0.6%

Jefferson County

0.35%

0.35%

Jennings County

1.25%

0.5%

Johnson County

1.00%

0.25%

Knox County

1.1%

0.65%

Kosciusko County

1.00%

0.475%

LaGrange County

1.4%

0.65%

LaPorte County

0.95%

0.7%

Lawrence County

1.75%

0.25%

Madison County

1.75%

0.625%

Marion County

1.62%

0.405%

Marshall County

1.25%

0.25%

Martin County

1.00%

0.4%

Miami County

2.54%

0.965%

Monroe County

1.05%

0.2625%

Montgomery County

2.1%

0.6%

Morgan County

2.72%

0.52%

Newton County

1.00%

0.25%

Noble County

1.5%

0.75%

Ohio County

1.00%

0.25%

Orange County

1.25%

0.5%

Owen County

1.3%

0.55%

Parke County

2.3%

0.75%

Perry County

1.06%

0.685%

Pike County

0.4%

0.4%

Porter County

0.5%

0.5%

Posey County

1.00%

0.625%

Pulaski County

3.13%

0.68%

Putnam County

1.5%

0.75%

Randolph County

1.5%

0.75%

Ripley County

1.38%

0.63%

Rush County

1.5%

0.75%

St. Joseph County

1.75%

0.7375%

Scott County

1.41%

0.4725%

Shelby County

1.25%

0.5%

Spencer County

0.8%

0.575%

Starke County

1.06%

0.81%

Steuben County

1.79%

0.54%

Sullivan County

0.3%

0.3%

Switzerland County

1.00%

0.25%

Tippecanoe County

1.1%

0.65%

Tipton County

1.33%

0.58%

Union County

1.5%

0.5%

Vanderburgh County

1.00%

0.25%

Vermillion County 0.10% 0.10%
Vigo County 1.25% 0.75%
Wabash County 2.90% 0.75%
Warren County 2.12% 0.57%
Warrick County 0.50% 0.50%
Washington County 1.50% 0.75%
Wayne County 1.50% 0.50%
Wells County 2.10% 0.70%
White County 1.32% 0.57%
Whitley County 1.2329% 0.4829%

Iowa

Appanoose County

1.00%

same

297 Iowa school districts impose an income tax surcharge
ranging between 1 and 20% of state income tax owed.

Kansas

30 Kansas counties, 105 Kansas cities, and 400 Kansas townships impose a local intangibles tax on interest, dividends, and securities transactions (but not wages). The tax rates are generally uniform: county tax is 0.75% and city and township taxes are 2.25%. No city or township has a rate higher than 2.25%, and 36 have a lower rate, as low as 0.25%. The taxes cumulatively raised approximately $2.4 million in 2008.

Kentucky

Adairville

1.50%

same

Alexandria

1.50%

same

Allen County

1.00%

same

Ashland

1.50%

same

Auburn

1.50%

same

Augusta

1.00%

same

Ballard County

1.00%

same

Bardstown

0.50%

same

Bath County

1.50%

same

Beattyville

1.00%

same

Bellevue

2.50%

same

Benton

0.50%

same

Berea

2.00%

same

Boone County

1.45%

same

Bourbon County

0.75%

same

Bowling Green

1.85%

same

Boyd County

1.00%

same

Boyle County

0.75%

same

Breathitt County

1.00%

same

Bromley

1.00%

same

Brooksville

1.75%

same

Brownsville

1.00%

same

Burkesville

1.00%

same

Butler County

1.00%

same

Cadiz

1.50%

same

Caldwell County

1.00%

same

Calvert City

0.50%

same

Campbell County

1.05%

same

Campbellsville

1.00%

same

Caneyville

$2 per week (full time) or $1 per week (part time)

same

Carlisle

1.00%

same

Carmango

1.00%

same

Carroll County

1.00%

same

Catlettsburg

1.50%

same

Cave City

2.00%

same

Clark County

1.50%

same

Clarkson

$2 per week

same

Clay City

1.00%

same

Clay County

1.00%

same

Clinton

0.50%

same

Clinton County

0.75%

same

Cold Spring

1.00%

same

Covington

2.50%

same

Crescent Springs

1.00%

same

Crestview Hills

1.00%

same

Cumberland County

1.25%

same

Cynthiana

1.50%

same

Danville

1.25%

same

Daviess County

0.35%

same

Dawson Springs

1.50%

same

Dayton

2.00%

same

Dry Ridge

0.50%

same

Eddyville

1.50%

same

Edgewood

1.00%

same

Edmonton

1.50%

same

Elizabethtown

1.35%

same

Elkhorn City

1.00%

same

Elkton

2.00%

same

Elsmere

0.013%

same

Eminence

0.75%

same

Erlanger

0.015%

same

Estill County

1.25%

same

Fayette County

0.50%

same

Flemingsburg

1.00%

same

Florence

2.00%

same

Fort Mitchell

1.00%

same

Fort Thomas

1.25%

same

Fort Wright

1.00%

same

Frankfort

1.75%

same

Franklin

1.00%

same

Franklin County

1.00%

same

Fulton

2.00%

same

Gallatin County

1.00%

same

Gamaliel

1.00%

same

Garrard County

1.00%

same

Georgetown

1.00%

same

Glasgow

1.50%

same

Graves County

1.00%

same

Grayson

1.00%

same

Grayson County

0.50%

same

Greensburg

1.00%

same

Guthrie

1.00%

same

Hancock County

1.25%

same

Harrison County

1.50%

same

Harrodsburg

1.00%

same

Hart County

0.008%

same

Hazard

1.75%

same

Henderson

1.00%

same

Hickman

1.50%

same

Highland Heights

1.00%

same

Hillview

1.50%

same

Hodgenville

0.75%

same

Hopkinsville

0.02%

same

Horse Cave

0.50%

same

Independence

1.25%

same

Jackson

1.00%

same

Jackson County

1.00%

same

Jamestown

1.00%

same

Jeffersontown

1.00%

same

Jeffersonville

1.00%

same

Jessamine County

1.00%

same

Johnson County

0.50%

same

Junction City

1.00%

same

Kenton County

0.1097% - 0.7097%

same

Knox County

1.00%

same

Lakeside Park

1.00%

same

Laurel County

1.00%

same

Lebanon

1.00%

same

Lebanon Junction

0.80%

same

Leitchfield

1.20%

same

Leslie County

1.00%

same

Lewisburg

1.50%

same

Lexington Fayette Urban County

2.25%

same

Lincoln County

1.00%

same

Livingston County

1.00%

same

Logan County

0.75%

same

Louisville

2.20%

same

Ludlow

1.50%

same

Madison County

1.00%

same

Madisonville

1.50%

same

Magoffin County

1.00%

same

Marion

0.75%

same

Marion County

1.00%

same

Marshall County

1.50%

same

Martin

1.30%

same

Martin County

1.00%

same

Mayfield

2.00%

same

Maysville

1.95%

same

McCracken County

1.00%

same

McCreary County

1.00%

same

McKee

1.00%

same

McLean County

1.00%

same

Menifee County

1.25%

same

Mercer County

0.45%

same

Metcalfe County

1.00%

same

Middlesboro

2.00%

same

Midway

2.00%

same

Millersburg

1.00%

same

Monroe County

0.50%

same

Montgomery County

1.00%

same

Morehead

1.50%

same

Morgan County

0.50%

same

Morgantown

2.00%

same

Mount Vernon

1.00%

same

Mt. Olivet

1.00%

same

Mt. Washington

1.00%

same

Muldraugh

1.00%

same

Munfordville

0.75%

same

Nelson County

0.50%

same

Newport

2.50%

same

Nicholas County

1.00%

same

Nicholasville

1.50%

same

Oak Grove

1.50%

same

Ohio County

1.00%

same

Owensboro

1.33%

same

Owenton

1.00%

same

Paducah

2.00%

same

Paintsville

1.00%

same

Paris

1.50%

same

Park City

1.00%

same

Park Hills

0.015%

same

Pendleton County

0.50%

same

Perryville

1.00%

same

Pikeville

2.00%

same

Pineville

1.50%

same

Pioneer Village

1.00%

same

Powell County

1.25%

same

Prestonburg

1.50%

same

Princeton

1.50%

same

Pulaski County

1.00%

same

Raceland

1.00%

same

Radcliff

2.00%

same

Richmond

2.00%

same

Robertson County

1.50%

same

Rockcastle County

1.50%

same

Rowan County

1.00%

same

Russell

0.875%

same

Russell County

0.25%

same

Russell Springs

1.00%

same

Russellville

2.00%

same

Saylersville

1.00%

same

Scott County

1.50%

same

Scottsville

1.50%

same

Shelby County

1.00%

same

Shelbyville

1.50%

same

Shepherdsville

1.00%

same

Shively

1.50%

same

Silver Grove

1.50%

same

Simpson County

0.75%

same

Southgate

2.50%

same

Spencer County

0.008%

same

Springfield

1.00%

same

St. Matthews

0.75%

same

Stanford

0.65%

same

Stanton

1.00%

same

Taylor County

1.00%

same

Taylor Mill

2.00%

same

Taylorsville

0.75%

same

Todd County

1.00%

same

Tompkinsville

1.00%

same

Union County

0.50%

same

Vanceburg

1.00%

same

Versailles

1.00%

same

Villa Hills

0.075%

same

Vine Grove

1.00%

same

Warren County

1.50%

same

Warsaw

1.00%

same

Washington County

0.75%

same

Wayne County

0.90%

same

West Buechel

1.00%

same

West Liberty

0.50%

same

West Point

2.00%

same

Whitley County

1.00%

same

Wilder

2.25%

same

Wilmore

2.00%

same

Winchester

1.50%

same

Wolfe County

1.25%

same

Woodford County

1.50%

same

Maryland

Allegany County

3.05%

1.25%

Anne Arundel County

2.56%

1.25%

Baltimore (city)

3.05%

1.25%

Baltimore County

2.83%

1.25%

Calvert County

2.80%

1.25%

Caroline County

2.63%

1.25%

Carroll County

3.05%

1.25%

Cecil County

2.80%

1.25%

Charles County

2.90%

1.25%

Dorchester County

2.62%

1.25%

Frederick County

2.96%

1.25%

Garrett County

2.65%

1.25%

Harford County

3.06%

1.25%

Howard County

3.20%

1.25%

Kent County

2.85%

1.25%

Montgomery County

3.20%

1.25%

Prince George's County

3.20%

1.25%

Queen Anne's County

2.85%

1.25%

St. Mary's County

3.00%

1.25%

Somerset County

3.15%

1.25%

Talbot County

2.25%

1.25%

Washington County

2.80%

1.25%

Wicomico County

3.10%

1.25%

Worcester County

1.25%

1.25%

Michigan

Albion

1.00%

0.5%

Battle Creek

1.00%

0.5%

Big Rapids

1.00%

0.5%

Detroit

2.50%

1.25%

Flint

1.00%

0.5%

Grand Rapids

1.50%

0.75%

Grayling

1.00%

0.5%

Hamtramck

1.00%

0.5%

Highland Park

2.00%

1.0%

Hudson

1.00%

0.5%

Ionia

1.00%

0.5%

Jackson

1.00%

0.5%

Lansing

1.00%

0.5%

Lapeer

1.00%

0.5%

Muskegon

1.00%

0.5%

Muskegon Heights

1.00%

0.5%

Pontiac

1.00%

0.5%

Port Huron

1.00%

0.5%

Portland

1.00%

0.5%

Saginaw

1.50%

0.75%

Springfield

1.00%

0.5%

Walker

1.00%

0.5%

Missouri

Kansas City

1.00%

same

St. Louis

1.00%

same

New Jersey

Newark

1.00% (imposed on employers)

same

New York

New York City

2.907% - 3.876%

none

New York City Metropolitan Transportation Authority (MTA) (New York City and surrounding jurisdictions)

0.34% (imposed on employers)

none

New York-New Jersey Waterfront (employers of port personnel)

2.00% (imposed on employers)

none

Yonkers

15% of net state tax

0.50%

Ohio

593 of Ohio's 932 municipalities and 181 of Ohio's 611 school districts impose an income tax. Listed below as representative are the taxes imposed in the twelve largest cities in the state.

Akron

2.25%

same

Canton

2.00%

same

Cincinnati

2.10%

same

Cleveland

2.00%

same

Columbus

2.50%

same

Dayton

2.25%

same

Hamilton

2.00%

same

Lorain

2.00%

same

Parma

2.50%

same

Springfield

2.00%

same

Toledo

2.25%

same

Youngstown

2.75%

same

Oregon

Lane County Mass Transit District (Eugene, Springfield, and surrounding communities)

0.0067% (imposed on employers)

same

Tri-Met Transportation District (Portland)

0.6918% (imposed on employers)

same

Pennsylvania

2,492 of Pennsylvania's 2,562 municipalities and 469 of Pennsylvania's 500 school districts impose a local income tax or local services tax. Listed below as representative are the taxes imposed in the twelve largest cities in the state.

Allentown

1.35% plus $52 per year

1.35%

Altoona

1.20% plus $52 per year

1.20%

Bethlehem

1.00% plus $52 per year

1.00%

Erie

1.18% plus $52 per year

1.18%

Harrisburg

1.00% plus $52 per year

1.00%

Lancaster

1.10% plus $52 per year

none

Philadelphia

3.928%

3.4985%

Pittsburgh

3.00% plus $52 per year

1.00%

Reading

3.60% plus $52 per year

1.30%

Scranton

3.40% plus $52 per year

1.00%

Wilkes-Barre

3.00% plus $52 per year

1.00%

York

1.00% plus $52 per year

none

West Virginia

Charleston

$2 per week (imposed on employers)

none

Huntington

$3 per week (imposed on employers)

none

Weirton

$2 per week (imposed on employers)

none

Source: Tax Foundation compilation from state revenue departments and other sources.

Note: The initial version of this publication inadvertently left out 10 Indiana county income taxes. These have been restored, resulting in a total of 4,943 local income tax jurisdictions.

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