Local Income Taxes in Retreat

August 31, 2011

Local taxes on wages and income, largely concentrated in a small handful of states, are on the wane nationwide, according to the new report we released today. The current total of 4,933 local income tax jurisdictions has been declining slowly in recent years, with some existing local income tax rates also falling. Fiscal Fact No. 280, written by Joseph Henchman and Jason Sapia, gives some background on where these city, county, and school district taxes came from and details recent developments in the as well.

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.

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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.

As Joe and Jason point out, though, not every locale is trending in the same direction. Portland, Oregon, and Reading, Pennsylvania, for example, have seen recent increases.

More on state & local budgets and spending here.


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