Most U.S. cities and counties do not impose a local income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. , 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.
|State||Average Local Income Taxes as a Percent of Total Income|
|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.|
Local income taxes arose during the Great Depression: declining property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. 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 taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. es, 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 surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. . 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.
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.
|State||Number of Local Income Tax Jurisdictions|
|Source: Tax Foundation calculations.|
|State||Resident Tax Rate||Nonresident Tax Rate|
|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.|
|San Francisco||1.50% (imposed on employer)||same|
|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|
|St. Joseph County||1.75%||0.7375%|
|297 Iowa school districts impose an income tax surcharge ranging between 1 and 20% of state income tax owed.|
|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.
|Caneyville||$2 per week (full time) or $1 per week (part time)||same|
|Clarkson||$2 per week||same|
|Kenton County||0.1097% – 0.7097%||same|
|Lexington Fayette Urban County||2.25%||same|
|Anne Arundel County||2.56%||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%|
|Newark||1.00% (imposed on employers)||same|
|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%|
|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.|
|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|
|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|
|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|
|Charleston||$2 per week (imposed on employers)||none|
|Huntington||$3 per week (imposed on employers)||none|
|Weirton||$2 per week (imposed on employers)||none|