Essay on Sources of Revenue for State and Local Governments in the United States

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1960 words
University of California, Santa Barbara
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In the United States, citizens expect state and local governments to provide them with services such as education, security, healthcare, welfare programs, and maintenance of public infrastructure. These governments have to raise revenue in order to provide these services. They obtain income from various sources, with the breakdown changing drastically from state to state. Proportions usually vary based on the types of fees and taxes levied within state borders, the kind of resources that a state owns, the amount of intergovernmental transfers, as well as the policy priorities of the two types of governments. This essay looks at the sources of revenue for state and local governments in the United States.

Taxes are a major source of income for governments to provide public services to the people. Paying them may not be something that everyone enjoys. However, revving taxes on citizens is among the concurrent powers wielded by the government, with state and local governments all having the authority to tax. For most people, the money they pay in form of taxes fund very visible services that they often take for granted, unless some of them are not provided in the right manner. Citizens are most likely to criticize the governments when the basic services are done poorly or insufficiently. To understand why revenue is needed, it is worth looking at the expenses incurred by governments. Education happens to be the single biggest expenditure, with the average state and localities contained in it spending slightly less than a quarter of its total budget on public education institutions. While funds for education are mainly gotten from the local school district budget, a significant amount of administrative and financial support offered to schools come from state governments. Other major items on the budget include public welfare, healthcare, roads and public works, utilities, security, and interests on debt. Each of them make up less than ten percent of local and state expenditures in a majority of states, although when combined make a significant portion of the total expenses incurred.

While cities, townships, counties, and states get some of their income from fees, licenses and profits from state-run businesses, about half of their revenue is gotten from taxes. Other sources of income include grants from the federal government, and in certain states, lotteries. If a state is blessed with abundant resources, it can collect huge amounts of revenue in form of taxes on those resources. This means that much of the income is not gotten from the states residents themselves. Rather, the state may choose to direct the economic burden of those taxes to consumers of minerals and mineral-based products from other states by charging higher prices on them. Examples of states that do this are Wyoming and Alaska, and they do not direct much economic activities outside the state given that resources such as coal and natural gas are comparatively immobile. Other kinds of taxes that state governments usually rely upon include personal income, property, corporate income, and gross and sales receipts taxes.

Sales Taxes

Sales taxes happen to be the most important source of income for state governments. It is levied on various products whereby consumers pay them when they make purchases. Almost all states levy a sales tax that is mainly charged on consumer goods, although sometimes food and clothing are excluded. Certain cities charge sales tax. This category is made up of general and selective sales taxes. General sales taxes are charged on all kinds of goods and services although they are subject to specified exemptions. On the other hand, selective sales taxes are levied on amusements, alcoholic drinks, motor fuels, insurance, tobacco products, pari-mutuels, and public utilities.

Only five states do not levy a sales tax; Delaware, Alaska, New Hampshire, Montana, and Oregon. However, this list is somehow misleading given that, although Alaska does not charge a sales tax, localities within it are allowed to impose taxes ranging from 1% to 7%. These figures put the average statewide sales taxes at about 1.75% which, although not much, is still not zero. Montana also does charge local sales taxes. While Delaware does not levy a sales tax, it imposes a gross receipts tax on businesses, which is a percentage of the total amounts gotten from products sold or services offered in the state. It ranges between .1006 % and .7543 %. Despite not technically being levied on consumers, its impact is evident in the prices that goods and services are sold. Of the states that do charge a sales tax, some are more when compared to those of others. Californias tax is the highest at 7.5% while that of Colorado is the least at 2.9%. a total of 13 states levy a sales tax of 5% or less of the purchase price, including five of them whose figure is a mere 4%.

As of 2017, 38 states levy sales taxes at both the local and state levels. Only Delaware, Kentucky, Indiana, Maryland, Maine, Michigan, Massachusetts, Montana, new jersey, new Hampshire, Oregon, the district of Columbia, and Rhode island do not allow local sales taxes. Thus, Oregon, New Hampshire, and Montana are the only ones that do not actually levy any sales taxes at all, or addition taxes that can be felt by the consumer. Smart consumers and businesses apply adjustment strategies when combined tax rates are too much. For instance, residents of New Jersey cross the border to purchase goods in Delaware where it is cheaper even when the receipts tax is charged. Also, many residents of Chicago purchase items outside the city. For the states that do levy a combined sales tax, Tennessee, Louisiana, Washington, Arkansas, and Alabama charge the highest rates when local and state taxes are brought together. As of 2017, they range between 8.92% in Washington and 9.98% in Louisiana. On the other end of the spectrum, Wisconsin, Wyoming, and Hawaii charge the highest rates of 5.42%, 5.4% and 4.35% respectively. Businesses located near the borders of these states as well as those that do not charge any sales tax at all, often purchase property or carry out their operations on the areas with the lowest charges.

Many of the states levying sales taxes exclude food from taxation, although Hawaii, Alabama, Kansas, Idaho, Oklahoma, South Dakota, and Mississippi do not do that. Foodstuffs are subject to local sales taxes even in cases where it is excluded from local taxes in a handful of states such as Louisiana, Georgia, Tennessee, and North Carolina. All states apart from Illinois exclude prescription drugs from both types of sales taxes, with that particular state charging a 1% sales tax on them. A few states also exclude non-prescription drugs from sales taxes. Also, clothing is excluded from sales taxes is a handful of states, particularly in the northeast.

Property Taxes

Today, property taxes are the main source of revenue for local governments. They are charged on buildings, pieces of land, and other personal property. The property must first undergo an assessment of its value; with most cities employing assessors for that. All in all, property taxes are somehow controversial due to the fact that certain types of property such as bank accounts, bond, and stocks are not levied. Thus, individuals who own real property contribute a disparate share of the revenue. Any American citizen will pay these taxes if they own real estate irrespective of the state in which they live, although some states charge much lower rates than others.

While quite some complicated mathematics is used in coming up with property tax figures, the main equation is all about the percentage of home value. This presents an excellent way of ranking the states since it offers a standardized for comparison. For instance, an individual living in state A may be paying $10,000 annually in property taxes for a home valued at $ 1 million. Another in state B may pay the same amount per year on a house worth $150,000. An ideal way of comparing the two states is by calculating the taxes as a percentage of the home value. The individual in state A is paying just 1% of the value of his home while that in state B is parting with almost 7%. Hence, the former is getting the best deal despite the fact that both are paying the same figure.

For the 2015 tax year, Hawaii had the lowest property tax rate at 0.28% while New Jersey had the highest at 2.38%. The difference between the lowest and the highest was a staggering 2.1%, a figure that is quite a significant property tax bill, especially on a luxury home. All in all, states that levy high property tax rates, such as Texas and New Hampshire, offer residents some breaks in other tax categories. A good example is Texas that does not have a state income tax. Such states heavily rely on property taxes as a source of revenue. A notable thing about property taxes is that they are not levied just at the state level. Local school boards, counties, and cities usually get involved, meaning that taxes in one part of the state may be more than those in other parts. Also, some parts offer exemptions to people with disabilities, senior citizens, and war veterans.

Property taxes make up a huge burden for many homeowners, and they can easily be more than the cost of mortgage in some parts of the United States. For those planning to purchase a home, they need to bear in mind how property taxes will affect housing costs as a whole. It is worth knowing that the tax rate is just what someone pays based on the value of their home. There is a possibility of a state, or area within the state, to levy a high tax rate while house prices are low. Ultimately, such a situation makes it more affordable than a place where in which the opposite is true. Simply put, while property taxes contribute to the overall housing costs, a potential homeowner needs to look at the big picture before making a decision.

Another thing worth bearing in mind is that property taxes are known to increase even when home values plummet. In 2000, American homeowners paid real estate taxes amounting to an estimated $247 billion. That figure had risen to $476 billion by 2010, a short while after the housing bubble burst, and long before the housing market got a chance to recover. Although a potential homeowner cannot predict how property tax rates will be like in the future, they should not get too comfortable with the amount they start paying at the beginning. This is why people are better off being conservative with their house purchases. It is recommended that housing costs including property taxes and insurance should not be more than 30% of someones net salary. However, if a house buyer hits the highest end of this limit and their property taxes rise the following year, such an individual may have a hard time keeping up with payments. On the other hand, it is worth thinking about what a persons taxes can buy them. For instance, property taxes in some areas cater for the cost of track pick up. In others, residents are expected to pay for private pickup in addition to the taxes. It is worth remembering that property taxes act as an ideal tax deduction. If an individuals are on the higher side, they will enjoy a larger break upon filing returns.

Income Taxes

Income taxes are levied by all but a few states on corporate and personal incomes. Generally, states do not give local governments the green light to collect these taxes although certain municipalities levy a payroll tax on individuals that work within their borders. Personal income taxes are usually progressive, meaning that they are adjusted so that they are proportional to the level of income. Federal income tax is collected by a branch of the US Treasury called the Internal Revenue Service. Citizens are expected to pay this tax...

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