Federal taxes are bad enough, but when states taxes are added, the pain gets worse. Then for some unlucky Americans, their local governments add income taxes on top of it all, creating the most brutal high-tax environments in the nation – the New York’s and San Francisco’s of the world.
Income taxes are now imposed at the local level in jurisdictions within 17 states, making up over 10% of tax revenue in six of those states, according to a study conducted by the Tax Foundation on local income taxes.
Income taxes took hold at the federal level in 1913 and expanded to the states in the following decades. Income taxes were part of the early progressive movement. They became considerably more common during the Great Depression, when traditional revenue sources were no longer sufficient for providing tax revenue. The income tax was gradually adopted by cities and counties in the mid-century and was eventually imposed on 4,964 taxing jurisdictions.
Local income tax rates are typically 1 to 3 percent, and exist in various forms including wage taxes, payroll taxes, local service taxes, and occupational privilege taxes. Maryland leads in local income taxes, which claim 2.28% of adjusted gross income on average in the state, accounting for one third of local tax collections.
The local income tax can be levied against all income, earned income, or interest and dividend income. The tax is levied by counties, municipalities, school districts, and special districts. The complexity of these tax systems can create a significant compliance cost for local businesses. Some cities charge businesses a weekly flat rate per employee. Sometimes commuters are charged local income taxes for their work district, and other times they are exempted because they do not receive the full benefit of the local tax. Yonkers, New York has a confounding policy in which residents pay 16.75% of their state tax as a “piggy-back” local tax.
The majority of local income taxes are imposed on cities and towns in the Rust Belt and the Northeast. Unsurprisingly, local taxes have been imposed in notoriously high-tax states like New Jersey, New York, and California.
Those paying high local income taxes were impacted by the implementation of the limit on State and Local Tax Deductions (SALT) in 2018. The $10,000 cap meant residents of high tax states would not be able to pass on the burdens imposed by their local and state governments. It is impossible to ignore the cost of income tax stacked atop sales tax stacked atop property tax (and so forth).
Instead of complaining at the federal government, these taxpayers should focus on the state and county legislatures, and city councils who have created the tax burdens they are no longer getting a discount on.
Local income taxes could be used to replace other local taxes, like property taxes, but instead more often get piled on top of already lengthy tax bills to make life a living tax hell for families and businesses.