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State and Local Taxes

 

Ever since the beginning of our history, the states have maintained the right to impose taxes. The Federal Government has always recognized this right. When our Constitution was adopted, the Federal Government was granted the authority to impose taxes. The states, however, retained the right to impose any type of tax except those taxes that are clearly forbidden by the United States Constitution and their own state constitution.

Today, the states acquire the necessary revenue to maintain their governments through tax collection, fees, and licenses. The Federal Government also grants money to the 50 states. With the revenue that the states receive from the Federal Government, taxes, licenses, and fees, they provide public services to their citizens. Examples of these public services are public schools, police protection, health and welfare benefits, and the operation of the state government.

Among the common types of taxes that many states impose are personal income tax, corporate income tax, sales tax, and real property tax. Throughout the 1930s and 1940s, personal income tax and sales tax were introduced in many states because additional revenue was needed to finance public services.

Real property tax has, however, a long history. In 1646, the Massachusetts Bay Colony began taxing settlers who owned property. After independence, many states started to tax property. As time passed, local communities took over the power to tax property. Today, property tax is usually paid to a local government, a school district, a county government, or a water district, but not to a state.

Personal Income Tax

History shows that it was the states that introduced personal income tax into America. The first modern personal income tax system was originated in 1911 by the State of Wisconsin.

Today, most of the states require their residents to pay a personal income tax. These states generally use one of two methods to determine income tax. These two methods are the graduated income tax and the flat rate income tax, and both methods first require the taxpayer to figure his or her taxable income.

State Sales Tax

A sales tax is a tax levied on the sale of goods and services. Very often you pay sales tax when you purchase something. There are three different types of sales tax: the vendor tax, the consumer tax, and the combination vendor-consumer tax.

Vendor Tax

A vendor tax system taxes the person doing business. This tax is imposed by some states because they consider that it is an individual's privilege to be engaged in business. The tax is based upon the amount of goods sold. For example, if you owned a record store, you would be taxed by your state for the right to sell records to the public. The amount of tax you paid would be based upon how many records you sold.

Consumer Tax

A consumer tax system taxes the retail sale. The vendor at a store collects the tax from the buyer and then sends the tax money to the state. For example, if you bought a record album, you would pay a tax in addition to the record price.

Combination

A combination vendor-consumer system taxes the vendor (the owner of the record store) who then is required to pass the tax on to the consumer (the person who buys the record). From the standpoint of the consumer, a combination vendor-consumer sales tax appears identical to a consumer sales tax. The consumer pays a tax in addition to the sale price.

Sales Tax, A Regressive Tax

All states that apply a sales tax have an established rate. This established rate can pose problems. All people, no matter how much money they earn, pay the same percentage of tax. Such a tax is called a regressive tax because the people with smaller incomes pay a larger percentage of their money into the sales tax system than people with higher incomes. However, since all of us use state services, such as state highways, state public schools, and state medical institutions, all should pay a tax for using these services.

Exclusions and Exemptions

To help those groups that are adversely affected by a regressive sales tax, exclusions are often used by the states that levy a sales tax. Exclusions in sales tax often include food, clothing, medicine, newspapers, and utilities. For example, since food is a necessity, some states do not tax food.

In addition, certain groups are often exempt from paying sales tax. Charitable, religious, and educational groups are often excused from paying sales tax under certain circumstances. A large portion of a state's sales tax revenue goes towards education, the running of the state government, and public welfare. Because of this, many states consider sales tax to be the most important tax they impose.

Use Tax

In addition to the sales tax, many states also have a use tax. A use tax is very similar to a sales tax and is imposed for the storage, use, or purchase of personal property which is not covered by the sales tax. Usually, it is applied to lease or rental transactions, or to major items purchased outside of the state, such as automobiles.

Property Tax

The revenue from property taxes usually goes towards financing public services, such as public schools, police protection, and sanitation. The amount of tax to be paid is figured on the total value of the property or on a certain percentage of the value. People usually pay property tax to the county, school district, local government, or water district. It is, however, the state that establishes the guidelines under which local government can impose property taxes.

Each of the 50 states have different definitions of property that is to be taxed. Some states allow local communities to tax real property. Real property consists of land and items that are permanently attached to the land. Examples of real property are homes, factories, wharves, and condominiums. Other states also permit local governments to tax personal property. Personal property is property that is not real property. Examples of personal property are boats, cars, jewelry, airplanes, computer, equipment, tools, and furniture.

Other State Taxes

In addition to personal income tax, sales tax, and property tax, there are other taxes that states may impose, including fuel tax, inheritance tax, and corporate income tax.

Fuel Tax

Every state imposes a liquid fuel tax on gasoline and diesel fuel purchased within the state. Most often the tax on gasoline and diesel fuel is a cents-per-gallon tax. The tax rates vary from state to state, but the concept remains the same. Liquid fuel taxes are collected by the distributor. The distributor must then submit the tax revenue to the state government.

Liquid fuel taxes are user taxes. A user tax is paid by those people who will most directly benefit from the service it pays for. Because money is required to build and maintain highways and roads, the idea is that drivers who use state highways should pay for them through taxes.

As with other state taxes, certain groups are exempted from paying tax on gasoline consumption. For example, volunteer fire companies and governmental units are often exempted from paying gas taxes. Gasoline taxes are often refunded to farmers for gasoline used in their farming operation.

Inheritance Tax and Estate Taxes

Inheritance tax is a tax that is imposed on the transfer of property after the owner's death. Under the inheritance tax system, the beneficiary of the property must pay the tax. As with a state personal income tax system, the inheritance tax will be determined by the flat rate method or graduated rate method. Most states impose an inheritance tax.

Estate tax is different from inheritance tax in that estate tax is imposed on the entire estate of the individual. The federal governmnet and some states use the estate tax system.

Corporate Income Tax

Most states impose a corporate income tax, which makes corporations subject to income tax just as individuals are. As with state personal income tax systems, state corporate income tax system use the graduated method in some states and the flat rate method in others. Some states purposely keep their corporate income tax rates lower than other states as part of their business incentives. These incentives also include certain tax exemptions. They are designed to attract new businesses to these states.

Last Updated: 12/5/2010 10:24 AM