Local Income and Wage Taxes Continue to Wane
September 12, 2011
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, say Joseph Henchman and Jason Sapia of the Tax Foundation.
- While most U.S. cities and counties do not impose a local income tax, 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, 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.
- In Ohio, 593 municipalities and 181 school districts have such a tax.
- In Pennsylvania 2,469 municipalities and 469 school districts impose local income or wage taxes.
- Many cities and school districts in Iowa and Michigan also have these 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.
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, say Henchman and Sapia.
Source: Joseph Henchman and Jason Sapia, "Local Income Taxes: City- and County-Level Income and Wage Taxes Continue to Wane," Tax Foundation, August 31, 2011.
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