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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 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.
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.
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