Over 213 million tax returns were filed electronically for the 2022 tax year, according to the IRS. An overwhelming amount of people are choosing to file electronically. This is in part due to the convenience that e-filing offers and as a way to navigate the increasingly complex tax code, from the federal level all the way down to the local level.
Local governments play a crucial role in maintaining infrastructure, public safety, education, and more. To fund these essential services, municipalities rely on various types of taxes. Knowing these different types of taxes not only aids in compliance but also in understanding how local governments sustain their operations.
Here’s a comprehensive look at some different types of local government taxes, from the most common to the lesser-known.
Sales Tax
One of the most recognizable on this list, sales tax is typically levied as a percentage of the purchase price of goods and, in some municipalities, of services. Sales tax is generally collected at the point of sale. Sales tax is often a primary revenue source for local governments. The funds may be used for general purposes or could sometimes be earmarked for specific projects. Sales tax is often a good indicator of local economic conditions and trends since more spending leads to more sales tax revenue and less sales tax means less spending power by the community.
Tourism Tax
Similar to the lodging tax but broader in scope, tourism taxes can be levied on various leisure and tourism-related services. This can include everything from attraction entry fees to restaurant bills. Tourism taxes help ensure that the influx of visitors, which might strain local resources, also brings in revenue to support those resources. The tax can fund tourism promotion, historical preservation, or other projects enhancing the area's appeal. Tourism hotspots, like Florida, generated more than $13 billion dollars in the 2021 fiscal year thanks to tourism taxes.
Lodging Tax
Sometimes known as a resort, bed, or occupancy tax, this type of tax is levied on visitors when they rent accommodations within a municipality. Local governments often use lodging taxes to support services or infrastructure that cater to tourists. This includes things like convention centers, tourism promotion, and funding cultural events. A lodging tax ensures that visitors, who utilize local resources, contribute to their upkeep.
Occupational Tax
Occupational taxes are typically levied on businesses operating within a municipality. This tax can be based on a company's revenue, number of employees, or any number of metrics. By taxing businesses, local governments can generate revenue from entities that benefit from the local infrastructure, workforce, and consumer base. The proceeds often go into general funds, supporting public services and fostering a business-friendly environment.
Payroll Tax
The payroll tax can also be quite the chameleon, adopting alternative names like income tax or occupational tax, depending on the jurisdiction. Some local governments, especially in larger municipalities, like New York City, impose their own income taxes on residents' earnings. But even smaller municipalities have a payroll tax. In fact, each county in Indiana has its own income tax. Rates for this tax can vary based on income levels.
Excise Tax
These are specific sales taxes on particular goods, like alcohol, tobacco, or gasoline. They are usually levied per unit, like per gallon or pack, rather than as a percentage of the price. Excise taxes often serve dual purposes. They generate revenue and can act as disincentives for the consumption of certain products, like tobacco or alcohol.
Utility Tax
A utility tax is a tax on utilities such as water, electricity, or telecommunications. These can be a flat fee or a percentage of the bill. Utility taxes ensure that those using public resources or infrastructure, like water or roads for cable lines, contribute to their maintenance and expansion.
Motion Picture Theater Admission Tax
Lights, camera, tax ‘em! One of the less common local taxes, this one requires moviegoers to pay an additional fee on top of their movie ticket purchase, with the proceeds going to bolster arts and culture initiatives. This tax can help serve as a lifeline for cultivating an arts-friendly community.
Soda Tax
Capping off the list with another less common tax, some municipalities levy a soda tax where the aim is both to generate revenue and discourage the consumption of unhealthy, sugary drinks. The end goal of this tax is to take steps to address public health issues like obesity. Cities like Philadelphia have a local tax of 1.5 cents per ounce sold.
Successfully Navigate the Different Types of Local Government Taxes
Local government taxes are more than just obligatory payments. They are an investment into the community, ensuring a steady flow of funds to sustain, improve, and grow local amenities and services. Municipalities that recognize the nuances of these taxes are able to have a deeper understanding of their importance and the pivotal role they play in the community’s overall health and development.
Having one streamlined system that automates the collection of a variety of different local taxes can save your municipality significant time and resources throughout the year.
