The local tax system in the United States has evolved in response to changes in the role of government and society. The types of local taxes collected, the purpose they serve, and their relative proportions have evolved considerably over the past 200 years. The changes in tax laws can be attributed to both historical events such as wars or changes in sociological patterns. To illustrate the evolution of tax laws in America we will examine the significant periods of United State’s history.
Before America was established as a free country, the federal government rarely had contact with the individual tax payer. Federal tax revenues were acquired through tariffs and excise taxes. With the Revolutionary War looming, the individual colonies acted as the primary authority on enforcing tax laws. When responsibilities expanded the colonies grew more desperate for money, and new forms of taxes were imposed on their citizens. The southern colonies instituted a form of sales tax where all goods, imports, and exports were subject to taxation.
The middle colonies imposed a property tax on its citizens, along with a “head tax” which was levied on each adult male. New England colonies imposed a more “modern” tax system where individuals were taxed based on their occupation, and the amount of land they owned. Taxation during Colonial Times were a factor in starting the Revolutionary War. England imposed taxes on colonists to raise revenue for its war with France. Colonists were forced to pay taxes to England but failed to receive representation in the English Parliament. The series of unjust taxes led to the famous rallying cry, “taxation without representation is tyranny.”
Post Revolutionary Era
Adopted in 1781, the Articles of Confederation delegated political power to the individual states. Americans feared that a strong central government would abuse its power, and lose site of the principles that the Revolutionary War instilled. During this era, the federal government did not impose a nationwide tax, and was only given funds through state donations. According to the Articles of Confederation, each state was its own sovereign entity and could impose tax as it pleased.
This localized tax system was shortly lived; the founding fathers addressed the need to tax on a federal level when the constitution was adopted in 1789. To raise money for the War of 1812, and to pay off the debts imposed by the Revolutionary War, the federal government issued direct taxes on goods such as land, tobacco, sugar, and alcohol.
The Civil War
The local tax systems imposed by the Union and Confederate armies were a major factor in deciding the outcome of the Civil War. To sustain the fight, both sides needed to levy its citizens with a series of local taxes. Local and state governments administered all tax obligations for the Confederate army. Based on a belief of smaller government or a culture that hated taxes, the citizens of the south enjoyed one of the lightest tax burdens for a contemporary society.
Congress applied a .5% tax on all property and land, which was to be paid to the local governments. Similar to the scenario that played out during the Revolutionary War, the individual states refused to collect the money, opting to raise funds through borrowing or printing notes. Failure to collect the funds resulted in an ineffective local tax system, and the Confederate states were soon burdened with inflation and a financial drought.
As oppose to the South which raised the majority of its funds through loans, the North enjoyed a highly succinct tax system led by a progressive federal income tax. The North refused to rely on local governments to collect taxes, and instead imposed numerous federal regulations to collect funds. With a developed industrial base, and an established treasury and tariff structure the North proved to sustain itself financially over the course of the war.
World War I and the Great Depression
Many states faced financial problems relative to World War I. Industry workers abandoned their posts to go fight in the war, leaving the states with a lack of production and large employment gap. In 1911, Wisconsin was the first state to adopt a local income tax. Shortly thereafter New York, Pennsylvania and Massachusetts adopted a similar tax to curb the mounting costs driven by the War. When the Great Depression shattered our economy in 1929, the majority of other states instituted the same policy.
World War II
During World War II local taxes were decreasing or remaining stable as spending was widely cut back. America was fighting two wars, and the need to build domestically was nonexistent. The majority of state revenue was obtained through the administration of excise taxes. Taxes on cigarettes and motor fuel dominated state revenues during the early 40’s. Following the war the necessity to expand was reversed as local governments increased tax collection to take advantage of rising property value. The populations for many communities was booming.
This drastic increase offered numerous positive externalities on society, as new communities formed through an expansion in the work force. Industrialization sparked a movement towards production, and many Americans decided to buy homes and raise families. The economic boom and the constant demand for land caused property taxes to rise dramatically. Due to this increase revenues for local governments were spiking.
When the tax rates increased many Americans were forced to sell their homes as a result of the financial strain imposed by such rising rates. This development soon sparked an innovation in the levying of taxes, in the form of tax caps and regressive tax systems.