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Taxation at Different Levels of Government

Taxation at Different Levels of Government

Taxation at Different Levels of Government: Understanding the Power and Responsibilities of Each

Taxation is a crucial aspect of any government-operated economy. It is the lifeblood that fuels the government’s ability to provide essential services and infrastructure to the public. Taxation can take many forms, including income tax, sales tax, property tax, and others. The amount and type of taxes vary from place to place, depending on the level of government that issues them.

Each level of government – federal, state, and local – has its power to impose taxes. In this article, we will discuss the different levels of taxation in the U.S. and their respective responsibilities and powers.

Federal Taxation

The federal government has the broadest authority to levy taxes. The Constitution gives Congress the power to “”lay and collect taxes, duties, imposts, and excises.”” The federal government’s primary sources of revenue come from income taxes, payroll taxes, corporate taxes, and excise taxes.

Income Taxes

The federal government imposes income taxes on individuals and corporations. The U.S. uses a progressive tax system, meaning the more money you earn, the higher percentage of your income is taxed.

According to the Internal Revenue Service (IRS), the top marginal tax rate (the tax rate on the highest taxable income) for individuals is 37 percent. The highest tax rate applies to those who earn over $523,600 annually. The lowest tax rate for individuals is ten percent, and that applies to people earning less than $9,950 per year.

Payroll Taxes

Payroll taxes fund two significant social insurance programs: Social Security and Medicare. Social Security provides retirement benefits for American workers, and Medicare provides healthcare to seniors. Employers and employees equally share these taxes on an individual’s wage or salary income. The current Social Security tax rate is 12.4 percent, and the Medicare tax rate is 2.9 percent.

Corporate Taxes

Corporate income tax is another significant revenue source for the U.S. government. Corporations pay taxes on the income they earn. The U.S. corporate tax rate is 21 percent.

Excise Taxes

Excise taxes are taxes on specific goods and services. Examples of taxable items include gasoline, tobacco products, alcoholic beverages, and firearms. Excise taxes are sometimes referred to as “”sin”” taxes because they are levied on goods that are considered harmful, such as tobacco and alcohol.

State Taxation

States also have the authority to levy taxes, but their powers are more limited than the federal government’s powers. The constitutions of each state grant their respective legislatures the power to impose taxes and regulate revenue collections. The primary sources of revenue for state governments are sales taxes, income taxes, property taxes, and excise taxes.

Sales Taxes

Sales taxes are a significant source of revenue for many states. These taxes are levied on most goods and services sold within the state. Sales tax rates and the types of goods and services exempted from sales tax vary widely from state to state.

The average state sales tax rate is 6.0 percent, but some states have a higher rate. For instance, California, Louisiana, and Tennessee have state sales tax rates of 7.25 percent, 9.98 percent, and 7.0 percent, respectively. Some states also allow local governments to add additional sales taxes on top of the state rate.

Income Taxes

Most states impose income taxes on individuals and corporations. State income tax rates and the types of income subject to taxation vary from state to state.

Some states like Texas, Florida, and Nevada do not have state income tax. They rely on revenue from sources like sales tax. California, on the other hand, has ten marginal tax rates ranging from 1 percent to 13.3 percent.

Property Taxes

Property taxes are taxes levied on the value of property within a given state’s jurisdiction. The state government sets property tax rates, and the local government collects the revenue. Property tax rates vary significantly from state to state.

In 2019, New Jersey had the highest effective property tax rate at 2.21 percent, while Hawaii had the lowest rate at 0.37 percent.

Excise Taxes

Excise taxes are also a significant source of revenue for some states. Like the federal excise tax, state excise taxes are levied on specific goods and services.

For example, New York State taxes cigarettes, gasoline, and alcohol, among others. New Jersey has excise taxes on alcohol and tobacco.

Local Taxation

Local governments, including counties, cities, and towns, also have the power to impose taxes. These taxes are separate from state and federal taxes and are used to fund local services and infrastructure.

Property Taxes

The primary form of local taxation is the property tax, which is used to fund schools, public works projects like roads and bridges, and public safety services like police and fire departments.

The local government, like counties and cities, assesses and sets property tax rates. Property taxes vary widely depending on the municipality, and local governments provide exemptions and credits for low-income homeowners and seniors.

Sales Taxes

Some local governments levy additional sales taxes on top of state sales taxes.

For example, in Chicago, the combined state and local sales tax rate is 10.25 percent, consisting of a 6.25 percent state sales tax and a 4 percent city sales tax. Other municipal taxes, such as a local restaurant tax or hotel occupancy tax, may also be levied.

Income Taxes

Some local governments, like cities or school districts, may impose income taxes on top of state income taxes. These taxes are rare in the U.S. and are typically used to pay for specific projects or services.

For example, in Ohio, some school districts have levied income taxes to attract and retain quality teachers.


In summary, taxation is implemented at different levels of government in the U.S., including federal, state, and local. Each level of government has the power to impose taxes, and the type of tax and rates applied vary from level to level.

Federal taxation is the broadest and includes income, corporate, payroll, and excise taxes. State taxation is the next level and includes sales, income, property, and excise taxes. Finally, local governments levy property, sales, and income taxes to fund local services and infrastructure.

Understanding which level of government collects taxes and what they are used for helps taxpayers understand how their tax dollars are spent and how they can take advantage of tax credits and exemptions. Knowing these taxes and what they fund can also aid individuals who are planning to move or work in a particular state, allowing them to better understand the financial implications of their decisions.

The Federal Constitution of the United States established the right of the government to impose taxes on its citizens to provide the necessary services and functions of a state government. The Constitution itself established the system of taxation for the federal government. The tenth amendment of the Federal Constitution states that whatever is not expressly prohibited by the Federal government will be left to the states to decide. At the inception of the 13 state governments of the United States, each state drafted their own
state constitutions and included taxation laws to provide citizens with the services that state and local governments can provide.

The Federal Constitution, prior to 1913, stated that neither the federal government nor state or local governments can impose direct taxes on the people. A direct tax is any tax that taxes individuals personally based on the value of someone’s possessions. Examples of direct taxes are property taxes and income taxes. Indirect taxes were historically what state, local, and federal governments depended on as a means of gaining revenue to balance their budgets and provide services to the public. Indirect taxes include sales taxes, court
fees, and added-value taxes. Indirect taxation places the tax burden on the good or service offered rather than the individual him or herself.

The American Revolution is well known to be fought in response to the imposition of unfair taxes without adequate political representation. The Revolution was not a rebellion against the institution of taxation itself but a rebellion against the fairness of taxation. The first American tax rebellion, after the establishment of the US and before the modern Constitution, occurred as a result of unfair state and local taxes in the Commonwealth of Massachusetts. In 1786, Daniel Shays and his group of angry farmers were foreclosed upon due to high taxation and high court fees from the state and local governments. The taxes and fees were high in Massachusetts because the debt from the Revolutionary War was to be handled on an individual basis under the Articles of Confederation. The Rebellion resulted in a skirmish between rebel and state militias. George Washington called for the execution of all 150 farmers who participated. Daniel Shays escaped to Vermont and was pardoned. Shays’ Rebellion showed the inherent weakness of a government that overemphasized state and local government. This is the most common perspective on  the narrative of Shays’ Rebellion; however, the Rebellion speaks volumes of the necessity to make taxation as fair and equitable as possible. It also addressed
the need of a strong federal government to carry the debt burden along with the other states. The Constitution strengthened the unity of the United States.

At the state and local level, governments have since attempted to solve the problem of what exactly constitutes fair and equitable taxation without jeopardizing a government’s necessary revenue stream. States can choose to lower or raise their tax rates. States can choose what consumer items are applicable to the imposition of sales taxes. For example, may not have a state income tax but impose sales taxes on all food products in lieu. The State of New Jersey does not impose sales taxes on clothing; while, just across the Hudson, the State government of New York does. It all depends on a state’s political philosophy of taxation. Each state and the District of Columbia have their own tax code, which contributes to the diversity of rights and privileges of being a resident of one state over another. A state may not, however, nullify any federal tax without violating the federal constitution.