Sources of Revenue for Local Government

Major Sources of Revenue for State and Local Government

The major sources of revenue for state governments differ depending on whether a state has a state income tax. While all workers pay federal income tax, not all states have a state income tax. States that are considered liberal, such as California, tend to have a state income tax, while states that are considered conservative, such as Texas, tend not to have a state income tax.

The amount paid in state income tax is deductible from federal income tax, meaning citizens in states with an income tax are not subject to double taxation.

These taxes are proportional or flat, meaning a fixed per-dollar tax is applied based on the property's value and does not change based on the total value. Sales taxes, which are used for all non-essential purchases, are also proportional. Therefore, both low-income and wealthy individuals pay the same rates on property and sales taxes.

State governments are also heavily supported by federal grants. This source of revenue is also known as intergovernmental revenue, and it refers to the flow of money from one level of the government to the other.

Grants, which do not have to be repaid, give money to help state and local governments provide public services. However, to receive the grants, the state and local governments must meet federal guidelines and fully detail their current and proposed use of grant funding.

The local government also benefits from some of the revenue that flows to the state government. One of the most significant sources for local government is money from intergovernmental transfers from the state government. Another critical source of revenue is property tax, utility, sales taxes, etc.

Two Sources of Revenue for Local Government

Two sources of revenue for local government include property taxes and intergovernmental revenue. Although states can levy (use or impose) income taxes, local governments cannot. Local governments can, however, directly impose their own property and sales taxes.

Property taxes are levied independently, while sales taxes for local governments are added to those levied by state governments in almost all states. Usually, states set a maximum local sales tax, meaning cities and counties can collectively add sales tax increments up to this ceiling.

Intergovernmental transfers are another source of revenue for local governments. This revenue comes from the state governments and is usually used to improve education and build public welfare.

Property tax, pixabay

Largest Sources of Revenue for Local Government

The largest sources of revenue for local governments include intergovernmental revenue, property taxes, utility revenues, sales taxes, and other sources of income.

• Intergovernmental revenue is the local government's money from state or federal government grants. This is one of the largest sources of revenue for local governments.
• Property taxes refer to the local tax government imposes on tangible and intangible assets held by the residents. Property taxes rank as the second-largest revenue for local governments.
• Utility revenue refers to the local government's revenue for offering public utilities such as water, electricity, gas, etc. Although the provincial government does not profit much from providing these services, it's one of the largest sources of revenue.
• Sales taxes refer to the amount of money the local government receives when a sale transaction occurs. Although it has a lower sales tax than the state government, it is still the fourth-largest source of revenue for local governments.
• Other revenue sources include other streams of revenue that the local government might receive. For instance, they can receive income from engaging in debt, such as selling municipal bonds.

Sources of Revenue for Local Government in the USA

Like in many other places, the sources of revenue for local government in the USA include intergovernmental revenue, property taxes, utility revenues, etc.

Property tax and transfer payments from state and federal governments are the largest revenue source for local governments in the USA.

Property tax funding is reallocated among local government districts in some states to ensure equitable funding.

Low-income areas would have insufficient funds for government services if they had to rely solely on local property taxes due to a weak tax base. By contrast, wealthy suburbs have strong tax bases but less need for government grants due to greater reliance on private schools and personal transportation and little need for welfare programs or public health clinics.

Local governments are unique because many provide public utilities like water, trash collection, natural gas, and electricity. Although the sale of utilities raises lots of revenue, this funding is usually not intended for general use by other government agencies.

The municipality only charges enough to cover its costs by providing utilities on a not-for-profit basis, meaning there is no net profit to local governments for providing these services. However, providing these services may give local governments greater ability to help lower-income residents or develop struggling areas by providing discounted services.