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1 Jared Walczak, et al., Local Income Taxes: A Primer 1 (2023)

handle is hein.taxfoundation/lclicmetx0001 and id is 1 raw text is: Local Income Taxes: A Primer Jared Walczak Vice President of State Projects Janelle Fritts Policy Analyst Maxwell James Research Assistant FISCAL FACT No. 808 Feb. 2023 Key Findings The Tax Foundation is the nation's leading independent tax policy research organization. Since 1937, our research, analysis, and experts have informed smarter tax policy at the federal, state, and global levels. We are a 501(c)(3) nonprofit organization. ©2022 Tax Foundation Distributed under Creative Commons CC-BY-NC 4.0 Tax Foundation 1325 G Street, NW, Suite 950 Washington, DC 20005 202.464.6200 taxfoundation.org Although most states forgo local income taxes, they are a significant source of local tax revenue in six states and at least a modest source of revenue in 10 others. Some use state definitions of income, while others define income separately or make modifications to the state base. Localities that piggyback on the state definition of income and rely on the state for collection and administration see a smaller administration burden. Localities that define income and collect the tax on their own increase administration costs for themselves and the compliance burden for taxpayers. Eight states (Alabama, Colorado, Delaware, Kansas, Kentucky, Missouri, Pennsylvania, and West Virginia) use the direct collection method of local income tax administration. Four states (Indiana, Iowa, Maryland, and New York) use the piggyback method. Four states (Minnesota, New Jersey, Ohio, and Oregon) use a combination of the two by either adopting the state income definitions and collecting the tax on the local level. While municipalities may be tempted to use an income tax to bring down property taxes, experience suggests that such swaps can often lead to higher overall tax burdens. To the extent that localities choose to impose local income taxes, they should be imposed at low rates, with uniform definitions and sourcing rules across the state. Ideally, they should be administered at the state level to reduce both compliance and administrative costs.

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