SOURCE:
1977 Wisconsin Department of Revenue; Bureau of Local Fiscal information and
analysis; Reference Publication - "State
& Local Finance"
Before
attempting to evaluate various local income tax proposals in terms of the
criteria defined in Part I, it would be useful to review local income taxes as
they have been used in other states and to identify the key dimensions along
which they vary. The oldest city income tax is Philadelphia’s adopted in 1939.
Their success, in terms of raising revenue, led to numerous other
localities adopting the tax since that time.
There are currently ten states (plus the District of Columbia) where
local units of government levy income taxes.
Within
these states, over 4,200 jurisdictions levy the tax. However, all but 100 or so
of these jurisdictions are in two states: Ohio and Pennsylvania. The percentage
of state population covered by local income taxes varies from 100% in
Pennsylvania and in Maryland (where it is mandatory) and 65% in Ohio, to a
quarter of the population or less in Missouri, Indiana and Alabama.
Local
income taxes can be very productive of revenue.
In Canton and Springfield, Ohio, they produced about 80% of all local tax
revenues in 1971-72. For other localities, the proportion is typically in the
25% to 50% range. The term "local
income tax" is used in this paper, and in most discussions
elsewhere, rather loosely to refer to all varieties of local taxes on earnings
or income, variously defined. In fact,
the typical tax is not on full income but rather is a proportional tax on
earned income only, or "earnings," which is usually defined as wages
and salaries and other employee compensation plus the net income of
unincorporated enterprises, including the income of self-employed professionals,
small businesses, and rental income of property owners.
Excluded are dividends, interest and capital gains.
The
principle feature of local income taxes as practiced in the 10 states and the
District of Columbia are summarized in Table 1 on the following page. The
seven major features about which decisions on options must be made are labeled
(A) through (G): (A) the type of
jurisdictions levying the tax and receiving the revenues, (B) the tax base, (C)
the tax rate structure, (D) the degree of local choice with respect to rates,
(E) the taxation of non-residents, (F) the level of government administering the
tax, and (G) the taxation of corporate income. These are discussed below.
(A)
The Type of Jurisdictions Levying the Tax.
In most states, the tax is levied by municipalities.
Pennsylvania permits school districts
to levy the tax as well. In
Maryland the tax is levied by county
governments (for their own use). In Indiana, the county government
levies the tax but the revenues are distributed to all local governments within
the county (including school districts and special districts) in proportion to
the local units' share of total property tax revenues collected by all local
governments in the county. The local income tax
in Indiana is part of a state tax program aimed at providing property tax
relief, and is combined with levy limits which freeze the property tax rate or
property tax revenues at the 1973 level.
Some other options might
be: (1) a tax levied by county governments and shared by the county and the
constituent municipalities, (2) a municipal income tax adopted by county
referendum at uniform county-wide, rates, and (3) a county-wide income tax
returned to school districts on basis of
origin or a redistributive
formula.
(B)
Taxation of Corporations. The Local Income Tax in five states
and the District of Columbia includes a tax on the net income of corporations.
In four states corporate income is not taxed, and in Ohio the practice varies,
there being no uniform state requirement.
Where the tax on individuals is a flat rate (applied to earnings or income) the
same rate is generally applied to corporate income.