Topic:
LEGISLATION; INCOME TAX; MUNICIPALITIES; STATISTICAL INFORMATION;
Location:
TAXES - INCOME;

OLR Research Report


November 17, 2005

 

2005-R-0860

LOCAL INCOME TAXES

By: Judith Lohman, Chief Analyst

You asked (1) whether cities, towns, or counties in other states can impose local income taxes, (2) how those taxes work, and (3) who administers them. You also asked if any bills have been introduced in Connecticut to allow towns to levy local income taxes and, if so, what happened to those bills.

SUMMARY

Ten states allow one or more of their local government entities (cities, counties, or school districts) to levy local income taxes. In five states (Indiana, Maryland, Michigan, Ohio, and Pennsylvania), local income taxes apply in most or all parts of the state. The other five states (Alabama, Delaware, Missouri, New York, and Oregon) have local income taxes in only one or two of their largest cities or counties.

All 10 of the states also have state income taxes. Most of the local taxes are tied to their state's income tax. The most common overlapping provisions are income definitions and credits and deductions. Maryland's county taxes are the most closely linked since they are “piggybacked” on, or figured as a percentage of, state tax liability.

Local income taxes are typically administered and collected by the local taxing jurisdiction. Only in Maryland and New York (in the case of Yonkers, but not New York City) does the state collect the tax on the localities' behalf.

A search of legislation introduced in the Connecticut General Assembly since 1991 (the year the state income tax was first enacted) shows only one bill that would have authorized towns and certain regional entitled to impose local income taxes. It would also have authorized these local entities to impose other local taxes, including sales and transaction taxes.  Although this bill was reported favorably by the Planning and Development Committee in the 1997, it died after referral to the Finance, Revenue and Bonding Committee

 Two other bills, one introduced in 1995 and one in 2005, would have required the state to return a portion of state income taxes paid by the taxpayers of each municipality to that municipality. Neither received a public hearing and both died in the Finance, Revenue and Bonding Committee.

LOCAL INCOME TAXES

Table 1 below summarizes three aspects of local income taxes in the 10 states. They are: (1) the types of income and taxpayers the tax applies to; (2) tax rates; and (3) any credits, exemptions, or deductions allowed. The information comes from the Commerce Clearinghouse (CCH) Internet Tax Research Network and from state and local government websites.

Table 1: Characteristics of Local Income Taxes in Other States

ALABAMA - Birmingham

Applies To

Rate(s)

Credits, Exemptions, Deductions

Gross receipts of people engaged in a trade, occupation, or business in Birmingham. Employers must withhold the tax from employee compensation.

1%

None

DELAWARE - Wilmington

Applies To

Rate(s)

Credits, Exemptions, Deductions

● Wages, salaries, and commissions earned by Wilmington residents or for work within Wilmington by nonresidents

● Net profits in businesses, professions and other activities by city residents or within the city by nonresidents

1.25%

The following income is exempt:

● Social Security, retirement, pensions, and qualified and nonqualified retirement plans

● Sick or disability benefits

● Workers' compensation benefits

● Unemployment compensation benefits

● Active military service pay

● Federal or state bonuses for active military service

● Death benefits

● Life insurance proceeds

● Gifts and bequests

● Interest and dividends

● Scholarships

● Board or lodging provided to employees for the convenience of the employer

● Employer-paid premiums for up to $50,000 in life insurance coverage for an employee

● Moving expense reimbursements

● Reimbursed employee business expenses

● Employer matching contributions to a deferred compensation plan

● Flexible spending accounts not included in federal gross income

INDIANA

Indiana counties and municipalities may levy up to four different income taxes at various rates, within certain limits set by state law.

Indiana County Adjusted Gross Income Tax

Applies To

Rate(s)

Credits, Exemptions, Deductions

Adjusted gross income (AGI) for Indiana state income tax

● Residents – 0.5%, 0.75%, or 1.0%

● Nonresidents – 0.25%

● Certain counties may impose additional temporary tax increases for specific purposes under certain conditions

Same as state income tax

Indiana County Option Income Tax

Applies To

Rate(s)

Credits, Exemptions, Deductions

AGI for Indiana state income tax

● Residents - initial rate of 0.2%, automatically increasing by 0.1% per year up to 0.6% and then to a maximum of 1% in 0.1% annual increments upon passage of county ordinance

● Nonresidents - 25% of rate in effect for residents

● Two specified counties may increase their rates by up to 0.25% to pay for building and equipping new county jails

● State income tax percentage credit for homesteads, up to a maximum of state credit plus 8%

● Taxes paid to local government entities outside Indiana

Local tax credit to match federal income tax credit for elderly or totally disabled

Indiana County Economic Development Tax

Applies To

Rate(s)

Credits, Exemptions, Deductions

AGI for Indiana state income tax. The tax covers those who live in the county and those who maintain a principal place of business in the county and who do not live in another county that imposes the economic development tax.

0.1%, 0.15%, 0.2%, 0.25%, 0.3%, 0.35%. 0.4%, 0.45%, or 0.5%. The tax rate plus any county adjusted gross income tax rate cannot exceed 1.25% and the tax rate plus any county option income tax rate cannot exceed 1.0%, except under certain conditions and for certain purposes.

None

Indiana Municipal Option Income Tax

Applies To

Rate(s)

Credits, Exemptions, Deductions

Cities in Lake County. The tax base is the AGI of resident and nonresident municipal taxpayers. The municipal tax may not be imposed when any of the county taxes described above are in effect. No municipal tax may continue in effect after 2005.

Maximum of 1% on city residents, and 0.5% on nonresidents.

● Prorated share of the federal elderly or disabled tax credit

● Amount of income tax imposed by a governmental entity outside Indiana on income derived from sources outside Indiana and subject to the municipal option tax

MARYLAND

The state allows counties to impose surtaxes on state taxable income. State credits, deductions, and exemptions are thus incorporated into the local taxes. All 23 counties and Baltimore impose a local income tax. The state collects the tax and remits the revenue to the local authorities.

Applies To

Rate(s)

Credits, Exemptions, Deductions

(1) Residents of the taxing county; (2) representatives of estates when the decedent lived in the taxing county on the day he died; (3) fiduciaries of trusts principally administered in, or connected to, the taxing county; and (4) nonresidents deriving income from salary, wages, or other compensation from personal services or employment in the taxing county.

1.25% to 3.2% of Maryland taxable income. Annual rate increases are limited and subject to conditions.

None

MICHIGAN

The state allows cities to levy a local income tax if they adopt the uniform city income tax ordinance. Twenty-two Michigan cities have adopted the ordinance.

Applies To

Rate(s)

Credits, Exemptions, Deductions

● Residents - all income

● Nonresidents - income arising from sources in the taxing city

● Corporations - net profits attributable to business activity in the taxing city

● Generally, maximum rates are 1% for residents; 1% for corporations; and, for nonresidents, 50% of whatever rate applies to residents.

● In Detroit, the maximums are 2.5% for residents, 1.25% for nonresidents, and 1% for corporations.

● In Highland Park, maximums are 2% for residents and 1% for nonresidents.

In Saginaw and Grand Rapids, maximums are 1.5% for residents, and 0.75% for nonresidents.

Residents with income from sources outside the city that are taxed by another city receive a credit for those other taxes.

The following income is excluded:

● Gifts and bequests

● Interest from U.S., state, or other government obligations

● Insurance and annuity proceeds

● Pension and retirement benefit

● Military pay

● Welfare, unemployment, and workers' compensation benefits

● Employer expense reimbursement

● Full personal and dependent exemptions allowed by federal income tax code

Cities may pass additional ordinances to allow (1) a minimum deduction of $600 per exemption as allowed in federal tax law, (2) additional exemptions for those both 65 or older or blind or two additional exemptions for those who are both, (3) exemptions for those who are paraplegic, quadriplegic, hemiplegic, totally and permanently disabled, or deaf; and (4) exemptions for those with AGIs under a specified amount.

Individuals who live in “renaissance zones” in cities that impose an income tax may claim deductions for earned income, capital gains, and lottery winnings.

The following expenses are deductible from gross income to the extent applicable to income subject to tax:

● Alimony, separate maintenance payments, and principal sums payable in installments to the extent includable in the spouse's federal AGI

● Moving expenses to the same extent as under federal income tax

● Federally deductible payments to a qualified retirement plan for a self-employed person

● IRA payments to the extent allowed under federal tax law

MISSOURI – Kansas City and St. Louis

Applies To

Rate(s)

Credits, Exemptions, Deductions

(1) residents' earnings, (2) nonresidents' earnings from services performed in the city, (3) net profits of unincorporated businesses conducted by residents, (4) net profits of nonresidents' unincorporated businesses earned from activities within the city, and (5) net profits of corporations earned from activities within the city.

1%

Income exempt from Missouri state income tax is exempt. Credits are allowed for taxes residents paid to other cities.

NEW YORK – New York City

Applies To

Rate(s)

Credits, Exemptions, Deductions

City taxable income of resident individuals, estates, and trusts. City taxable income is the same as New York state taxable income.

Vary by income, filing status, and tax year as shown in Table 2 below.

Same as state income tax

NEW YORK – Yonkers

Applies To

Rate(s)

Credits, Exemptions, Deductions

Income of Yonkers resident individuals and trusts, and estates, and of nonresident individual, trust, and estate earnings from self-employment within the city.

● Residents - 5% of net state tax

● Nonresidents – 0.25% of covered earnings

None

OHIO

Many Ohio cities and towns have local income taxes. The following summaries are examples of the taxes in place in several of the state's largest cities. All are locally administered and collected.

Akron

Applies To

Rate(s)

Credits, Exemptions, Deductions

● Resident income

● Nonresident compensation for services rendered within the city

● Net profits of resident or nonresident unincorporated businesses, professions, or other activities (the latter from activities within the city)

● Any part of a resident owner's distributive share of an unincorporated business that is neither attributable to the city nor subject to a business tax

2.25%

The following types of income are excluded:

● Receipts from seasonal or casual entertainment conducted by certain organizations

● Welfare, unemployment compensation, pensions, and disability benefits, life insurance proceeds; and alimony

● Earnings of a person under age 18

● Gains from involuntary conversion or cancellation of debt, interest on federal obligations, income already taxed by Ohio, income of a decedent's estate during administration, income that is tax-exempt under federal or Ohio law

● Military pay or allowances (including pay for members of reserves)

● Income of religious, charitable, educational etc. organizations to the extent derived from tax-exempt property or activities

● Intangible income

● First $1,000 of annual compensation paid to a precinct election official

● Compensation paid to transit drivers operating transit motor vehicles through the city on an irregular basis unless the driver lives in the city or the transit authority has its headquarters there

● Compensation paid to qualified individuals for personal services performed within the municipal corporations

Credits are allowed for residents paying income taxes to other cities.

Cincinnati

Applies To

Rate(s)

Credits, Exemptions, Deductions

Same as Akron, but excluding compensation to nonresidents employed by branch colleges of the University of Cincinnati

2.1%

The following types of income are excluded:

● Military pay or allowances for U.S. armed forces members

● Net profits of civic, religious, charitable, fraternal, or similar organizations specified in state law

● Intangible income

● Compensation arising from stock option grants, sales, or other stock option transactions

Credits are allowed for residents paying income taxes to other cities.

Cleveland

Applies To

Rate(s)

Credits, Exemptions, Deductions

Same as Akron

2.0%

Same as Akron

Columbus

Applies To

Rate(s)

Credits, Exemptions, Deductions

Same as Akron

2.0%

Same as Akron

Dayton

Applies To

Rate(s)

Credits, Exemptions, Deductions

Same as Akron

2.25%

Same as Akron

Toledo

Applies To

Rate(s)

Credits, Exemptions, Deductions

Same as Akron

2.25%

The following types of income are excluded:

● Military pay or allowances (including pay for members of reserves)

● Income of religious, charitable, educational etc. organizations to the extent derived from tax-exempt property or activities

● Intangible income

● First $1,000 of annual compensation paid to a precinct election official

● Compensation paid to transit drivers operating transit motor vehicles through the city on an irregular basis unless the driver lives in the city or the transit authority has its headquarters there

● Compensation paid to qualified individuals for personal services performed within the municipal corporation

● Certain income and benefits paid to a minister and excluded from federal taxation under IRC 107.

Credit is allowed for residents paying income taxes to other cities.

Youngstown

Applies To

Rate(s)

Credits, Exemptions, Deductions

Same as Akron

2.25%

See Toledo. Residents may deduct 50% of income taxes paid to another state or political subdivision.

OREGON – Multnomah County

Applies To

Rate(s)

Credits, Exemptions, Deductions

Taxable income of county residents. In effect from January 1, 2003 through December 31, 2005.

1.25%

First $2,500 for single filers and first $5,000 for joint filers is exempt.

PENNSYLVANIA

Pennsylvania law allows both municipalities and school districts to levy various kinds of local taxes, including local income taxes. Typically, these taxes are levied on “earned income” (such as wages, salaries, and commissions) and not on interest and dividends. Both residents and nonresidents are subject to taxes, if the nonresidents work in the city that levies the tax. The maximum tax rate is 1%, except in specified “home rule” cities that have no limit. If both a municipality and its school district impose the tax, the maximum rate for the two together is 1%.

Since local income taxes are common in Pennsylvania, we summarize the taxes in effect only for Philadelphia and Pittsburgh as examples. Both of these cities are allowed to exceed the 1% maximum tax rate.

Philadelphia - City Wage and Net Profits Tax

Applies To

Rate(s) for 2006

Credits, Exemptions, Deductions

Salaries, wages, commissions, and other compensation earned in Philadelphia by residents and nonresidents

● Resident - 4.301%

● Nonresident – 3.8197%

None

Philadelphia – School District Investment Tax

Applies To

Rate(s) for 2006

Credits, Exemptions, Deductions

Net income

4.331%

The following income is exempt:

● Interest from government obligations

● Interest and dividends from savings deposits and certificates

● Gains from disposing of property owned for more than six months

● Income subject to the Philadelphia wage and net profits tax

● Old age, retirement, and pension payments

● Sick pay and disability benefits

● Unemployment and workers' compensation benefits

● Active service military pay

● Veterans' bonuses

● Death benefits

● Life insurance proceeds

● Gifts and bequests

● Compensatory damages

Pittsburgh – Earned Income and Net Profits Tax

Applies To

Rate(s) for 2006

Credits, Exemptions, Deductions

(1) Salaries, wages, commissions, and other compensation earned by residents; (2) nonresidents' salaries, wages, commissions and other compensation earned within the city; and (3) net profits of residents and nonresidents from businesses, professions, and other activities conducted in Pittsburgh.

1%

Credit allowed to nonresidents subject to similar taxes in their home municipalities

Pittsburgh – School District Income Tax

Identical to the city's earned income and net profits tax except (1) the tax rate is 1.875% and (2) it is not imposed on nonresidents.

Table 2: New York City Income Tax Rates for 2005-2008

 

NEW YORK CITY TAXABLE INCOME

Married Filing Jointly

or Surviving Spouse

Single, Married Filing Separately, or Trusts & Estates

Head of Household

2005 Tax Year

TAX RATES

Over

But Not Over

Over

But Not Over

Over

But Not Over

2.907%

$0

$21,600

$0

$12,000

$0

$14,400

3.534%

21,600

45,000

12,000

25,000

14,400

30,000

3.591%

45,000

90,000

25,000

50,000

30,000

60,000

3.648%

90,000

150,000

50,000

100,000

60,000

125,000

4.05%

150,000

500,000

100,000

500,000

125,000

500,000

4.45%

Over $500,000

Over $500,000

Over $500,000

2006-08 Tax Years

2.55%

$0

$21,600

$0

$12,000

$0

$14,400

3.1%

21,600

45,000

12,000

25,000

14,400

30,000

3.15%

45,000

90,000

25,000

50,000

30,000

60,000

3.2%

Over $90,000

Over $50,000

Over $60,000

LOCAL INCOME TAX BILLS PROPOSED IN CONNECTICUT

A computer search of bills introduced in every General Assembly session since 1991 found only one proposal to allow towns to impose their own local income taxes and two bills that would have required the state to share a part of the state's income tax revenue received from taxpayers in each town with that town.  

Bill To Allow Local Income Taxes

 HB 6843, An Act Concerning Home Rule and Fiscal Autonomy, was raised in the 1997 session by the Planning and Development Committee.  Among other things, the bill would have allowed municipalities, by ordinance, to tax income, items, and transactions in addition to real and personal property and would have extended these powers to regional councils of government and regional councils of elected officials if all of the towns belonging to either type of council approved.

The committee held a public hearing on the bill on March 5, 1997, but testimony on its local income tax provisions was brief and general.  The committee reported the bill favorably to the House floor (File 315).  The House referred the bill to the Finance, Revenue and Bonding Committee on April 29, where it died without debate.

Bills To Require the State To Share Income Tax Revenue

SB 20, introduced in 1995 would have required the state to remit 10% of state income taxes paid by taxpayers from each town to that town. The bill required the payments to be in form of block grants and required towns to use the grants for property tax relief.  The bill was referred to the Finance, Revenue and Bonding Committee, where it died without a public hearing.

HB 5363 in the 2005 session would have required the state to return 0.5% of state income tax revenue to the town where each taxpayer lives.  That bill was also referred to the Finance Committee, which took no action on it.

JL:ro