Excise taxes can also be employed as user fees. A good example of this is the gas tax. The amount of gas a driver purchases generally reflects their contribution to traffic congestion and road wear-and-tear. Taxing this purchase effectively puts a price on using public roads. Property taxes are primarily levied on immovable property like land and buildings and are an essential source of revenue for state and local governments in the U. Property taxes in the U. Local governments rely on property tax revenue to fund public services like schools, roads, police and fire departments, and emergency medical services.
Overall, taxes on real property are relatively stable, neutral, and transparent, whereas taxes on tangible personal property are more problematic. Tangible personal property TPP is property that can be moved or touched, such as business equipment, machinery, inventory, furniture, and automobiles. Taxes on TPP make up a small share of total state and local tax collections, but are complex, creating high compliance costs; are nonneutral, favoring some industries over others; and distort investment decisions.
TPP taxes place a burden on many of the assets businesses use to grow and become more productive, such as machinery and equipment. By making ownership of these assets more expensive, TPP taxes discourage new investment and have a negative impact on economic growth overall.
As of , 43 states taxed tangible personal property. While estate taxes are paid by the estate itself, before assets are distributed to heirs, inheritance taxes are paid by those who inherit property.
Both taxes are also complex, hard for jurisdictions to administer, and can incentivize high-net-worth individuals to either engage in economically inefficient estate planning or leave a state or country altogether.
As of , only six countries in Europe—Norway, Spain, Switzerland, Belgium, the Netherlands, and Italy—had a wealth tax and two of those—the Netherlands and Italy—raised no revenue from it see chart below. The Tax Foundation works hard to provide insightful tax policy analysis. Our work depends on support from members of the public like you.
Would you consider contributing to our work? We work hard to make our analysis as useful as possible. Would you consider telling us more about how we can do better? Withholding Worldwide Tax System Go. The Three Basic Tax Types. Learn about 12 specific taxes, four within each main category— earn: individual income taxes, corporate income taxes, payroll taxes, and capital gains taxes; buy: sales taxes, gross receipts taxes, value-added taxes, and excise taxes; and own: property taxes, tangible personal property taxes, estate and inheritance taxes, and wealth taxes.
Develop a basic understanding of how these taxes fit together, how they impact government revenues and the economy, and where you may encounter them in your daily life. The TCJA also created a new federal deduction for pass-through business income income earned by sole proprietors, partnerships, and certain corporations.
However, because the deduction is for federal taxable income, this only affected states that use federal taxable income as the start of their tax calculations. A similar dynamic but with smaller fiscal ramifications occurred when Congress expanded the federal earned income tax credit and child tax credit in response to the COVID pandemic.
Because of connections between the federal and state tax codes, states that conform with these policies will also see increases in their state-level EITC. Other states offer a range exclusion and deductions not in federal law.
Pennsylvania and Alabama only allow losses to be deducted in the year that they are incurred, while New Jersey does not allow losses to be deducted from ordinary income see our table on state treatment of capital gains for more detail. However, unlike the federal government which provides a preferential rate, most states tax capital gains at the same rate as ordinary income. Connecticut, Hawaii, Massachusetts, and Oregon levy special tax rates on capital gain income. State income taxes are generally imposed by the state in which the income is earned.
Some states, however, have entered into reciprocity agreements with other states that allow outside income to be taxed in the state of residence.
Typically, these are states with major employers close to the border and large commuter flows in both directions. Most states also allow taxpayers to deduct income taxes paid to other states from what is owed to their home state.
See our backgrounder on state earned income tax credits. Gale, Kim S. Rueben, and Aaron Krupkin All dates in sections about revenue reference the fiscal year unless stated otherwise. Individual Income Taxes. Cross-Center Initiatives. Individual Income Taxes State and Local Backgrounders Homepage The individual income tax or personal income tax is a tax levied on the wages, salaries, dividends, interest, and other income a person earns throughout the year.
How much revenue do state and local governments raise from individual income taxes? Which states rely on individual income taxes the most? How much do individual income tax rates differ across states? What income is taxed? How do states tax capital gains and losses?
How do states tax income earned in other jurisdictions? An inheritance tax is paid by the beneficiary. There is no federal inheritance tax, and only six states have an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
There are many types of taxes that are applied in various ways. Understanding what triggers a tax situation can enable taxpayers to manage their finances to minimize the impact of taxes. Techniques that can help include annual tax-loss harvesting , to offset investment gains with investment losses, and estate planning , which works to shelter inherited income for heirs.
Department of the Treasury. Congressional Budget Office. Internal Revenue Service. Accessed Oct. National Conference of State Legislatures. Tax Policy Center. Social Security Administration. Government Publishing Office. Tax Foundation. Council on Foreign Relations.
Income Tax. Social Security. Small Business Taxes. Tax Laws. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data.
We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Part Of. Filing Status. Types of Income. Tax Types and Terms. What Are Taxes? Key Takeaways Taxes are mandatory contributions collected by governments. There are many forms of taxes; most are applied as a percentage of a monetary exchange for example, when income is earned or a sales transaction is completed.
Other forms of taxes, such as property taxes, are applied based on the assessed value of a held asset. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.
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