Does State and Local Taxes Only Apply to Goods and not on Services?

State and local governments collect taxes based on income, property, and what people buy. For example, residents in states and cities pay income tax based on their annual earnings, while property owners may be required to pay tax based on the value of their personal property such as cars, homes, boats and recreation vehicles, business machinery, and equipment, etc. States and localities also often levy sales taxes. General sales taxes and selective sales taxes are the main sources of revenue for state and local government agencies. 

State general sales taxes apply to most tangible goods unless exempted by law or regulation. The only notable exception to this rule is food purchased for immediate consumption at restaurants, typically taxed at a lower rate than the general sales tax. State and local governments rely on sales taxes more than on all other sources of revenue combined, collecting $341 billion in 2020 (or 15 percent of state general revenues). The Census Bureau also reports on gross receipts taxes, which are levied on total business transactions rather than individual purchases.

Local and State Taxes Deductions

Local and State Taxes Deductions

In addition to sales and excise taxes, state governments impose a variety of other types of taxes. For instance, state laws in most states require manufacturers to pay an excise tax on the production of certain items, such as alcohol and motor fuel. Some states impose gross receipts taxes on certain business inputs such as raw materials, equipment, and utilities.Local governments typically levy sales, property, and other taxes to raise revenue for services such as trash collection and police protection. In addition, state laws in many states provide tax credits to encourage the development of specific activities deemed to be desirable for society, such as renewable energy projects and job creation in low-income areas. Taxes paid to local and state government agencies are deductible – to some extent – when filing federal taxes each spring. In addition, individuals can deduct property tax payments from their federal income taxes.

The question of whether local or state taxes only apply to goods and not services is a complicated one. For example, the purchase of clothing may be subject to a city and/or state sales tax, but the sale of a haircut or a manicure is not.

On the other hand, some states and localities impose tax on the provision of health care or social services. The taxation of health services, however, is subject to considerable debate. For example, the taxation of health care in New York is a hotly debated issue.

In the end, there is no simple answer to this question. The best way to understand state and local taxes is to look at how they are collected, enforced, and applied. Then, compare that to what they are used for. The results will be a clearer picture of the impact of local and state taxes on economic growth and living standards in different parts of the country.

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