Primary Revenue Sources for U.S. Local and State Governments: Taxes, Fees, and Grants

U.S. cities, counties, and states fund services through a mix of own-source revenue and intergovernmental transfers. The composition varies by state law and local economy.

1. Property Taxes (Local Dominant)

• Levied on real estate (land + improvements) assessed value.
• Primary revenue for cities, counties, school districts, special districts.
• Average effective rate: 0.5%–2.5% of market value (varies wildly).
• Stable, predictable, but regressive (burden falls on owners/renters).

2. Sales Taxes (State & Local)

• Levied on retail goods (and some services) at point of sale.
• State rates: 0% (DE, MT, NH, OR) to 7.25% (CA base); local add-ons up to 5%+.
• Combined rates: 0%–10%+.
• Major for states; cities/counties often share or levy own.
• Regressive; broad base but eroding (services, e-commerce).

3. Income Taxes (State & Few Locals)

• States: 41 tax wage/salary income (flat or graduated); 9 don't (FL, TX, WA, NV, SD, WY, AK, NH, TN).
• Local: Only ~15 states allow local income tax (e.g., NYC, Philadelphia, Detroit, Baltimore, Indianapolis, Columbus, Birmingham).
• Progressive; volatile (capital gains, business cycles).

4. Fees, Charges, Permits, Fines

• Building permits, business licenses, impact fees, parking meters/tickets, court fines, utility fees (water, sewer, stormwater), tuition (public colleges), park fees.
• Growing share (user-pays philosophy).
• Regressive if flat; can deter activity.

5. Intergovernmental Grants & Aid

• Federal → State: Medicaid (largest), transportation, education, housing, disaster relief.
• State → Local: Education formula aid, revenue sharing, categorical grants.
• Conditional (strings attached) vs. block grants.
• ~30% of state budgets; ~20% of local budgets.

6. Other Sources

• Tourism taxes: Hotel occupancy, rental car, restaurant/meals (FL, NV, HI, NYC, DC).
• Severance taxes: Oil/gas/minerals (TX, AK, ND, WY, NM).
• Lottery/gaming: State lotteries, casino taxes.
• Investment income: Pension fund returns, rainy-day funds.
• Debt proceeds: Bonds (GO, revenue) for capital projects.

Structural Tensions

• Local reliance on property tax → inequality (rich districts vs. poor).
• State reliance on sales/income → volatility.
• Federal mandates without full funding (unfunded mandates).
• Tax competition / race to the bottom.

No single "most" source—property tax for locals, sales/income for states, grants for both. The mix defines fiscal health and equity.