Sources of Revenue for Local Government: USA (2024)

Local Government Primary Sources of Revenue Explained

To be able to explain the local government primary sources of revenue we need to start from the beginning. When we hear the term "government," most think of either the federal government - also known as the central government - in Washington, D.C., or a state government. However, most of our daily lives are affected primarily by our local government, which means the city government, county government, and special districts that provide services like public utilities, K-12 education, law enforcement, road maintenance, and emergency health care.

Local governments are extensions of state government and exercise powers granted to state governments under the U.S. Constitution.

The division of powers between the state and federal governments is known as federalism and has become more complex over time. Since the 1930s, and especially since the 1960s, there has been greater cooperation and interplay between local, state, and federal resources due to the use of grants to provide funding for services.

Local Government Revenue is the local government's budget received through various revenue streams.

Revenue for local governments comes from several sources: income taxes, property taxes, sales taxes, intergovernmental transfers and grants, fees for government services, fines imposed by local ordinances for violations, and the sale of goods and services like public utilities, hospital fees, and community college tuition.

Local governments can also sell municipal bonds to investors, though this money will have to be paid back, with interest, over time.

Government agencies can also generate revenue by selling obsolete or unnecessary equipment, often through a government auction. Auctions are conducted by local and state governments and the federal government to dispose of equipment, land, or property foreclosures.

Major Sources of Revenue for State and Local Government

The major sources of revenue for state governments differ depending on whether a state has a state income tax. While all workers pay federal income tax, not all states have a state income tax. States that are considered liberal, such as California, tend to have a state income tax, while states that are considered conservative, such as Texas, tend not to have a state income tax.

The amount paid in state income tax is deductible from federal income tax, meaning citizens in states with an income tax are not subject to double taxation.

Property taxes are taxes citizens pay on property. It is one of the largest single sources of state government revenue. Both personal residences and commercial property (businesses) are subject to property taxes.

These taxes are proportional or flat, meaning a fixed per-dollar tax is applied based on the property's value and does not change based on the total value. Sales taxes, which are used for all non-essential purchases, are also proportional. Therefore, both low-income and wealthy individuals pay the same rates on property and sales taxes.

State governments are also heavily supported by federal grants. This source of revenue is also known as intergovernmental revenue, and it refers to the flow of money from one level of the government to the other.

Intergovernmental revenue refers to the flow of money from one level of the government to the other.

Grants, which do not have to be repaid, give money to help state and local governments provide public services. However, to receive the grants, the state and local governments must meet federal guidelines and fully detail their current and proposed use of grant funding.

Federal grants are commonly given to states to subsidize Medicaid (medical care for those in poverty), highways, and welfare programs.

We have an entire explanation about State Government Revenue Sources. Make sure you don't miss it!

The local government also benefits from some of the revenue that flows to the state government. One of the most significant sources for local government is money from intergovernmental transfers from the state government. Another critical source of revenue is property tax, utility, sales taxes, etc.

Two Sources of Revenue for Local Government

Two sources of revenue for local government include property taxes and intergovernmental revenue. Although states can levy (use or impose) income taxes, local governments cannot. Local governments can, however, directly impose their own property and sales taxes.

Property taxes are levied independently, while sales taxes for local governments are added to those levied by state governments in almost all states. Usually, states set a maximum local sales tax, meaning cities and counties can collectively add sales tax increments up to this ceiling.

Intergovernmental transfers are another source of revenue for local governments. This revenue comes from the state governments and is usually used to improve education and build public welfare.

Property tax, pixabay

Largest Sources of Revenue for Local Government

The largest sources of revenue for local governments include intergovernmental revenue, property taxes, utility revenues, sales taxes, and other sources of income.

• Intergovernmental revenue is the local government's money from state or federal government grants. This is one of the largest sources of revenue for local governments.
• Property taxes refer to the local tax government imposes on tangible and intangible assets held by the residents. Property taxes rank as the second-largest revenue for local governments.
• Utility revenue refers to the local government's revenue for offering public utilities such as water, electricity, gas, etc. Although the provincial government does not profit much from providing these services, it's one of the largest sources of revenue.
• Sales taxes refer to the amount of money the local government receives when a sale transaction occurs. Although it has a lower sales tax than the state government, it is still the fourth-largest source of revenue for local governments.
• Other revenue sources include other streams of revenue that the local government might receive. For instance, they can receive income from engaging in debt, such as selling municipal bonds.

Sources of Revenue for Local Government in the USA

Like in many other places, the sources of revenue for local government in the USA include intergovernmental revenue, property taxes, utility revenues, etc.

Property tax and transfer payments from state and federal governments are the largest revenue source for local governments in the USA.

Some locally-provided government services combine local and state funding, such as K-12 and community college education and hospitals.

Property tax funding is reallocated among local government districts in some states to ensure equitable funding.

Low-income areas would have insufficient funds for government services if they had to rely solely on local property taxes due to a weak tax base. By contrast, wealthy suburbs have strong tax bases but less need for government grants due to greater reliance on private schools and personal transportation and little need for welfare programs or public health clinics.

Local governments are unique because many provide public utilities like water, trash collection, natural gas, and electricity. Although the sale of utilities raises lots of revenue, this funding is usually not intended for general use by other government agencies.

The municipality only charges enough to cover its costs by providing utilities on a not-for-profit basis, meaning there is no net profit to local governments for providing these services. However, providing these services may give local governments greater ability to help lower-income residents or develop struggling areas by providing discounted services.

What are the main sources of revenue for local governments?

What are the largest sources of revenue for local governments?

Intergovernmental revenue and property taxes.

What are the two types of government revenue?

What are the six sources of local government revenue?

What is the major source of tax revenue for local governments in the U.S.?

Property taxes.