What Is the Major Source of Tax Revenue for Local Governments?

The largest portion of local government tax revenue in the United States comes from residential and commercial property taxes. Overall, local governments obtained more than 75 percent of their fiscal year 2010 tax revenues from property taxes, as reported by the U.S. Census Bureau. During that same fiscal year, New Hampshire was the state whose local governments relied most heavily on property taxes, with New Jersey and Vermont in second and third place, respectively.

Local government in the U.S. refers to those jurisdictions below the state level, and it includes counties and, at one level below, the various forms of municipalities such as cities, towns, boroughs and villages. From their earliest beginnings, municipalities looked to real estate as a source of tax revenue. It was plainly visible, fixed in place, its value was well known and the revenues collected could be allocated directly to the sector of government in which the property was located.

The 10th Amendment to the U.S. Constitution, which was ratified in 1791, made the various forms of local government a matter for state governments to decide, with the exceptions of the District of Columbia and U.S. territories. The result was that the states implemented varying types of structural and taxation systems for their county and municipal governments.

The U.S. Census Bureau is charged with the task of compiling statistics relating to local government every 5 years. Detailed information is collected and made publicly available regarding local government organization, employment and tax revenues.