The Tax Autonomy of Local Governments in the United States

Statistics on the share of total government tax revenue raised by local governments provide an incomplete picture of local government taxing power. If higher level governments define the local tax base, determine tax rates, or place other restrictions on local taxes, local governments have limited tax autonomy. In the mid-1990s, the Organization of Economic Cooperation and Development (OECD) developed a methodology for measuring the degree of local government tax autonomy, which since then they have applied to OECD member countries on a regular basis.  Because the U.S. local government fiscal system is highly complex and heterogeneous, the OECD tax autonomy reports excluded the U.S. The purpose of this paper is to fill that gap by applying the OECD taxonomy of taxing power to local governments in each state and the District of Columbia.

The results show that on average, local governments in the U.S. have a little more tax autonomy than local governments in the average OECD country. However, because of the heavy reliance on the property tax in the U.S. and the widespread presence of property tax limitations, tax autonomy is substantially limited in many U.S. states. If the U.S. had the same mix of taxes as found in the average OECD country, tax autonomy would be substantially greater in the U.S. than in most OECD countries. Even among states that rely heavily on the property tax, there exists substantial difference among states in their degree of local government tax autonomy.