Where Tax Dollars Come From and Where They Go

A Short Primer on How Government Gets Funded

Anyone who has ever done anything with a dollar knows that taxes are a part of life. You are taxed on what you earn. You are taxed on what you buy. Not only that, but you are taxed on what you invest. Taxes are everywhere. But, not all taxes are the same, and there is value to investigate how different forms of government derive their income.

The chart below is a handy cheat-sheet for localities here in Ohio on what layer of government gets tax dollars from the three largest pots of taxes - income tax, sales tax and property tax.

Federal Government - The federal government gets most of their income from borrowing. The federal government is the only government that doesn’t have restrictions on how much it can borrow, by issuing notes and bonds, and it takes full advantage of that fact. The current federal debt stands at $34.68 Trillion Dollars. When it comes to taxes, the income tax, created in 1913, is where the federal government derives most of its revenues from the population.

State Government - In Ohio, the state is largely funded by state income taxes and a statewide sales tax. The sales tax rate is 5.75% statewide on most consumer goods, and the income tax is collected through a graduated marginal income tax, much like the federal tax.

County Government - Now, you are probably realizing that you pay way more than 5.75% in sales tax on the goods you buy here in Ohio. And you are absolutely right. Ohio law allows counties and transit authorities to levy local taxes on sales and services up to 2.25%. Most sales tax rates in Ohio are in the 7.25% (53 Ohio counties have this tax rate). Miami County is just below that at 7.00%; meaning that the county’s effective sales tax rate is 1.25% Counties also receive a small portion of the property tax. In Miami County, the county government has a millage rate of 2.4 mills for every property in the county.

Township Government - Townships can only derive their funding from property tax and for the most parts these levies are voted upon for voters. However, there are certain amounts of millage that are guaranteed to the township. Given the fact that these levies are voted upon, the property tax rates vary greatly throughout the county. Bethel Township has the highest millage rate at 12.3 mills, where neighboring Elizabeth Township has the lowest rate at 1.1 mills.

City and Village Government - Ohio’s Cities and Villages are funded primarily through income taxes. Unlike the federal and state government, municipal income tax rates are a flat rate and there are very few tax credits available. Income taxes on wages are collected where one works, not where one lives, and reciprocal agreements still generally exist where residents need not pay income taxes to the community they live, if they paid income taxes on where they worked. However, residents are expected to make up the difference if they live in a community where the income tax rate is higher than where they work. Most municipal income tax rates are in the 1% to 3% range.

Cities and villages also receive a small amount from property taxes, that are, again, mostly voted upon by voters. City millage rates range from anywhere 1.4 mills in Pleasant Hill to over 25 mills in those parts of the City of Union that are in Miami County.

School Districts - School districts receive most of their funding from property taxes approved by tax levies, though many districts (roughly 1/3rd statewide) are also receiving funding through an earned income tax that was approved by voters.

School district income taxes were started since property taxes were seen as overly burdensome to older residents. Older residents that were retired were burdened with large property tax bills and were often at the ballot box voting against school levies, not because they were against the schools, but these folks were voting more for their own economic self-interest. Laws were changed that allowed districts to levy a voter improved income tax. All school districts in the county have some form of income tax, with rates varying from 0.75% to 1.75%. Property tax millage rates range from 27.87 mills with the Bradford School District to over 80 mills for Miami County land in the Northmont School District.

Special Districts - Special Districts are those forms of local government that rarely get any attention, often because they are so specialized and their focus is only one particular service. A good example of a Special District would be the Miami County Park District. The park district is governed by a three-member board that is independent of county government.

In Ohio, Special Districts are primarily funded through property tax levies. There is an asterisk above because there are instances where sales taxes are used to fund special districts; regional transit authorities are such an exampe.

In Miami County, those county-wide special districts include the Riverside School (Board of Developmental Disabilities), Tri-County Board of Mental Health, the Miami County Park District and the Miami Conservancy District. The latter, being a multi-county special district created by the state.

There are other special districts that also receive funding from dedicated funding sources. For example, the Miami County Visitors and Conventions Bureau is a special district, but their funding doesn’t come from property taxes, rather they are funded through the lodging tax, a separate fee added for every night someone stays in a hotel in the county.

Hopefully this helps get some clarity on how government is largely funded. Future articles will go in depth on how there are other special taxes (fuel, alcohol, tobacco, for example) and how those dollars are collected and distributed to government.

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