Local taxes | Taxes and tax forms | Financial Literacy | Khan Academy

When you look around your town, you'll see a lot of services for you and other people in your town, and you might wonder who pays for it all. For example, in this picture, which I actually generated with AI—very exciting—you see all sorts of local services. We see some nice roads over here; someone has to pay for keeping those roads in shape. We see a fire truck, so you have emergency services. You see a police car right over here—more emergency services. We see what looks like a hospital, maybe of some kind. Maybe this is the hospital right over here. We see a school, we see City Hall, we see a park.

Who pays for all of those things, or how are those things paid for? You might guess, based on the title of this video, that it's paid for, for the most part, with local taxes. Now, local taxes in particular, I'm going to separate from some of the income taxes. There’s federal income tax, and there's also usually state income tax, and in certain cases, there's even city income taxes. But we're not going to talk about income taxes. Instead, we're going to talk about the two most common very local taxes at your town or your county level, and these are sales tax and property tax.

Now, sales tax is probably the first type of tax that I became familiar with, even when I was very young. Because you probably noticed that if you go to the store and let's say it says that something costs $2, and then all of a sudden, when you go to pay at the cash register, they're charging you $2.14. So, what they really did is they charged an extra 7%. So, plus 7% here; 7% of $2 is 14 cents. They added that on—that added 7%, or that added 14 cents—that is sales tax. Now, it's not always 7%. It depends on the state; it depends on the city or county that you're living in.

But just as an example, right now, at the time of this video—and this might change over time—Virginia, as a state, the state of Virginia has a 5.3% base sales tax. But that's not the only sales tax; the local towns and communities can add sales tax to that, so it could easily go up to 7%, like this example we just showed. Now, it's not that everything that you buy or sell will have a sales tax of exactly 7%. In fact, some communities try to use this to motivate certain behaviors or others.

For example, you might have a higher sales tax on things like alcohol or cigarettes, and you could have a much lower sales tax or no sales tax on things that are considered necessities. For example, food—non-prepared food. Let me write that down, actually—that's a lot to write down: non-prepared food. So, if you were to just go buy groceries, that oftentimes has no sales tax or much lower sales tax than if you were to say go to a restaurant and have prepared food, where it might be, say, 7% or a higher sales tax.

Why would that be? Well, the town is saying, "Well, everyone has to buy food, especially if they're cooking it themselves, but not everyone has to go to a restaurant. A restaurant is more of a luxury, so we'll tax the luxury more, but the necessity we will tax at a lower rate." Now, sales tax is not the only type of tax, as I mentioned; you also have property tax. This is something you learn a lot more about as you become an adult, especially as you start buying property.

Now, in most places, property tax—let me do that over here—property tax in most places is real estate property tax or taxes on real property. What they do is, every year, not just when you buy or sell, every year there's an assessment. There are people called assessors, and they assess what the value of that property is. So, let's say that you have a house, and in this year, the assessor says your house is worth $300,000.

And our local property tax rate is 1%. So, in that year, 1% of $300,000—you are going to pay $3,000 in property tax just for that year. If next year they assess that your property is still $300,000, you're going to pay $3,000 the next year as well. If your property goes up in value, it's going to be 1% of that, so your property tax will go up in value.

So, this is a significant tax, and especially, you could imagine if you have a much more valuable property or if the property taxes in your area are a lot higher, and sometimes they can become much, much higher than 1%. Now, you also have other types of property tax. In certain places, there are personal property taxes. This is where they would try to assess the value of things that you could move around, like a boat or a car. But they will tax similarly; they will assess it on an annual basis and they will charge you for it.

But hopefully, this gives you a sense of where the government gets its money: these local taxes—sales and property tax. You add to that things like income tax at the federal or the state level, and you have a good picture of how the government, for the most part, funds itself.