Ideological Variables

• Because local income tax rates are set by elected officials, local politics are a major variable that determines how income taxes are applied. Communities that focus heavily on public services and capital investments typically apply higher income, property and sales taxes in order to pay for these services. Communities that provide fewer public services to reduce the cost of their local governments generally apply lower income and sales taxes. The different ideologies of local voters are usually a strong determinant in these policy considerations.
  
  

Economic Conditions

• Economic conditions can have some effect on local tax rates, especially as income tax revenues tend to decline in recessions. The effect of economic conditions -- whether for higher or lower taxes -- can vary substantially according to priorities of local governments and voter ideology. During times of economic hardship, some communities might be pressured politically to raise local income tax rates in order to close budget shortfalls and help an expanding base of economically disadvantaged citizens. In other communities, there might be pressure to lower income taxes during recessions in order to help stimulate private sector spending.
  
  

Debt Variables

• The conditions of local government finances are also a major variable in state and city income tax rates. Governments carrying substantial debts may be forced to raise income taxes as part of an effort to pay down their financial obligations and reduce their long-term borrowing costs. Governments without debt burdens have more flexibility in deciding where to set income tax rates, based on local priorities. Communities generally will raise taxes to avoid defaulting on their debts.
  
  

Competition with Nearby Communities

• Finally, tax rates at the state and local levels are impacted by the tax rates set by neighboring communities. Communities will sometimes use low taxes as means to attract businesses and workers to their communities. In some cases, other local governments will respond by similarly lowering taxes to avoid businesses fleeing their higher tax rate. In this way, the willingness of other jurisdictions located nearby can have some effect on local tax rates.