ACCY 312 Chap.2 Federal, State and Local Taxes
Federal, State and Local Taxes
Federal taxes by base
At the federal level the course lists four families. Income taxes fall on individuals and corporations.
Employment taxes fall on wages: the social security tax at 12.4%, split 6.2% each between employee and employer on wages up to $184,500 in 2026, the Medicare tax at 2.9% split the same way with no cap, and the federal unemployment tax paid by employers at 6% of the first $7,000. Excise taxes are charged per unit bought, on goods such as tobacco, gasoline and alcohol.
Transfer taxes fall on gifts and estates.
Two transfer thresholds are worth memorising. For 2026 estates up to $15 million per individual owe no estate tax, and the gift tax allows an annual exclusion of $19,000 per donee.
Income taxes dominate the federal picture: the Treasury exhibit used in class puts individual income tax at 51% of federal revenue and employment taxes at 33%, with corporate income tax at 9%.
State and local taxes
States and localities rely more on sales taxes, which the class exhibit shows at 46.4% of average state tax revenue against 33% for individual income tax.
A sales tax applies to retail sales of goods and services; a use tax applies to goods owned, used or consumed in a state that were not bought there, so a buyer cannot escape the local rate by shopping across a border. Property taxes split into real property, such as a home, and personal property, such as a car. States also levy excise taxes much like the federal ones.
The slides start close to home.
Champaign's combined sales tax rate is 9%, built from 6.25% for the state, 1.25% for the county and 1.5% for the city, with a further 0.5% on food and beverage, and Illinois taxes personal income at a flat 4.95%.
Implicit taxes
Not every tax arrives as a bill. An implicit tax is the lower before-tax return an investor accepts on a tax-favoured asset.
Municipal bonds, which states and cities sell, pay interest that is exempt from federal income tax, so investors bid up their prices until the before-tax return falls.
At equilibrium the investor is indifferent between the taxable bond and the exempt one, because both leave the same after-tax return; the gap in before-tax returns is the implicit tax.
Questions to ask of any tax
The course frames this reading around four questions: what the base is, who bears or pays the tax, which level of government levies it and how to tell similar taxes apart.
Sales against use and real against personal property are the pairs most often confused.
What this chapter covers
- 01
Federal income, employment and unemployment taxes
- 02
Excise taxes on quantity
- 03
Estate and gift taxes
- 04
Sales and use taxes
- 05
Real and personal property taxes
- 06
Implicit taxes and before-tax rates of return
- 07
Municipal bonds as tax-favoured assets
Worked example · free
Find the implicit tax on a municipal bond
- 2Corporate bond: $1,200 of interest less $288 of tax leaves $912, an after-tax return of 4.56%.
- 2Indifference: the exempt bond must return 4.56% before tax, because nothing is taken from it.
- 1Implicit tax: 6% less 4.56% is 1.44 percentage points of forgone before-tax return.
Key terms
- Excise Tax
- A tax levied on the quantity of a good purchased, such as each gallon of gasoline.
- Use Tax
- A tax on goods owned, used or consumed in a state that were not purchased in that state.
- Transfer Tax
- A tax on transfers of wealth by gift or at death, covering the estate tax and the gift tax.
- Implicit Tax
- The lower before-tax rate of return an investor accepts on a tax-favoured asset.
- Municipal Bond
- A bond issued by a state or local government whose interest is exempt from federal income tax.
- Personal Property Tax
- A tax on movable property such as an automobile, as distinct from real property.
Federal, State and Local Taxes FAQ
How do sales and use taxes differ?
A sales tax is collected on a retail purchase made in the state. A use tax reaches goods bought elsewhere and then used or consumed in the state, so it closes the gap a buyer would otherwise exploit by purchasing out of state.
Is the social security tax progressive or regressive?
The course treats it as regressive. Wages above the 2026 cap of $184,500 bear no social security tax, so a very high earner pays a smaller share of total income than someone whose wages fall entirely under the cap.
Who actually bears an implicit tax?
The investor who buys the tax-favoured asset bears it, by accepting a lower before-tax return than a comparable taxable investment offers. No return is filed and nothing is paid to a government, yet the investor still gives something up.
Are tariffs a tax under the course definition?
The slides pose this as a discussion question. Apply the three conditions: a tariff is required, imposed by the federal government and not tied to a specific benefit for the importer, so it fits the definition used in class.
Exam move
Make a two-column list of every tax in this chapter: its base on the left and who pays it on the right. Test yourself on the confusable pairs, then work one before-tax and after-tax return comparison at a different marginal rate.
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