Theme 4: What Is Taxed and WhyLesson 1: Federal/State/Local Taxes

Educational Standards

State and National Standards

Time Frame

One to four hours

Curriculum Area(s)

• Civics/Government
• Economics
• Technology

Purpose

To help students understand that federal, state, and local governments need revenues to provide goods and services for their residents

Objectives

Students will be able to

• identify the kinds of taxes most commonly collected by federal, state, and local governments.
• give examples of the goods and services most commonly provided by federal, state, and local tax revenues.

Background

The Constitution sets up a federal system of government by dividing powers among the national, state, and local governments. Citizens elect officials to serve at each of these three levels. The separation of powers restricts governmental power and prevents its abuse. Each governmental level has its own responsibilities, but there are many areas of overlap between federal, state, and local jurisdictions. Examples appear below.

• Federal Responsibilities: Defense, currency regulation, and foreign relations. In addition, the federal government has responsibility in health, education, welfare, transportation, and housing and urban development.
• State Responsibilities: State criminal code, working conditions, internal communications, and regulations of property, industry, business, and public utilities.
• Local Responsibilities: Police and fire protection, health regulations, education, public transportation, and housing.

Each level of government raises money through taxation of its citizens. Each level of government makes its own decisions about how and what to tax and how to spend the money. Although most federal revenue comes from income taxes, state and local revenues may come from transaction taxes, which are on the sale of goods and services; income taxes, which come from taxes on earned and unearned income; and property taxes, which come from taxes on property.

Key Terms

income taxes

Taxes on income, both earned (salaries, wages, tips, commissions) and unearned (interest, dividends). Income taxes can be levied on both individuals (personal income taxes) and businesses (business and corporate income taxes).

property taxes

Taxes on property, especially real estate, but also can be on boats, automobiles (often paid along with license fees), recreational vehicles, and business inventories.

transaction taxes

Taxes on economic transactions, such as the sale of goods and services. These can be based on a set of percentages of the sales value (ad volorem-sales taxes), or they can be a set amount on physical quantities ("per unit"-gasoline taxes).

Opening the Lesson

Show Slide Show: Theme 4 Overview: What Is Taxed and Why, or present the background information above. Explain that taxes are collected for our local, state, and federal governments.

Developing the Lesson

Have students name some taxes they or their families have paid recently. Students may mention sales tax on purchases; restaurant or hotel tax; gasoline tax; registration or license fees for a vehicle; federal, state, or local withholding tax; Social Security withholding tax; tax on a phone bill; and hunting or fishing licenses. Explain that federal revenue comes from income taxes and that state and local taxes come from transaction taxes, income taxes, and property taxes. Use Info Sheet 1: Transaction, Income, and Property Taxes to supplement the discussion.

Concluding the Lesson

Review with students the major categories of revenue and expenditures at the federal, state, and local levels. Make sure students understand that federal revenue comes from income taxes and that state and local taxes come from transaction taxes, income taxes, and property taxes.