State governments have two budgets. The operating budget pays day-to day expenses. The capital budget pays for major capital, or investment, spending. New bridges and buildings are examples of capital spending. State laws require a balanced budget—a budget in which revenue is equal to spending. This rule applies only to the operating budget.

     While tax policies and spending differ among states, most spend the largest amounts on education, public safety, highways, and public welfare. Public safety includes state police, crime labs, and corrections systems. States also build and maintain highways and roads, often with federal assistance. States get revenue several ways. All but five states have a sales tax. States may also have excise taxes, state income taxes, taxes on real property, such as land and buildings, and personal property, such as furniture and jewelry. Most states collect corporate income taxes and license fees.

     Local governments—towns, cities, townships, counties, and special districts—also collect taxes. These taxes support public schools, law enforcement, fire protection, libraries, airports, public hospitals, parks, public transportation, and more. The main source of local revenue is property taxes, a tax on the value of a property. Property taxes are paid by people who own homes, apartments, buildings, or land. An official called a tax assessor determines the value of the property. Local governments may also levy sales taxes, excise taxes, and income taxes.