What Is a Political Subdivision?
Learn how local government entities are legally defined and empowered by the state, a distinction crucial for their operations and public financing.
A political subdivision is a form of local government created by a state to help administer public duties. These entities are established through state law to serve specific public purposes within a defined geographic area, operating as extensions of the state. The creation of these bodies must be expressly authorized by state statute, which also delegates specific governmental functions and allocates funds for their exclusive use.
Core Governmental Powers
A defining characteristic of a political subdivision is its possession of delegated sovereign powers. Legal precedent identifies three specific powers as indicators of this status. These powers are not inherent; they are explicitly granted by the state government that creates the subdivision.
One delegated authority is the power to tax. This allows the entity to levy taxes, such as property or sales taxes, on the individuals and businesses within its jurisdiction. The revenue generated from these taxes is used to fund the public services and infrastructure projects that the subdivision is responsible for providing.
Another authority is police power, the ability to regulate and enforce order to protect public health, safety, and general welfare. This is exercised through the creation and enforcement of local laws and ordinances. Examples include zoning regulations that dictate land use, building codes that ensure structural safety, and public health rules governing sanitation.
The power of eminent domain is the third sovereign power. This is the right of the government to take private property for public use, provided that “just compensation” is paid to the property owner. This authority is used for public projects, such as building roads, schools, or public utilities.
Common Types of Political Subdivisions
Political subdivisions exist in many forms to serve distinct governmental functions. The most recognizable types are general-purpose governments like counties, cities, towns, and villages. These entities provide a wide range of services to their residents, including law enforcement, fire protection, and road maintenance. Their structure and responsibilities are defined by state charters.
Counties, or parishes in some areas, are the largest local government divisions within a state. They manage broader regional services, such as court systems, public health departments, and election oversight. Within counties, municipalities like cities and towns operate with a more localized focus, managing services for their populated areas.
Beyond general-purpose entities are special-purpose districts created to perform a single function. School districts are a prime example, existing to operate public schools. Other examples include fire districts, water and sewer authorities, library districts, and park districts. These districts have their own governing boards and taxing authority to focus resources on their mission.
Significance in Federal Tax Law
The status of a political subdivision carries implications under federal tax law, as outlined in the Internal Revenue Code. A provision states that gross income does not include interest earned on the bonds issued by a state or its political subdivisions. These debt securities are known as municipal bonds and are issued by these entities to fund public projects.
This tax-exempt status benefits the issuing political subdivision. Because investors do not have to pay federal income tax on the interest they receive, they are willing to accept a lower interest rate compared to taxable bonds. This results in lower borrowing costs for the subdivision, making it more affordable to finance capital projects like schools, hospitals, and roads.
For investors, the appeal of municipal bonds lies in the tax savings. The interest income is exempt from federal income tax and, in many cases, from state and local taxes for residents of the issuing state. This makes municipal bonds an attractive investment for those seeking a steady stream of tax-advantaged income.
The Internal Revenue Service has established criteria to determine if an entity qualifies to issue tax-exempt bonds. To qualify, the entity must serve a clear governmental purpose and possess at least one sovereign power. The IRS also considers whether the entity is subject to governmental control. This control factor means a state or local government has the power to direct the entity’s actions or approve or remove a majority of its governing body.