State income tax
is an income tax
in the United States
that is levied by each individual state
. Seven states choose to impose no income tax. These states are Alaska
, South Dakota
, and Wyoming
. Additionally, New Hampshire
limit their state income taxes to dividends
and interest income
only. As of 2007
, the highest rate of state income tax is that of California
, with a maximum rate of 10.3%. Of those states which impose an income tax, the lowest maximum rate is that of Illinois
, which levies a flat tax
of 3%. Most states (34) have a progressive income tax
, where the rate rises as an income gets larger. In California
, for instance, the rate begins at 1% at $6,622 in income and rises to 9.3% over $43,468. In 2005, California
added a mental health tax of 1% on incomes greater than $1 million, making the marginal income tax rate in California
10.3% at the extreme income ranges.
State income taxes are on top of the federal income tax, which currently tops out at 35%, as well as payroll taxes (contributions to Social Security and Medicare). Therefore, the maximum total rate is 35% of income in the states of Florida, Texas, and Washington, but 44.5% of income in Vermont and 45.3% in California, in addition to payroll taxes. However, these figures do not reflect the fact that some state and local taxes (including state income taxes) are deductible for federal tax purposes. Due to Alternative Minimum Tax, or AMT, itemization may not yield much, if any, tax savings on the federal return. For those not affected by AMT, the federal government effectively subsidizes a portion of an individual's state income tax, but only for individuals whose total deductions are greater than the standard deduction, which means the subsidy falls almost entirely to middle class payers.
In addition, some states allow cities and/or counties to impose income taxes above and beyond the federal and state income taxes. An example is New York City, where there is both a state income tax of up to 8.14% and a city income tax, up to 4.00%. The maximum rate in the city limits of New York City (as of 2007) is therefore 47.14% (approximately one-half of marginal income), or 1.35 times the 35.0% rate (approximately one-third of marginal income) inside "federal income tax only" cities such as Seattle, Houston, Dallas, and Miami.
U.S. States without a personal income tax
Individual Income Tax Rates-2008
- Alaska – has a state corporate income tax
- Florida – has a state corporate income tax. Once had tax on "intangible personal property" held on the first day of the year (stocks, bonds, mutual funds, money market funds, etc.) but was abolished at the start of 2007. The Florida Constitution explicitly prohibits a personal income tax.
- New Hampshire – The state does have tax, at a 5% rate, on interest and dividends
- South Dakota – has a state corporate income tax on financial institutions.
- Tennessee – does have tax on income (at a 6% rate) received from stocks and bonds not taxed ad valorem (Tenn Const Art II, §28). The Tennessee Supreme Court has held that a personal income tax is unconstitutional. [Evans v. McCabe]
- Texas – in May 2006, passed a franchise tax on businesses (sole proprietorships and some partnerships are exempt). The Texas Constitution places severe restrictions on passage of a personal income tax and use of its proceeds.
- Washington – has a corporate tax called the "Business and Occupation Tax (B&O)", which is a gross receipts tax