Does State Income Tax Vary by State?

State income taxes vary by state, due to the different rates imposed and the nature of the taxable income. For example, as of 2013, New Hampshire and Tennessee taxed income from interest and dividends only, explains the Tax Policy Center.

State rules for taxable income are sometimes in line with the rules for federal taxable income, but they can vary, explains the Tax Policy Center. A few states levy a flat tax rate on all residents, but most states have multiple income brackets, and residents are taxed at different rates. Local governments in some states collect an income tax in addition to the state tax. Most income is taxed by the state in which it was earned, but some states have reciprocal agreements for taxing outside income in the person's state of residence.