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States with no state income tax are in red, states taxing only dividend and interest income are in yellow

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, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Additionally, New Hampshire and Tennessee limit their state income taxes to only dividends and interest income. These states (such as Tennessee) raise primary revenue through alternate taxation methods, such as higher sales taxes.[1] As of May of 2009, the highest rate of state income tax is that of Hawaii, with a maximum rate of 11%. 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 rates rise as the income grows higher. In California, for instance, the rate for a single person begins at 1% at $6,622 in income and rises to 9.3% over $44,814[2]. In 2005, California added a mental health tax of 1% on incomes greater than $1 million, making the marginal income tax rate in that state 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[3], 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 6.85%[4] and a city income tax, up to 3.648%[5]. The maximum rate in the city limits of New York City (as of 2007) is therefore 45.498% (approximately one-half of marginal income), or 1.3 times the 35.0% rate (approximately one-third of marginal income) inside "federal income tax only" cities such as Seattle, Houston, Dallas, and Miami.

Contents

U.S. States without a personal income tax

  • Alaska – no personal tax, but has a state corporate income tax.
  • Florida – no personal income tax, but has a corporate income tax (at a 5% rate). The state once had a tax on "intangible personal property" held on the first day of the year (stocks, bonds, mutual funds, money market funds, etc.), but it was abolished at the start of 2007.
  • Nevada – has no personal or corporate income tax. Nevada gets most of its revenue from gambling taxes.
  • New Hampshire – has an Interest and Dividends Tax of 5%, and a Business Profits Tax of 8.5%.[6]
  • South Dakota – no personal income tax, but 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). In 1932, the Tennessee Supreme Court struck down a broad-based personal income tax that had passed the General Assembly [Evans v. McCabe]. However, a number of Attorneys General have recently opined that, if properly worded, an income tax would be found constitutional by today's court. This is due to a 1971 constitutional amendment. (see Tenn. AG Op #99-217, Paul G. Summers [1])
  • Texas – no personal income tax or corporate income tax. In May 2007, the legislature replaced the franchise tax with a gross margins tax on businesses (sole proprietorships and some partnerships were automatically exempt; corporations with receipts below a certain level were also exempt), which was amended in 2009 to increase the exemption level. The Texas Constitution places severe restrictions on passage of a personal income tax and use of its proceeds.
  • Washington – no personal tax, but has a Business and Occupation Tax (B&O) on gross receipts, applied to "almost all businesses located or doing business in Washington." It varies from 0.138% for splitting dried peas to 1.6% for bigtime gambling.[7][8]
  • Wyoming – has no personal or corporate income taxes.

U.S. States with a flat rate personal income tax

The following states have a flat rate personal income tax:[9]

History

Rhode Island did not have an income tax until 1971.[10] New Jersey did not have an income tax until 1976.[11]

See also

Notes

External links

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