State Income Taxes

On this page: Taxation

Background

Income taxes are a major revenue source for states and localities, accounting for about one-quarter of state and local taxes. Most states and the District of Columbia have a broad-based income tax; nine states do not. In addition, some localities impose a local income tax.

Most state income taxes are closely linked to the federal tax structure through state conformity with federal definitions of income. They are, therefore, similar in structure to the federal income tax but have different tax rates, brackets, and other parameters.

In addition to conformity, state and federal income taxes are linked through provisions such as the deductibility of state income taxes and local property taxes from federal taxable income. This link is generally desirable because it simplifies tax administration, enhances compliance and enforcement, and makes it easier for taxpayers to file their state returns. Yet whenever the federal government modifies its tax base, it can create adjustment problems for states. In response to difficult budget situations, many states recently changed their systems so they no longer conform, fully or in part, to the federal scheme.

Generally state income taxes are the most progressive of state taxes (for more on the term “progressive,” see this chapter’s section Key Concepts in Taxation). Even so, state and local income tax systems are typically much less progressive than the federal income tax. A number of states have a flat, or nearly flat, tax system, in which the same rate applies to all, or nearly all, taxable income. Unlike the federal income tax, most state tax systems are not automatically indexed for inflation; over time this leads to automatic tax increases and even less progressive tax structure.

States can make their systems more progressive by increasing standard deductions and personal exemptions, adjusting income tax brackets, and regularly indexing tax parameters. State earned income tax credits, currently in place in some states, are another way to make income taxes more progressive.

State Income Taxes: Policy

Personal Income Tax

In this policy: StateTaxationincome taxequity

States that do not have a broad-based personal income tax should enact one to increase equity, improve balance among revenue sources, and promote economic and budgetary stability.

Increasing the progressive nature of the income tax

In this policy: StateTaxationprogressivity

States should exempt from state tax rolls individuals and families with incomes below an appropriately measured level of poverty.

States should increase the progressive nature of their income tax systems by adjusting personal exemptions, standard deductions, credits, tax rates, and brackets and indexing them for inflation.

Treatment of taxes paid to other states

In this policy: StateTaxationcredit

States with income taxes should allow credits for taxes paid by their residents to other states so that no taxpayer is subject to double taxation.