State income tax
Most individual U.S. states collect a state income tax in addition to federal income tax. In addition, some local governments impose an income tax, often based on state income tax calculations. Forty-three states and many localities in the United States impose an income tax on individuals. Forty-seven states and many localities impose a tax on the income of corporations.
State income tax is imposed at a fixed or graduated rate on the taxable income of individuals, corporations, and certain estates and trusts. The rates vary by state. Taxable income conforms closely to Federal taxable income in most states, with limited modifications. The states are prohibited from taxing income from Federal bonds or other obligations. Most do not tax Social Security benefits or interest income from obligations of that state. Several states require different useful lives and methods be used by businesses in computing the deduction for depreciation. Many states allow a standard deduction or some form of itemized deductions. States allow a variety of tax credits in computing tax.
Each state administers its own tax system. Many states also administer the tax return and collection process for localities within the state that impose income tax.
State income tax is allowed as a deduction in computing federal income tax, subject to limitations for individuals.
Basic principles 
State tax rules vary widely. Those states imposing a tax on income compute the tax as a tax rate times taxable income as defined by the state. The tax rate may be fixed for all income levels and taxpayers of a certain type, or it may be graduated, that is, the tax rates on higher amounts of income are higher than on lower amounts. Tax rates may differ for individuals and corporations.
Most states conform to Federal rules for determining:
- gross income,
- timing of recognition of income and deductions,
- most aspects of business deductions,
- characterization of business entities as either corporations, partnerships, or disregarded.
Gross income generally includes all income earned or received from whatever source, with exceptions. The states are prohibited from taxing income from Federal bonds or other obligations. Most states also exempt income from bonds issued by that state or localities within the state, as well as some portion or all of Social Security benefits. Many states provide tax exemption for certain other types of income, which varies widely by state. The states imposing an income tax uniformly allow reduction of gross income for cost of goods sold, though the computation of this amount may be subject to some modifications.
Most states provide for modification of both business and non-business deductions. All states taxing business income allow deduction for most business expenses. Many require that depreciation deductions be computed in manners different than at least some of those permitted for Federal income tax purposes. For example, many states do not allow the additional first year depreciation deduction.
Most states tax capital gain and dividend income in the same manner as other investment income. In this respect, individuals and corporations not resident in the state generally are not required to pay any income tax to that state with respect to such income.
Some states have alternative measures of tax. These include analogs to the Federal Alternative Minimum Tax in 14 states, as well as measures for corporations not based on income, such as capital stock taxes imposed by many states.
Income tax is self assessed, and individual and corporate taxpayers in all states imposing an income tax must file tax returns in each year their income exceeds certain amounts determined by each state. Returns are also required by partnerships doing business in the state. Many states require that a copy of the Federal income tax return be attached to at least some types of state income tax returns. The time for filing returns varies by state and type of return, but for individuals in many states is the same (typically April 15) as the Federal deadline .
Every state, including those with no income tax, has a state taxing authority with power to examine (audit) and adjust returns filed with it. Most tax authorities have appeals procedures for audits, and all states permit taxpayers to go to court in disputes with the tax authorities. Procedures and deadlines vary widely by state. All states have a statute of limitations prohibiting the state from adjusting taxes beyond a certain period following filing returns.
All states have tax collection mechanisms. States with an income tax require employers to withhold state income tax on wages earned within the state. Some states have other withholding mechanisms, particularly with respect to partnerships. Most states require taxpayers to make quarterly payments of tax not expected to be satisfied by withholding tax.
All states impose penalties for failing to file required tax returns and/or pay tax when due. In addition, all states impose interest charges on late payments of tax, and generally also on additional taxes due upon adjustment by the taxing authority.
Individual income tax 
Forty-three states impose a tax on the income of individuals, sometimes referred to as personal income tax. Tax rates vary widely, with the highest marginal rate being 13.3% in California. The income subject to tax varies by state. Some states impose the tax on Federal taxable income with minimal modifications, while others tax a measure bearing little resemblance to Federal taxable income.
The states imposing an income tax on individuals tax all taxable income (as defined in the state) of residents. Such residents are allowed a credit for taxes paid to other states. Most states tax income of nonresidents earned within the state. Such income includes wages for services within the state as well as income from a business with operations in the state. Where income is from multiple sources, formulary apportionment may be required for nonresidents. Generally, wages are apportioned based on the ratio days worked in the state to total days worked.
All states that impose an individual income tax allow most business deductions. However, many states impose different limits on certain deductions, especially depreciation of business assets. Most of the states allow non-business deductions in a manner similar to Federal rules. Few allow a deduction for state income taxes, though some states allow a deduction for local income taxes. Eight of the states allow a full or partial deduction for Federal income tax.
In addition, some states allow cities and/or counties to impose income taxes. Most Ohio cities and towns impose an income tax on individuals and corporations. By contrast, in New York only New York City and Yonkers impose a municipal income tax.
States with no individual income tax 
Nine U.S. states do not level a broad-based individual income tax. Some of these do tax certain forms of personal income:
- Alaska – no individual tax but has a state corporate income tax. Like New Hampshire, Alaska has no state sales tax. Alaska has an annual Permanent Fund Dividend, derived from oil revenues, for all citizens living in Alaska after one calendar year, except for some convicted of criminal offenses.
- Florida – no individual income tax but has a 5.5% corporate income tax. 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 individual or corporate income tax. Nevada gets most of its revenue from gambling and sales taxes.
- New Hampshire – has an Interest and Dividends Tax of 5%, and a Business Profits Tax of 8.5%. A Gambling Winnings Tax of 10% went into effect July 1, 2009 and was repealed May 11, 2011. New Hampshire has no sales tax.
- South Dakota – no individual income tax but has a state corporate income tax on financial institutions.
- Tennessee has a 6% tax on income received from stocks and bonds not taxed ad valorem. In 1932, the Tennessee Supreme Court struck down a broad-based individual income tax that had passed the General Assembly, in the case of Evans v. McCabe. However, a number of Attorneys General have recently opined that, if properly worded, a state income tax would be found constitutional by today's court, due to a 1971 constitutional amendment.
- Texas – no individual income tax but imposes a franchise tax on corporations. 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 as were corporations whose tax liability was also below a specified amount), which was amended in 2009 to increase the exemption level. The Texas Constitution places severe restrictions on passage of an individual income tax and use of its proceeds.
- Washington – no individual 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% to 1.9% depending on the type of industry.
- Wyoming has no individual or corporate income taxes.
States with flat rate individual income tax 
- Colorado - 4.63%
- Illinois - 5.0% (until 2015 to 2024, when it is set to fall to 3.75%; in 2025, the rate will fall permanently to 3.25%)
- Indiana - 3.4% (however, counties may impose an additional income tax.) See Taxation in Indiana.
- Massachusetts - 5.3% (most types of income)
- Michigan - 4.33% (2012) 4.25% (2013) (22 cities in Michigan may levy an income tax, with non-residents paying half the rate of residents)
- Pennsylvania - 3.07% (most municipalities in Pennsylvania assess a tax on wages, most are 1%, but can be as high as 3.98% in Philadelphia)
- Utah - 5.0%
Corporate income tax 
||This section needs additional citations for verification. (June 2010)|
Most states impose a tax on income of corporations having sufficient connection ("nexus") with the state. Such taxes apply to U.S. and foreign corporations, and are not subject to tax treaties. Such tax is generally based on business income of the corporation apportioned to the state plus nonbusiness income only of resident corporations. Most state corporate income taxes are imposed at a flat rate and have a minimum amount of tax. Business taxable income in most states is defined, at least in part, by reference to Federal taxable income.
According to www.taxfoundation.org these states have no state corporate income tax as of Feb 1, 2010: Nevada, Washington, Wyoming, Texas, and South Dakota. However, Texas has a Franchise Tax based on "taxable margin", generally defined as sales less either cost of goods sold less compensation, with complete exemption (no tax owed) for less than $1MM in annual earnings and gradually increasing to a maximum tax of 1% based on net revenue, where net revenue can be calculated in the most advantageous of four different ways.
States are not permitted to tax income of a corporation unless four tests are met under Complete Auto Transit, Inc. v. Brady:
- There must be a substantial connection (nexus) between the taxpayer's activities and the state
- The tax must not discriminate against interstate commerce
- The tax must be fairly apportioned
- There must be a fair relationship to services provided
In general, nexus requirements vary by state and are subject to interpretation, generally by the state's comptroller or tax office, and often in administrative "letter rulings."
In Quill Corp. v. North Dakota, the Supreme Court of the United States held that corporations must maintain a physical presence in the state (such as physical property, employees, officers) for a non-transient amount of time, and that such physical presence must be "substantial" for the state to be able to require non-domestic corporations to collect and remit sales or use tax. The Supreme Court's physical presence requirement in Quill is expressly limited to sales and use tax nexus, though the idea of "substantial nexus" has been applied to corporate income tax by numerous state supreme courts.
The courts have held that the requirement for fair apportionment may be met by apportioning between jurisdictions all business income of a corporation based on a formula using the particular corporation's details. Many states use a three factor formula, averaging the ratios of property, payroll, and sales within the state to that overall. Some states weight the formula. Some states use a single factor formula based on sales.
Nonbusiness income 
Some states tax resident corporations on nonbusiness income regardless of apportionment. Generally, a resident corporation is one incorporated in that state. The definition of nonbusiness income varies but generally includes investment income of business corporations, including dividends.
Consolidated or unitary filings 
Some states require and some states permit parent/subsidiary controlled groups of corporations to file returns on a consolidated or combined basis. California and Illinois require that all U.S. members of a "unitary" group must file a combined return.
State corporate income tax returns vary highly in complexity from two pages to more than 20 pages. States often require that a copy of the Federal income tax return be attached to the state return. Corporate income tax return due dates may differ from individual tax return due dates. Most states grant extensions of time to file corporate tax returns.
Some of the English colonies in North America taxed property (mostly farmland at that time) according to its assessed produce, rather than, as now, according to assessed resale value. Some of these colonies also taxed "faculties" of making income in ways other than farming, assessed by the same people who assessed property. These taxes taken together can be considered a sort of income tax. The records of no colony covered by Rabushka (essentially, the colonies that became part of the United States) separated the property and faculty components, and most records indicate amounts levied rather than collected, so much is unknown about the effectiveness of these taxes, up to and including whether the faculty part was actually collected at all. Colonies with laws taxing both property and faculties include:
- Plymouth Colony from 1643 and Massachusetts Bay Colony from 1646, and after they merged, the Province of Massachusetts Bay until the Revolution;
- New Haven Colony from 1649 and Connecticut Colony from 1650, past the 1662 merger with New Haven, until the Revolution;
- the Colony of Rhode Island and Providence Plantations, arguably from 1673 to 1744;
- the Province of West Jersey, a single 1684 law;
- the "South-west part" of the Province of Carolina, later the Province of South Carolina, from 1701 until the Revolution;
- the Province of New Hampshire, arguably from 1719 to 1772;
- and the Delaware Colony in the Province of Pennsylvania, from 1752 to the Revolution.
Rabushka makes it clear that Massachusetts and Connecticut actually levied these taxes regularly, while for the other colonies such levies happened much less often.
During and after the American Revolution, although property taxes were evolving toward the modern resale-value model, several states continued to collect faculty taxes. These include:
- Massachusetts until 1916;
- Connecticut until 1819;
- South Carolina, where the tax edged closer to a modern income tax, until 1868;
- Delaware until 1796;
- Maryland from 1777 to 1780;
- New York, one 1778 levy;
- Vermont from 1778 to 1850;
- Pennsylvania from 1782 to 1871;
- and Virginia from 1786 to 1790.
Following the Panic of 1837, but not always because of that depression, some states attempted to institute or expand income taxes, usually taxing only specific forms of income. These include:
- Pennsylvania (whose laws changed several times in the 1840s, and whose 1835 tax on bank dividends, paid by withholding, eventually paid half its total revenue);
and five states whose income taxes (like Pennsylvania's, except the bank dividend part) produced little revenue:
- Maryland from 1841 to 1850;
- Virginia from 1843;
- Alabama from 1843 to 1884;
- Florida from 1845 to 1855;
- and North Carolina from 1849.
During the American Civil War and Reconstruction Era, when both the United States of America (1861-1871) and the Confederate States of America (1863-1865) instituted income taxes, so did several states, including:
- Texas from 1863 to 1871;
- Missouri from 1861 to 1865;
- West Virginia in 1863 only;
- Georgia from 1863 to 1865;
- Louisiana from 1865 to 1899;
- and Kentucky from 1867 to 1872.
In 1883 Tennessee instituted the tax on interest and dividends which it still collects.
Following the 1895 Supreme Court decision in Pollock v. Farmers' Loan & Trust Co. which effectively ended a federal income tax, some more states instituted their own:
- South Carolina from 1897 to 1918;
- Oklahoma from 1908;
- Wisconsin from 1911 (Wisconsin's is generally considered the first modern state income tax, because it was administered not by local elected officials but by state civil servants, and because it taxed income in general, largely by withholding; the relevant law was largely written by Delos Kinsman, whose 1900 thesis on state income taxes is cited below);
- Mississippi from 1912.
Also during this period, the Republic of Hawaii started an income tax in 1896 which was almost immediately ruled to violate the country's constitution; after annexation as the Territory of Hawaii, in 1901, it instituted the income tax it still levies as a state.
The discussion up to this point concerns only individual income taxes, but Hawaii's 1901 tax was and is also levied on corporate incomes, and is acknowledged as the first state corporate income tax, bar the quibble that Hawaii was at the time a territory instead. (Previous state taxes on corporations had usually been on capital, not income, essentially a form of property tax.) Subsequently, Wisconsin and Mississippi included corporate income taxes in their laws instituting income taxes in general, although Mississippi's was held up in court until 1921.
- Connecticut, corporate (and called a franchise tax), from 1915;
- Virginia, corporate, from 1915;
- Massachusetts, individual, from 1916;
- Delaware, individual, from 1917;
- Missouri, individual and corporate, from 1917;
- Montana, corporate (franchise), from 1917;
- New York, corporate (franchise), from 1917;
- New York, individual, from 1919;
- North Dakota, individual and corporate, from 1919;
- New Mexico, individual, from 1919;
- Massachusetts, corporate (franchise), from 1920;
- North Carolina, corporate, from 1921;
- South Carolina, individual, from 1921;
- South Carolina, corporate, from 1922;
- New Hampshire, individual, restricted to interest and dividends, from 1923;
- Tennessee, corporate (franchise), from 1923.
A third of the current state individual income taxes, and still more of the current state corporate income taxes, were instituted during the decade after the Great Depression started:
- Arkansas, individual and corporate, from 1929;
- California, corporate (franchise), from 1929;
- Georgia, corporate, from 1929;
- Oregon, corporate (franchise), from 1929;
- Georgia, individual, from 1931;
- Idaho, individual and corporate, from 1931;
- Oklahoma, corporate, from 1931;
- Utah, individual and corporate (franchise), from 1931;
- Vermont, individual and corporate (franchise), from 1931;
- Alabama, corporate, from 1933;
- Arizona, individual and corporate, from 1933;
- Indiana, individual, from 1933;
- Kansas, individual and corporate, from 1933;
- Minnesota, individual, corporate, and corporate (franchise), from 1933;
- Montana, individual, from 1933;
- New Mexico, corporate, from 1933;
- Iowa, individual and corporate (franchise), from 1934;
- Louisiana, individual and corporate, from 1934;
- Alabama, individual, from 1935;
- California, corporate, from 1935;
- Pennsylvania, corporate (franchise), from 1935;
- South Dakota, corporate, from 1935;
- California, individual, from 1936;
- Kentucky, individual and corporate, from 1936;
- Colorado, individual and corporate, from 1937;
- Maryland, individual and corporate, from 1937.
The District of Columbia instituted a corporate income tax in 1939. Two states, South Dakota and West Virginia, abolished Depression-era individual income taxes in 1942; South Dakota also abolished its corporate income tax in 1943. In 1947, Rhode Island instituted a corporate income tax, while the District of Columbia instituted a corporate income tax called a franchise tax. In 1949, the Alaska Territory instituted an income tax which the state of Alaska would maintain until 1980.
During the 1950s, a few more states added corporate income taxes:
- Pennsylvania, from 1951;
- Oregon, from 1955;
- Delaware, from 1958;
- New Jersey, from 1958;
- Idaho, from 1959;
- Utah, from 1959.
In 1961, West Virginia resumed levying income taxes, and in 1963, Indiana instituted a corporate income tax.
The next wave of new state income taxes began in 1967:
- Michigan, individual and corporate, from 1967;
- Nebraska, corporate, from 1967;
- West Virginia, corporate, from 1967;
- Nebraska, individual, from 1968;
- Illinois, individual and corporate, from 1969;
- Maine, individual and corporate, from 1969;
- New Hampshire, corporate, from 1970;
- Florida, corporate, from 1971;
- Ohio, corporate, from 1971;
- Pennsylvania, individual, from 1971;
- Rhode Island, individual, from 1971;
- Ohio, individual, from 1972;
- New Jersey, individual, from 1976.
The only remaining state to institute an income tax to date is Connecticut, on individuals, from 1991, but that tax replaced an earlier tax apparently limited to capital gains and dividends. Numerous states with individual income taxes have considered or enacted measures to abolish those taxes since the Late-2000s recession began, and several states without individual income taxes have considered measures to institute them, but no state has so far actually changed its individual-income-taxing status.
Rhode Island did not have an income tax until 1971, but now it has one of the top five highest maximum rates in the nation. New Jersey added an income tax component to its corporation business tax in 1958. Connecticut added a personal income tax in 1992, as the median family income in many of the state's suburbs was nearly twice that of families living in urban areas. Governor Lowell Weicker's administration imposed a personal income tax (designed to address the inequities of the sales tax system) and implemented a program to modify state funding formulas so that urban communities received a larger share.
See also 
- Income tax in the United States
- State tax levels in the United States
- Taxation in the United States
- U.S. State Non-resident Withholding Tax
- The states with no individual income tax as of 2010 are Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas and Wyoming. The states with no corporate income tax as of 2010 are Nevada, South Dakota, and Wyoming. For tables of information on state taxes, see, e.g., 2009 State Tax Handbook, CCH, ISBN 9730808019213 (hereafter "CCH") or later editions, or All States Handbook, 2010 Edition, RIA Thomson, ISBN 978-0-7811-0415-9 ("RIA") or later editions.
- Exceptions are Arkansas, Iowa, Mississippi, New Hampshire (interest and dividends only), New Jersey, Pennsylvania, and Tennessee (interest and dividends only), none of which use Federal taxable income as a starting point in computing state taxable income.
- 31 USC 3124.
- CCH, page 277.
- Carl Davis, Kelly Davis, Matthew Gardner, Robert S. McIntyre, Jeff McLynch, Alla Sapozhnikova, "Who Pays? A Distributional Analysis of the Tax Systems in All 50 States", Institute on Taxation & Economic Policy, Third Edition, November 2009, pp 118.
- Due to California Prop 30, California's highest marginal tax rate exceeds New York City's combined 8.82% state and 3.876% local tax rates. See State Individual Income Tax Rates and Local Income Tax Rates by Jurisdiction, Tax Foundation, 2011-2012.
- For example, Colorado adjusts Federal taxable income only for state income tax, interest on Federal obligations, a limited subtraction for pensions, payments to the state college tuition fund, charitable contributions for those claiming the standard deduction, and a few other items of limited applicability. See 2010 Colorado individual income tax booklet. By contrast, Tennessee taxes individuals only on interest and dividend income; see 2010 Tennessee individual income tax return kit.
- Alaska Permanent Fund Division website eligibility requirements www.PFD.state.AK.us/eligibility
- NH House Bill 229
- New Hampshire Department of Revenue Administration, FAQs
- Tenn Const Art II, §28.
- See Tenn. AG Op #99-217, Paul G. Summers - .
- Business and Occupation, Washington State Department of Revenue
- Business and Occupation Tax brochure, Washington State Department of Revenue (2007)
- Wyoming Department of Revenue
- State Individual Income Taxes
- Massachusetts taxes certain types of gains at a flat 12%; a subset of those allow a 50% deduction, producing an effective rate of 6%. These tiers are still considered flat, since they are based on the type of income, and not the amount. See Individual Income Tax Provisions in the States.
- Texas Statutes Chapter 171 Section 171.101. CCH State Tax Handbook 2009 edition, page 219. 2009 edition ISBN 97808080192103.
- Franchise Tax
- See, generally, Tax Commissioner of the State of West Virginia v. MBNA America Bank, 220 W. Va. 163; 640 S.E.2d 226, and Geoffrey, Inc. v. South Carolina Tax Commission, 313 S.C. 15; 437 S.E.2d 13
- See, e.g., the discussion in Hellerstein, Hellerstein & Youngman, State and Local Taxation, Chapter 8 section C. ISBN 0-314-15376-4.
- For a compilation of formulas, see State Tax Handbook published annually by CCH.
- Seligman, Edwin R.A. (1914). The Income Tax: A Study of the History, Theory, and Practice of Income Taxation at Home and Abroad. Second edition, revised and enlarged with a new chapter. New York: The Macmillan Company. Underlies most of the history section through 1911, but for the faculty taxes and Seligman's evaluation of them as income taxes, see Part II Chapter I, pp. 367-387.
- Rabushka, Alvin (2008). Taxation in Colonial America. Princeton: Princeton University Press. ISBN 978-0-691-13345-4
- Kinsman, Delos Oscar (1900). The Income Tax in the Commonwealths of the United States. Ithaca: Publications of the American Economic Association, Third Series, Vol. IV, No. 4. A source for the history section through 1900 in general, but specifically for the PA dividend tax see pp. 31-32.
- Stark, John O. (1987-1988). "The Establishment of Wisconsin's Income Tax". Wisconsin Magazine of History volume 71 pp. 27-45.
- State Taxation of Interstate Commerce. Report of the Special Subcommittee on State Taxation of Interstate Commerce of the Committee on the Judiciary, House of Representatives. Pursuant to Public Law 86-272, as Amended. 88th Congress, 2d Session, House Report No. 1480, volume 1. (Usually abbreviated House Report 88-1480.) Often referred to as the "Willis committee report" after chair Edwin E. Willis. See chart p. 103, supported by surrounding pages of text.
- Comstock, Alzada (1921). State Taxation of Personal Incomes. Volume CI, Number 1, or Whole Number 229, of Studies in History, Economics and Public Law edited by the Faculty of Political Science of Columbia University. New York: Columbia University.
- Willis commission report again
- "Chapter VIII: Era of Transition". State of Rhode Island General Assembly. 2009-12-29.
- http://www.taxfoundation.org/research/topic/56.html (accessed Feb. 1, 2010)
- New Jersey Division of Taxation Corporation Business Tax Overview.
|Find more about income tax at Wikipedia's sister projects|
|Definitions and translations from Wiktionary|
|Media from Commons|
|Learning resources from Wikiversity|
|News stories from Wikinews|
|Quotations from Wikiquote|
|Source texts from Wikisource|
|Textbooks from Wikibooks|
|Travel information from Wikivoyage|
- 'The Best and the Worst States for Taxes' - MSN Money
- State Individual Income Tax Rates - Federation of Tax Administrators
- Tax Links for All 50 States - AccountingMajors.com
- Individual State Income Tax Rates 2009 - Incomejunkie.com
- Individual income tax revenue by state Sourced from the US Census Bureau