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States Take Different Approaches on Income Taxes

Feb 24th 2016
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The difference between a taxidermist and a tax collector? The taxidermist takes only your skin, Mark Twain said. But a new report by the Tax Foundation offers a look at how states tax individual income – and how much is left untaxed on taxpayers’ bones varies a lot more than the old sage might think.

It’s certainly no secret that most states (43) levy income taxes. Of those, 41 tax wages and salaries, while New Hampshire and Tennessee only tax dividend and interest income. Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming don’t impose any income tax.

Of the states that tax wages, eight impose one tax rate for all taxable income. But most (33) levy graduated rates, and those tax brackets can vary widely. California and Missouri, for instance, have 10 tax brackets, while Kansas has a two-bracket system.

Here’s a snapshot of the findings:

  • State income tax rates in 2016 range from California’s high of 13.3 percent to North Dakota’s low of 2.9 percent. Nineteen states are in the 3 percent to 6 percent range.
  • Some states cluster a large number of tax brackets in a narrow income band. In Missouri, for example, the 10th and highest bracket is hit at $9,001 in annual income. (The state’s income tax rate is 6 percent.)
  • In New Jersey, the top bracket is at $500,000. In California, it’s $1 million if the state’s “millionaire’s tax” surcharge is factored in, according to the report.
  • Many states don’t index tax brackets, exemptions, and deductions for inflation.
  • Individual income taxes account for 27 percent of state tax collections.
  • In addition to personal income taxes, Delaware also taxes lump-sum distributions.
  • This year, Arkansas’ top marginal rate is 6.9 percent, down from 7 percent last year, on income exceeding $35,100. The state also imposed a new tax schedule for people earning between $21,000 and $75,000.
  • Hawaii’s temporary tax increases expired this year. The three top tax brackets were cut and the top marginal rate dropped from 11 percent to 8.25 percent.
  • Maine lowered rates and added a third tax bracket. That cut rates from 6.5 percent and 7.95 percent to 5.8, 6.75, and 7.15 percent.
  • Massachusetts also dropped tax rates, from 5.15 percent to 5.1 percent.
  • Ohio’s top marginal tax rate dropped from 5.333 percent to 4.997 percent.

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By DonaldHill
Aug 9th 2017 12:19

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