Why might state income tax be different for people living in different states?
September 23, 2023
Why State Income Tax Varies Across the US
Have you ever wondered why some states charge more income tax than others? Or why some states have no income tax at all? In this article, we will explore the reasons behind these differences and how they affect you as a taxpayer.
History of State Income Tax
State income tax is a tax levied by state governments on the income earned by individuals and businesses within their jurisdiction. The first state to impose an income tax was Wisconsin in 1911, followed by Mississippi in 1912. By 1930, 24 states had adopted some form of income tax. Today, 41 states and the District of Columbia have state income tax, while nine states have no state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
Factors that Influence State Income Tax Rates
State income tax rates vary widely across the US, ranging from 1% to 13.3%. There are several factors that influence how much a state charges in income tax, such as:
- The state’s budget and spending needs. States that have higher expenditures on public services, such as education, health care and infrastructure, may need to raise more revenue from income tax.
- The state’s political and ideological preferences. States that lean more towards progressive or liberal policies may favor higher income tax rates, especially for higher-income earners, to reduce income inequality and fund social programs. States that lean more towards conservative or libertarian policies may favor lower or no income tax rates, to promote economic growth and individual freedom.
- The state’s other sources of revenue. States that have no or low income tax may rely more on other taxes, such as sales tax, property tax, excise tax or corporate tax. States that have abundant natural resources, such as oil or gas, may also generate revenue from severance taxes or royalties.
- The state’s economic and demographic characteristics. States that have a larger and more diverse population, a higher cost of living, or a more dynamic and competitive economy may have higher income tax rates than states that have a smaller and more homogeneous population, a lower cost of living, or a more stagnant and less competitive economy.
Benefits and Drawbacks of High and Low State Income Tax
Depending on your perspective, high or low state income tax rates may have different benefits and drawbacks. Here are some of the pros and cons of each:
| High State Income Tax | Low or No State Income Tax |
|---|---|
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Comparison of State Income Tax Rates in 2023
To give you an idea of how much state income tax you would pay in different states, here is a comparison of the state income tax rates for single filers in 2023, based on the latest data from the Tax Foundation:
| State | Income Tax Rate |
|---|---|
| Alabama | 2% – 5% |
| Alaska | No Income Tax |
| Arizona | 2.55% – 2.98% |
| Arkansas | 2% – 4.9% |
| California | 1% – 13.3% |
| Colorado | 4.4% |
| Connecticut | 3% – 6.99% |
| Delaware | 2.2% – 6.6% |
| District of Columbia | 4% – 10.75% |
| Florida | No Income Tax |
| Georgia | 1% – 5.75% |
| Hawaii | 1.4% – 11% |
| Idaho | 1.125% – 6.925% |
| Illinois | 4.95% |
| Indiana | 3.23% |
| Iowa | 0.33% – 8.53% |
| Kansas | 3.1% – 5.7% |
| Kentucky | 5% |
| Louisiana | 1.85% – 4.25% |
| Maine | 5.8% – 7.15% |
| Maryland | 2% – 5.75% |
| Massachusetts | 5% |
| Michigan | 4.25% |
| Minnesota | 5.35% – 9.85% |
| Mississippi | 4% – 5% |
| Missouri | 1.5% – 5.3% |
| Montana | 1% – 6.9% |
| Nebraska | 2.46% – 6.84% |
| Nevada | No Income Tax |
| New Hampshire | 5% |
| New Jersey | 1.4% – 10.75% |
| New Mexico | 1.7% – 5.9% |
| New York | 4% – 10.9% |
| North Carolina | 4.99% |
| North Dakota | 1.1% – 2.64% |
| Ohio | 2.77% – 3.99% |
| Oklahoma | 0.25% – 4.75% |
| Oregon | 4.75% – 9.9% |
| Pennsylvania | 3.07% |
| Rhode Island | 3.75% – 5.99% |
| South Carolina | 0% – 7% |
| South Dakota | No Income Tax |
| Tennessee | No Income Tax |
| Texas | No Income Tax |
| Utah | 4.85% |
| Vermont | 3.35% – 8.75% |
| Virginia | 2% – 5.75% |
| Washington | 7% |
| West Virginia | 3% – 6.5% |
| Wisconsin | 3.54% – 7.65% |
| Wyoming | No Income Tax |
Tips for Saving on State Income Tax
If you live in a state that has income tax, you might be looking for ways to reduce your tax bill. Here are some tips that can help you save money on state income tax. Also, this website shows how to make cash that will help you offset the cost of paying taxes.
Claim all the deductions you can
Deductions are expenses that you can subtract from your taxable income, lowering your tax liability. Some common deductions are mortgage interest, property taxes, charitable contributions, medical expenses, and student loan interest. Depending on your state, you might be able to claim more deductions than the federal ones, or vice versa. Check your state tax forms and instructions to see what deductions are available to you.
Take advantage of tax credits
Tax credits are even better than deductions, because they reduce your tax bill dollar for dollar. Some common tax credits are child tax credit, earned income credit, education credit, and energy credit. Again, depending on your state, you might be eligible for more or fewer credits than the federal ones. Check your state tax forms and instructions to see what credits are available to you.
Make adjustments to your income
Adjustments are amounts that you can subtract from your gross income before calculating your taxable income. Some common adjustments are contributions to retirement accounts, health savings accounts, alimony payments, and moving expenses. Depending on your state, you might be able to make more or fewer adjustments than the federal ones. Check your state tax forms and instructions to see what adjustments are available to you.
Adjust your withholding or make estimated payments
If you want to avoid a large tax bill or a penalty at the end of the year, you should make sure that enough taxes are withheld from your paycheck or that you make estimated payments throughout the year. You can use a withholding calculator or a worksheet to determine how much taxes you should have withheld or pay each quarter. You can also adjust your withholding by filing a new W-4 form with your employer.
