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In addition to federal
income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Ta ...
collected by the United States, most individual
U.S. state In the United States, a state is a constituent political entity, of which there are 50. Bound together in a political union, each state holds governmental jurisdiction over a separate and defined geographic territory where it shares its sove ...
s collect a state income tax. Some local governments also impose an income tax, often based on state income tax calculations. Forty-two states and many localities in the United States impose an
income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Ta ...
on individuals. Eight states impose no state income tax, and a ninth,
New Hampshire New Hampshire is a U.S. state, state in the New England region of the northeastern United States. It is bordered by Massachusetts to the south, Vermont to the west, Maine and the Gulf of Maine to the east, and the Canadian province of Quebec t ...
, imposes an individual income tax on
dividend A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-i ...
s and
interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...
income but not other forms of income (though it will be phased out by 2027). 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 taxable income of individuals, corporations, and certain estates and trusts. These tax rates vary by state and by entity type.
Taxable income Taxable income refers to the base upon which an income tax system imposes tax. In other words, the income over which the government imposed tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. ...
conforms closely to federal taxable income in most states with limited modifications. States are prohibited from taxing income from federal bonds or other federal obligations. Most states do not tax Social Security benefits or interest income from obligations of that state. In computing the deduction for
depreciation In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the ...
, several states require different useful lives and methods be used by businesses. Many states allow a
standard deduction Under United States tax law, the standard deduction is a dollar amount that non- itemizers may subtract from their income before income tax (but not other kinds of tax, such as payroll tax) is applied. Taxpayers may choose either itemized deduc ...
or some form of itemized deductions. States allow a variety of
tax credit A tax credit is a tax incentive which allows certain taxpayers to subtract the amount of the credit they have accrued from the total they owe the state. It may also be a credit granted in recognition of taxes already paid or a form of state "dis ...
s 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 an itemized deduction in computing federal income tax, subject to limitations for individuals.


Basic principles

State tax rules vary widely. The tax rate may be fixed for all income levels and taxpayers of a certain type, or it may be graduated. Tax rates may differ fo
individuals
an

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 entities. Gross income generally includes all income earned or received from whatever source with some exceptions. States are prohibited from taxing income from federal bonds or other federal 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 Tax exemption is the reduction or removal of a liability to make a compulsory payment that would otherwise be imposed by a ruling power upon persons, property, income, or transactions. Tax-exempt status may provide complete relief from taxes, redu ...
for certain other types of income, which varies widely by state. States 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 In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the ...
deductions be computed in manners different from at least some of those permitted for federal income tax purposes. For example, many states do not allow the additional first year bonus depreciation deduction. Most states tax
capital gain Capital gain is an economic concept defined as the profit earned on the sale of an asset which has increased in value over the holding period. An asset may include tangible property, a car, a business, or intangible property such as shares. A ...
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 their state income tax returns. The deadline for filing returns varies by state and type of return, but for individuals in many states is the same as the federal deadline, typically April 15. Every state, including those with no income tax, has
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 A statute of limitations, known in civil law systems as a prescriptive period, is a law passed by a legislative body to set the maximum time after an event within which legal proceedings may be initiated. ("Time for commencing proceedings") In ...
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 estimated tax payments not expected to be satisfied by
withholding tax Tax withholding, also known as tax retention, Pay-as-You-Go, Pay-as-You-Earn, Tax deduction at source or a ''Prélèvement à la source'', is income tax paid to the government by the payer of the income rather than by the recipient of the incom ...
. 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. State income tax rates vary widely from state to state. 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 In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the ...
of business assets. Most 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. Six 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. For example, most
Ohio Ohio () is a U.S. state, state in the Midwestern United States, Midwestern region of the United States. Of the List of states and territories of the United States, fifty U.S. states, it is the List of U.S. states and territories by area, 34th-l ...
cities and towns impose an income tax on individuals and corporations. By contrast, in
New York New York most commonly refers to: * New York City, the most populous city in the United States, located in the state of New York * New York (state), a state in the northeastern United States New York may also refer to: Film and television * '' ...
, only
New York City New York, often called New York City or NYC, is the List of United States cities by population, most populous city in the United States. With a 2020 population of 8,804,190 distributed over , New York City is also the L ...
and
Yonkers Yonkers () is a city in Westchester County, New York, United States. Developed along the Hudson River, it is the third most populous city in the state of New York (state), New York, after New York City and Buffalo, New York, Buffalo. The popul ...
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. Alaska has no state sales tax, but lets local governments collect their own sales taxes. 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 – no individual or corporate income tax. Nevada gets most of its revenue from sales taxes as well as taxes on the gambling and mining industries. # New Hampshire – has an Interest and Dividends Tax of 5% (scheduled to phase out from 2023 through 2026), and a Business Profits Tax of 8.5%. New Hampshire has no sales tax. # South Dakota – no individual income tax but has a state franchise income tax on financial institutions. # Tennessee – has no individual income tax. In 2014 voters approved an amendment to the state constitution prohibiting state or local governments from levying any income tax. Prior to January 1, 2021 Tennessee had the " Hall income tax", a tax on certain interest and dividend income from investments. # Texas – no individual income tax but imposes a franchise tax on corporations. In May 2007, the legislature modified the franchise tax by enacting a modified gross margin tax on certain 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 The Constitution of the State of Texas is the document that establishes the structure and function of the government of the U.S. state of Texas, and enumerates the basic rights of the citizens of Texas. The current document was adopted on Febr ...
bans the passage of an income tax with a 2/3 majority of the legislature required to repeal the ban. # 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. In July 2017, the
Seattle City Council The Seattle City Council is the legislative body of the city of Seattle, Washington. The Council consists of nine members serving four-year terms, seven of which are elected by electoral districts and two of which are elected in citywide at-la ...
unanimously approved an income tax on Seattle residents, making the city the only one in the state with an income tax. It was subsequently ruled unconstitutional by the
King County Superior Court The Superior Court of Washington for King County (more commonly, the King County Superior Court) is the largest trial court in Washington state. It is based at the King County Courthouse, 516 Third Avenue, in downtown Seattle, Washington. It als ...
. The
Court of Appeals A court of appeals, also called a court of appeal, appellate court, appeal court, court of second instance or second instance court, is any court of law that is empowered to hear an appeal of a trial court or other lower tribunal. In much ...
upheld that ruling and the
Washington Supreme Court The Washington Supreme Court is the highest court in the judiciary of the U.S. state of Washington. The court is composed of a chief justice and eight associate justices. Members of the court are elected to six-year terms. Justices must retire ...
declined to hear the case, maintaining the tax as unconstitutional and unenforceable. In 2022, through the Long-Term Care Trust Act, Washington began taxing high-net-worth individuals once capital gains exceeded $250,000. Stakeholders advocating for adoption of this act include assisted living, adult family home, and nursing home providers; labor unions; area agencies on aging; businesses; the
AARP AARP (formerly called the American Association of Retired Persons) is an interest group in the United States focusing on issues affecting those over the age of fifty. The organization said it had more than 38 million members in 2018. The magazi ...
, and more. # Wyoming – no individual or corporate income taxes.


States with flat rate individual income tax

The following eight states have a flat rate individual income tax as of 2016: *Colorado – 4.63% (2019) *Illinois – 4.95% (July 2017) *Indiana – 3.23% Counties may impose an additional income tax). See
Taxation in Indiana Taxes in Indiana are almost entirely authorized at the state level, although the revenue is used to fund both local and state level government. The state of Indiana's income comes from four primary tax areas. Most state level income is from a s ...
*Massachusetts – 5.1% (2016) (most types of income) *Michigan – 4.25% (2016) (22 cities in Michigan may levy an income tax, with non-residents paying half the rate of residents) *North Carolina – 4.99% (2022) *Pennsylvania – 3.07% (many municipalities in Pennsylvania assess a tax on wages: most are 1%, but can be as high as 3.84% in Philadelphia. School districts may also impose an earned income tax up to Act 32 limits. ) *Utah – 5.0% (2016)


States with local income taxes in addition to state-level income tax

The following states have local income taxes. These are generally imposed at a
flat rate A flat fee, also referred to as a flat rate or a linear rate refers to a pricing structure that charges a single fixed fee for a service, regardless of usage. Less commonly, the term may refer to a rate that does not vary with usage or time of use ...
and tend to apply to a limited set of income items. Alabama: *Some counties, including Macon County, and municipalities, including
Birmingham Birmingham ( ) is a city and metropolitan borough in the metropolitan county of West Midlands in England. It is the second-largest city in the United Kingdom with a population of 1.145 million in the city proper, 2.92 million in the We ...
(employees on payroll only) California: *
San Francisco San Francisco (; Spanish for " Saint Francis"), officially the City and County of San Francisco, is the commercial, financial, and cultural center of Northern California. The city proper is the fourth most populous in California and 17t ...
(payroll only) Colorado: *Some municipalities, including
Denver Denver () is a consolidated city and county, the capital, and most populous city of the U.S. state of Colorado. Its population was 715,522 at the 2020 census, a 19.22% increase since 2010. It is the 19th-most populous city in the Unit ...
and
Aurora An aurora (plural: auroras or aurorae), also commonly known as the polar lights, is a natural light display in Earth's sky, predominantly seen in high-latitude regions (around the Arctic and Antarctic). Auroras display dynamic patterns of bri ...
(flat-fee Occupational Privilege tax for privilege of working or conducting business; filed with municipality imposing fee) Delaware: * Wilmington (earned, certain Schedule E income, as well as capital gains from sale of property used in business; income must be reported to the City of Wilmington if Wilmington tax is not withheld by employer.) Indiana (all local taxes reported on state income tax form): *All counties Iowa (all local taxes reported on state income tax form): *Many school districts and
Appanoose County Appanoose County is a county in the U.S. state of Iowa. As of the 2020 census, the population was 12,317. Its county seat is Centerville. History Appanoose County was formed on February 17, 1843, from open territory. It was named for th ...
Kansas: *Some counties and municipalities (interest and dividend income; reported on separate state form 200 filed with the county clerk) Kentucky: *Most counties, including Kenton County, Kentucky, and municipalities, including
Louisville Louisville ( , , ) is the largest city in the Commonwealth of Kentucky and the 28th most-populous city in the United States. Louisville is the historical seat and, since 2003, the nominal seat of Jefferson County, on the Indiana border. ...
and
Lexington Lexington may refer to: Places England * Laxton, Nottinghamshire, formerly Lexington Canada * Lexington, a district in Waterloo, Ontario United States * Lexington, Kentucky, the largest city with this name * Lexington, Massachusetts, the oldes ...
(earned income and certain rental income that qualifies as a business; reported as Occupational License fee/tax by employer or as Net Profits tax by business, filed with county or municipality imposing tax) Maryland (all local taxes reported on state income tax form): *All counties, and the independent city of
Baltimore Baltimore ( , locally: or ) is the most populous city in the U.S. state of Maryland, fourth most populous city in the Mid-Atlantic, and the 30th most populous city in the United States with a population of 585,708 in 2020. Baltimore was ...
Michigan: *Many cities, including
Detroit Detroit ( , ; , ) is the largest city in the U.S. state of Michigan. It is also the largest U.S. city on the United States–Canada border, and the seat of government of Wayne County. The City of Detroit had a population of 639,111 at t ...
,
Lansing Lansing () is the capital of the U.S. state of Michigan. It is mostly in Ingham County, although portions of the city extend west into Eaton County and north into Clinton County. The 2020 census placed the city's population at 112,644, maki ...
, and
Flint Flint, occasionally flintstone, is a sedimentary cryptocrystalline form of the mineral quartz, categorized as the variety of chert that occurs in chalk or marly limestone. Flint was widely used historically to make stone tools and start ...
(most income above a certain annual threshold; reported on form issued by imposing city or on separate state form 5118/5119/5120 in the case of Detroit) Missouri (all other cities are prohibited from imposing local income tax): *
Kansas City The Kansas City metropolitan area is a bi-state metropolitan area anchored by Kansas City, Missouri. Its 14 counties straddle the border between the U.S. states of Missouri (9 counties) and Kansas (5 counties). With and a population of more th ...
(earned income; income must be reported to the Kansas City if Kansas City tax is not withheld by employer; residents must file the Earnings tax form to report wages on which Kansas City income tax is not withheld and the Business Earnings tax form to report self-employment income) * St. Louis (earned income; income must be reported to the City of St. Louis if St. Louis tax is not withheld by employer; residents must file the Earnings tax form to report wages on which St. Louis income tax is not withheld and the Business Earnings tax form to report self-employment income) New Jersey: * Newark (payroll only) New York (all local taxes reported on state income tax form): *
New York City New York, often called New York City or NYC, is the List of United States cities by population, most populous city in the United States. With a 2020 population of 8,804,190 distributed over , New York City is also the L ...
(employees with NYC section 1127 withholding should also file New York City Form 1127) *
Yonkers Yonkers () is a city in Westchester County, New York, United States. Developed along the Hudson River, it is the third most populous city in the state of New York (state), New York, after New York City and Buffalo, New York, Buffalo. The popul ...
* Metropolitan Commuter Transportation District (self-employed with income sourced from New York City, as well as the counties of Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk, and Westchester) Ohio: *Some school districts (either traditional or earned income tax base; reported on separate state form SD-100). *RITA (Regional Income Tax Agency). https://www.ritaohio.com/Municipalities *Most
cities A city is a human settlement of notable size.Goodall, B. (1987) ''The Penguin Dictionary of Human Geography''. London: Penguin.Kuper, A. and Kuper, J., eds (1996) ''The Social Science Encyclopedia''. 2nd edition. London: Routledge. It can be def ...
and
villages A village is a clustered human settlement or community, larger than a hamlet but smaller than a town (although the word is often used to describe both hamlets and smaller towns), with a population typically ranging from a few hundred to ...
(more than 600 out of ) on earned income and rental income. Some municipalities require all residents over a certain age to file, while others require residents to file only if municipal income tax is not withheld by employer. Income is reported on a tax form issued by the municipal income tax collector, currently
Cleveland Cleveland ( ), officially the City of Cleveland, is a city in the United States, U.S. U.S. state, state of Ohio and the county seat of Cuyahoga County, Ohio, Cuyahoga County. Located in the northeastern part of the state, it is situated along ...
's Central Collection Agency (CCA) or the Regional Income Tax Authority (RITA), or a collecting municipality. Municipalities such as Columbus and Cincinnati sometimes also collect for neighboring towns and villages. Oregon: * Portland (all residents must file an Arts Tax form with the city to either pay the flat-fee tax or qualify for an exemption based on low individual or household income) *
Lane Transit District The Lane Transit District (LTD) is a public agency that provides public transportation in Lane County, Oregon, United States. The transit district serves the Eugene and Springfield metropolitan areas, including the neighboring cities of Coburg, ...
(self-employed with income sourced from Lane Transit District, which includes parts of Lane County; reported on separate state tax form LTD) * Tri-County Metropolitan Transportation District (self-employed with income sourced from TriMet, which includes parts of Clackamas, Multnomah, and
Washington Washington commonly refers to: * Washington (state), United States * Washington, D.C., the capital of the United States ** A metonym for the federal government of the United States ** Washington metropolitan area, the metropolitan area centered o ...
counties; reported on separate state tax form TM) *Other transit districts (businesses with income sourced from those transit districts; filed with transit districts or municipalities administering transit districts) Pennsylvania: *Most municipalities, including
Pittsburgh Pittsburgh ( ) is a city in the Commonwealth (U.S. state), Commonwealth of Pennsylvania, United States, and the county seat of Allegheny County, Pennsylvania, Allegheny County. It is the most populous city in both Allegheny County and Wester ...
and Allentown, and school districts (earned income only; local return must be filed by all residents of municipality or school district imposing local earned income tax with the local earned income tax collector, such as Berkheimer, Keystone Collections, or Jordan Tax Service; an additional local services tax, potentially refundable if income is below a certain threshold, is also imposed by some municipalities and school districts on earned income sourced from those municipalities and school districts; local earned income tax collectors, rates, and local service tax refund rules can be found on th
Pennsylvania Municipal Statistics
website) *
Philadelphia Philadelphia, often called Philly, is the largest city in the Commonwealth of Pennsylvania, the sixth-largest city in the U.S., the second-largest city in both the Northeast megalopolis and Mid-Atlantic regions after New York City. Since ...
(earned and passive income; income must be reported to the City of Philadelphia if Philadelphia tax is not withheld by employer; residents must file the Earnings tax form to report wages on which Philadelphia income tax is not withheld, the Net Profits tax form to report self-employment, business, and most rental income, and the School Income tax to report passive income excluding interest earned from checking and savings accounts; an additional Business Income and Receipts Tax is also imposed on business income sourced from Philadelphia; individuals earning less than amount that would qualify them for the Pennsylvania income tax forgiveness program are eligible to receive a partial refund of their wage tax withheld by filing a refund application) West Virginia: *Some municipalities, including Charleston and Huntington (flat City Service fee for privilege of working or conducting business; filed with municipality imposing fee)


Corporate income tax

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 A tax treaty, also called double tax agreement (DTA) or double tax avoidance agreement (DTAA), is an agreement between two countries to avoid or mitigate double taxation. Such treaties may cover a range of taxes including income taxes, inheritan ...
. 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 taxfoundation.org, these states have no state corporate income tax as of Feb 1, 2020: Nevada, Ohio, South Dakota, Texas, Washington, and Wyoming. However, Nevada, Ohio, and Washington impose a gross receipts tax while 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.


Nexus

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 nexus" (connection) between the taxpayer's activities and the state, :* The tax must not discriminate against interstate commerce, :* The tax must be fairly apportioned, and :* There must be a fair relationship to services provided. Substantial nexus (referred to generally as simply "nexus") is a general U.S. Constitutional requirement that is subject to interpretation, generally by the state's comptroller or tax office, and often in administrative "letter rulings". In ''
Quill Corp. v. North Dakota ''Quill Corp. v. North Dakota'', 504 U.S. 298 (1992), was a United States Supreme Court ruling, since overturned, concerning use tax. The decision effectively prevented states from collecting any sales tax from retail purchases made over the Inter ...
'' the
Supreme Court of the United States The Supreme Court of the United States (SCOTUS) is the highest court in the federal judiciary of the United States. It has ultimate appellate jurisdiction over all U.S. Federal tribunals in the United States, federal court cases, and over Stat ...
confirmed the holding of ''National Bellas Hess v. Illinois'' that a corporation or other tax entity must maintain a physical presence in the state (such as physical property, employees, officers) for the state to be able to require it to collect sales or use tax. The Supreme Court's physical presence requirement in ''Quill'' is likely limited to sales and use tax nexus, but the Court specifically stated that it was silent with respect to all other types of taxes ("Although we have not, in our review of other types of taxes, articulated the same physical-presence requirement that ''Bellas Hess'' established for sales and use taxes, that silence does not imply repudiation of the ''Bellas Hess'' rule."). Whether ''Quill'' applies to corporate income and similar taxes is a point of contention between states and taxpayers. The "substantial nexus" requirement of ''Complete Auto'', supra, has been applied to corporate income tax by numerous state supreme courts.


Apportionment

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.


State capital gains taxes

Most states tax capital gains as ordinary income. Most states that do not tax income (Alaska, Florida, Nevada, South Dakota, Texas, and Wyoming) do not tax capital gains either, nor do two states (New Hampshire and Tennessee) that do or did tax only income from dividends and interest.


History

The first state income tax, as the term is understood today in the United States, was passed by the State of Wisconsin in 1911 and came into effect in 1912. However, the idea of taxing income has a long history. 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 (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. *
Plymouth Colony Plymouth Colony (sometimes Plimouth) was, from 1620 to 1691, the first permanent English colony in New England and the second permanent English colony in North America, after the Jamestown Colony. It was first settled by the passengers on the ...
from 1643 and
Massachusetts Bay Colony The Massachusetts Bay Colony (1630–1691), more formally the Colony of Massachusetts Bay, was an English settlement on the east coast of North America around the Massachusetts Bay, the northernmost of the several colonies later reorganized as th ...
from 1646, and after they merged, the
Province of Massachusetts Bay The Province of Massachusetts Bay was a colony in British America which became one of the thirteen original states of the United States. It was chartered on October 7, 1691, by William III and Mary II, the joint monarchs of the kingdoms of ...
until the Revolution; *
New Haven Colony The New Haven Colony was a small English colony in North America from 1638 to 1664 primarily in parts of what is now the state of Connecticut, but also with outposts in modern-day New York, New Jersey, Pennsylvania, and Delaware. The history of ...
from 1649 and
Connecticut Colony The ''Connecticut Colony'' or ''Colony of Connecticut'', originally known as the Connecticut River Colony or simply the River Colony, was an English colony in New England which later became Connecticut. It was organized on March 3, 1636 as a settl ...
from 1650, past the 1662 merger with New Haven, until the Revolution; * the
Colony of Rhode Island and Providence Plantations The Colony of Rhode Island and Providence Plantations was one of the original Thirteen Colonies established on the east coast of America, bordering the Atlantic Ocean. It was founded by Roger Williams. It was an English colony from 1636 until 1 ...
, arguably from 1673 to 1744 or later; * the Province of West Jersey, a single 1684 law; * the "South-west part" of the
Province of Carolina Province of Carolina was a province of England (1663–1707) and Great Britain (1707–1712) that existed in North America and the Caribbean from 1663 until partitioned into North and South on January 24, 1712. It is part of present-day Alabam ...
, later the Province of South Carolina, from 1701 until the Revolution; * the
Province of New Hampshire The Province of New Hampshire was a colony of England and later a British province in North America. The name was first given in 1629 to the territory between the Merrimack and Piscataqua rivers on the eastern coast of North America, and was nam ...
, arguably from 1719 to 1772 or later; * and the
Delaware Colony Delaware Colony in the North American Middle Colonies consisted of land on the west bank of the Delaware River Bay. In the early 17th century the area was inhabited by Lenape and possibly the Assateague tribes of Native Americans. The first Eu ...
in the
Province of Pennsylvania The Province of Pennsylvania, also known as the Pennsylvania Colony, was a British North American colony founded by William Penn after receiving a land grant from Charles II of England in 1681. The name Pennsylvania ("Penn's Woods") refers to Wi ...
, 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; South Carolina levied no direct taxes from 1704 through 1713, for example. Becker, however, sees faculty taxes as routine parts of several colonies' finances, including Pennsylvania. During and after the
American Revolution The American Revolution was an ideological and political revolution that occurred in British America between 1765 and 1791. The Americans in the Thirteen Colonies formed independent states that defeated the British in the American Revoluti ...
, although property taxes were evolving toward the modern resale-value model, several states continued to collect faculty taxes. * Massachusetts until 1916 (when it was replaced by a quasi-modern classified individual income tax); * 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; * Virginia from 1777 to 1782; * New York, one 1778 levy; * the
Vermont Republic The Vermont Republic (French: ''République du Vermont''), officially known at the time as the State of Vermont (French: ''État du Vermont''), was an independent state in New England that existed from January 15, 1777, to March 4, 1791. The s ...
, then Vermont as a state, from 1778 to 1850; * and Pennsylvania from 1782 to 1840 (when it was replaced by an individual income tax; Becker, as noted above, would date this tax earlier). Between the enactment of the Constitution and 1840, no new general taxes on income appeared. In 1796, Delaware abolished its faculty tax, and in 1819 Connecticut followed suit. On the other hand, in 1835, Pennsylvania instituted a tax on bank dividends, paid by withholding, which by about 1900 produced half its total revenue. Several states, mostly in the South, instituted taxes related to income in the 1840s; some of these claimed to tax total income, while others explicitly taxed only specific categories, these latter sometimes called classified income taxes. These taxes may have been spurred by the ideals of
Jacksonian democracy Jacksonian democracy was a 19th-century political philosophy in the United States that expanded suffrage to most white men over the age of 21, and restructured a number of federal institutions. Originating with the seventh U.S. president, And ...
, or by fiscal difficulties resulting from the
Panic of 1837 The Panic of 1837 was a financial crisis in the United States that touched off a major depression, which lasted until the mid-1840s. Profits, prices, and wages went down, westward expansion was stalled, unemployment went up, and pessimism abound ...
. None of these taxes produced much revenue, partly because they were collected by local elected officials. * Pennsylvania from 1840 to 1871; * Maryland from 1841 to 1850; * Alabama from 1843 to 1884; * Virginia from 1843 to 1926 (when it was replaced by a modern individual income tax); * Florida from 1845 to 1855; * and North Carolina from 1849 to 1921 (when it was replaced by a modern individual income tax). The 1850s brought another few income tax abolitions: Maryland and Vermont in 1850, and Florida in 1855. During the
American Civil War The American Civil War (April 12, 1861 – May 26, 1865; also known by Names of the American Civil War, other names) was a civil war in the United States. It was fought between the Union (American Civil War), Union ("the North") and t ...
and
Reconstruction Era The Reconstruction era was a period in American history following the American Civil War (1861–1865) and lasting until approximately the Compromise of 1877. During Reconstruction, attempts were made to rebuild the country after the bloo ...
, when both the United States of America (1861-1871) and the Confederate States of America (1863-1865) instituted income taxes, so did several states. * Texas from 1863 to 1871; * Missouri from 1861 to 1865; * Georgia from 1863 to 1866; * West Virginia in 1863 only; * Louisiana from 1865 to 1899; * and Kentucky from 1867 to 1872. As with the national taxes, these were made in various ways to produce substantial revenue, for the first time in the history of American income taxation. On the other hand, as soon as the war ended, a wave of abolitions began: Missouri in 1865, Georgia in 1866, South Carolina in 1868, Pennsylvania and Texas in 1871, and Kentucky in 1872. The rest of the century balanced new taxes with abolitions: Delaware levied a tax on several classes of income in 1869, then abolished it in 1871; Tennessee instituted a tax on dividends and bond interest in 1883, but Kinsman reports that by 1903 it had produced zero actual revenue; Alabama abolished its income tax in 1884; South Carolina instituted a new one in 1897 (eventually abolished in 1918); and Louisiana abolished its income tax in 1899. 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 along the lines established in the 19th century: * Oklahoma 1908 to 1915; * Mississippi 1912 to 1924; * Missouri, individual and corporate, from 1917. However, other states, some perhaps spurred by
Populism Populism refers to a range of political stances that emphasize the idea of "the people" and often juxtapose this group against " the elite". It is frequently associated with anti-establishment and anti-political sentiment. The term develop ...
, some certainly by
Progressivism Progressivism holds that it is possible to improve human societies through political action. As a political movement, progressivism seeks to advance the human condition through social reform based on purported advancements in science, tech ...
, instituted taxes incorporating various measures long used in Europe, but considerably less common in America, such as withholding, corporate income taxation (as against earlier taxes on corporate capital), and especially the defining feature of a "modern" income tax, central administration by bureaucrats rather than local elected officials. The twin revenue-raising successes of Wisconsin's 1911 (the Wisconsin Income Tax, the first "modern" State Income Tax was passed in 1911 and came into effect in 1912) and the United States' 1914 income taxes prompted imitation. Note that writers on the subject sometimes distinguish between corporate "net income" taxes, which are straightforward corporate income taxes, and corporate "franchise" taxes, which are taxes levied on corporations for doing business in a state, sometimes based on net income. Many states' constitutions were interpreted as barring direct income taxation, and franchise taxes were seen as legal ways to evade these bars. The term "franchise tax" has nothing to do with the voting franchise, and franchise taxes only apply to individuals insofar as they do business. Note that some states actually levy both corporate net income taxes and corporate franchise taxes based on net income. For the following list, see and.National Industrial Conference Board, Inc. (1930). ''State Income Taxes. Volume I. Historical Development''. New York. * The
Territory of Hawaii The Territory of Hawaii or Hawaii Territory ( Hawaiian: ''Panalāʻau o Hawaiʻi'') was an organized incorporated territory of the United States that existed from April 30, 1900, until August 21, 1959, when most of its territory, excluding ...
, then Hawaii as a state, individual and corporate from 1901 (this is sometimes claimed as the oldest state income tax; it is certainly the oldest state corporate income tax); * Wisconsin, individual and corporate from 1911 (generally considered the first modern state income tax, built on a law largely written by Delos Kinsman, whose 1903 book on the subject is cited above; its major distinction as against older laws, including Hawaii's, is that state bureaucrats rather than local assessors collected it); * Connecticut, franchise, from 1915; * Oklahoma, modernisation of existing individual tax, from 1915; * Massachusetts, individual, from 1916; * Virginia, corporate, from 1916; * Delaware, individual, from 1917; * Montana, franchise, from 1917; * New York, franchise, from 1917; * Note abolition of South Carolina's non-modern individual income tax in 1918; * Alabama, individual, 1919, declared unconstitutional 1920; * New Mexico, individual and corporate, 1919, apparently abolished soon thereafter; * New York, individual, from 1919; * North Dakota, individual and corporate, from 1919; * Massachusetts, corporate (franchise), from 1919 or 1920; * Mississippi's income tax was held to apply to corporations in 1921; * North Carolina, modernisation of existing individual and institution of corporate taxes, from 1921; * South Carolina, individual and corporate, from 1921 or 1922; * New Hampshire, "intangibles" (restricted to interest and dividends), from 1923; * Oregon, individual and corporate, 1923 (repealed 1924); * Tennessee, corporate, from 1923; * Mississippi, modernisation of existing corporate and individual taxes, from 1924; * Virginia, modernisation of existing corporate and individual taxes, from 1926. This period coincided with the United States' acquisition of colonies, or dependencies: the Philippines, Puerto Rico, and Guam from Spain in the Spanish–American War, 1898–99; American Samoa by agreements with local leaders, 1899-1904; the Panama Canal Zone by agreement from Panama in 1904; and the U.S. Virgin Islands purchased from Denmark in 1917. (Arguably, Alaska, purchased from Russia in 1867, and Hawaii, annexed in 1900, were also dependencies, but both were by 1903 "incorporated" in the U.S., which these others never have been.) The Panama Canal Zone was essentially a company town, but the others all began levying income taxes under American rule. (Puerto Rico already had an income tax much like a faculty tax, which remained in effect for a short time after 1898.) * The Philippines and Puerto Rico, from 1913, by the same law that instituted the federal income tax; this law is ancestral to the modern independent Philippines' income tax as well; and * The U.S. Virgin Islands, from 1922. 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 The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
started: Penniman, Clara, and Walter W. Heller (1959). ''State Income Tax Administration''. Chicago: Public Administration Service. Chart pp. 7-8.Penniman, Clara (1980). ''State Income Taxation''. Baltimore and London: The Johns Hopkins University Press. . Chart pp. 2-3. * Arkansas, individual and corporate, from 1929; * California, franchise, from 1929; * Georgia, individual and corporate, from 1929; * Oregon, individual, franchise, and intangibles, from 1929, but the individual tax didn't take effect until 1930 and was restricted to use for property tax relief, and the intangibles tax was held unconstitutional in 1930; * Tennessee, intangibles, from 1929; * Idaho, individual and corporate, from 1931; * Ohio, intangibles, from 1931, apparently abolished soon thereafter; * Oklahoma, corporate, from 1931; * Oregon, intangibles, 1931 to 1939; * Utah, individual and franchise, from 1931; * Vermont, individual and corporate, from 1931; * Illinois, individual and corporate, 1932, soon declared unconstitutional; * Washington, individual and corporate, 1932, declared unconstitutional 1933;Washington State Research Council (1964). ''A State Income Tax: pro & con''. Pp. 6-7. * Alabama, individual and corporate, from 1933; * Arizona, individual and corporate, from 1933; * Kansas, individual and corporate, from 1933; * Minnesota, individual, corporate, and franchise, from 1933; * Montana, individual and corporate, from 1933; * New Mexico, individual and corporate, from 1933; * Iowa, individual and franchise, from 1934; * Louisiana, individual and corporate, from 1934; * California, individual and corporate, from 1935; * Pennsylvania, franchise, from 1935; * South Dakota, individual and corporate, 1935 to 1943; * The U.S. Virgin Islands income tax in 1935 became the first "mirror" tax, for which see below; * Washington, individual and corporate, 1935, held unconstitutional in separate decisions the same year; * West Virginia, individual, 1935 to 1942; * Kentucky, individual and corporate, from 1936; * Colorado, individual and corporate, from 1937; * Maryland, individual and corporate, from 1937; * District of Columbia, individual and either corporate or franchise, from 1939. A "mirror" tax is a tax in a U.S. dependency in which the dependency adopts wholesale the U.S. federal income tax code, revising it by substituting the dependency's name for "United States" everywhere, and vice versa. The effect is that residents pay the equivalent of the federal income tax to the dependency, rather than to the U.S. government. Although mirroring formally came to an end with the
Tax Reform Act of 1986 The Tax Reform Act of 1986 (TRA) was passed by the 99th United States Congress and signed into law by President Ronald Reagan on October 22, 1986. The Tax Reform Act of 1986 was the top domestic priority of President Reagan's second term. The ...
, it remains the law as seen by the U.S. for Guam and the Northern Mariana Islands because conditions to its termination have not yet been met. In any event, the other mirror tax dependencies (the U.S. Virgin Islands and American Samoa) are free to continue mirroring if, and as much as, they wish. The U.S. acquired one more dependency from Japan in World War II: the Trust Territory of the Pacific Islands. Two states, South Dakota and West Virginia, abolished Depression-era income taxes in 1942 and 1943, but these were nearly the last abolitions. For about twenty years after World War II, new state income taxes appeared at a somewhat slower pace, and most were corporate net income or corporate franchise taxes: * Rhode Island, corporate, from 1947; * The
Territory of Alaska The Territory of Alaska or Alaska Territory was an organized incorporated territory of the United States from August 24, 1912, until Alaska was granted statehood on January 3, 1959. The territory was previously Russian America, 1784–1867; the ...
, then Alaska as a state, individual and corporate, from 1949; * Guam, mirror, from 1950; * Pennsylvania, corporate, from 1951; * Oregon removed the restriction of individual income tax funds to property tax relief in 1953; * Delaware, corporate, from 1958; * New Jersey, corporate, from 1958; * Idaho, franchise, from 1959; * Utah, corporate, from 1959; * West Virginia, individual, from 1961; * American Samoa, mirror, from 1963; * Indiana, individual and corporate, from 1963; * Wisconsin, franchise, from 1965. As early as 1957
General Motors The General Motors Company (GM) is an American Multinational corporation, multinational Automotive industry, automotive manufacturing company headquartered in Detroit, Michigan, United States. It is the largest automaker in the United States and ...
protested a proposed corporate income tax in
Michigan Michigan () is a state in the Great Lakes region of the upper Midwestern United States. With a population of nearly 10.12 million and an area of nearly , Michigan is the 10th-largest state by population, the 11th-largest by area, and t ...
with threats of moving manufacturing out of the state. However, Michigan led off the most recent group of new income taxes: * Michigan, individual and corporate (this replacing a value-added tax), from 1967; * Nebraska, individual and corporate, from 1967; * Maryland, individual (added county withholding tax and non resident tax. Believes led to state being mainly a commuter state for work) 1967, Present * West Virginia, corporate, from 1967; * Connecticut, intangibles (but taxing capital gains and not interest), from 1969; * Illinois, individual and corporate, from 1969; * Maine, individual and corporate, from 1969; * New Hampshire, corporate, from 1970; * Florida, franchise, from 1971; * Ohio, individual and corporate, from 1971; * Pennsylvania, individual, from 1971; * Rhode Island, individual, from 1971; * The Trust Territory of the Pacific Islands, individual and corporate, from 1971. In the early 1970s, Pennsylvania and Ohio competed for businesses with Ohio wooing industries with a reduced corporate income tax but Pennsylvania warning that Ohio had higher municipal taxes that included taxes on inventories, machinery and equipment. A few more events of the 1970s follows: * Michigan abolished its corporate income tax in 1975, replacing it with another value-added tax; * New Jersey instituted an individual income tax in 1976; * The Northern Mariana Islands negotiated with the U.S. in 1975 a mirror tax which was to go into effect in 1979, but in 1979 enacted a law rebating that tax partially or entirely each year and levying a simpler income tax; * Alaska abolished its individual income tax retroactive to 1979 in 1980. (Also during this time the U.S. began returning the Panama Canal Zone to Panama in 1979, and self-government, eventually to lead to independence, began between 1979 and 1981 in all parts of the Trust Territory of the Pacific Islands except for the Northern Mariana Islands. The resulting countries - the Marshall Islands, the Federated States of Micronesia, and Palau - all levy income taxes today.) The only subsequent individual income tax instituted to date is Connecticut's, from 1991, replacing the earlier intangibles tax. 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 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. Numerous states with income taxes have considered measures to abolish those taxes since the
Late-2000s recession The Great Recession was a period of marked general decline, i.e. a recession, observed in national economies globally that occurred from late 2007 into 2009. The scale and timing of the recession varied from country to country (see map). At t ...
began, and several states without income taxes have considered measures to institute them, but only one such proposal has been enacted: Michigan replaced its more recent value-added tax with a new corporate income tax in 2009.


Rates by jurisdiction


Alabama

The corporate income tax rate is 6.5%.


Alaska

Alaska does not have an individual income tax.


Arizona


Personal income tax

Reference:


Corporate income tax

The corporate income tax rate is 4.9%.


Arkansas


Scheduled Rate Reductions

During a special session of the Arkansas Legislature in August, 2022, the top personal income tax rate was reduced to 4.9% retroactively effective to January 1, 2022, instead of 2025 as was originally planned while also marking the first time since 1971 that the top income tax rate has been 5.0% or lower. Arkansas experienced a budget surplus of nearly $1.5 Billion in the fiscal year ended June 30, 2022.


California

California taxes all capital gains as income.


Personal income tax

California's listed tax brackets from 1%-12.3% are indexed for inflation and were most recently by
2012 California Proposition 30 Proposition 30, officially titled Temporary Taxes to Fund Education, is a California ballot measure that was decided by California voters at the statewide election on November 6, 2012. The initiative is a measure to increase taxes to prevent cu ...
. There state has a 1% Mental Health Services surtax (Form 540, line 62) for incomes above $1 million that creates the maximum bracket of 13.3%. California also separately imposes a state Alternative Minimum Tax (Form 540, line 52) at a 7% rate, so a taxpayer may end up paying both the AMT and the 1% surtax. Reference:


Corporate income tax

The standard corporate rate is 8.84%, except for banks and other financial institutions, whose rate is 10.84%.


Colorado

Colorado has a flat rate of 4.55% for both individuals and corporations.


Connecticut


Personal income tax


Corporate income tax

Connecticut's corporate income tax rate is 7.5%.


Delaware


Personal income tax

Reference:


Corporate income tax

Delaware's corporate income tax rate is 8.7%.


State individual income tax rates and brackets


State corporate tax rates and brackets


See also

*
Income tax in the United States Income taxes in the United States are imposed by the federal government, and most states. The income taxes are determined by applying a tax rate, which may increase as income increases, to taxable income, which is the total income less allowa ...
*
State tax levels in the United States State tax levels indicate both the tax burden and the services a state can afford to provide residents. States use a different combination of sales, income, excise taxes, and user fees. Some are levied directly from residents and others are ...
*
Taxation in the United States The United States of America has separate federal, state, and local governments with taxes imposed at each of these levels. Taxes are levied on income, payroll, property, sales, capital gains, dividends, imports, estates and gifts, as well as ...
* U.S. State Non-resident Withholding Tax * State Sales Tax * Jock tax


References


External links

{{sister project links, income tax
Federation of Tax Administrators: State Tax AgenciesWho Pays?
(2009 edition) *
Critique
of Who Pays, 6th ed., 2018. Income taxes State taxation in the United States