Individual Income Taxes

The individual income tax is levied on the wages, salaries, dividends, interest, and other income earned by a person throughout the year. The tax is generally imposed by the state in which the income is earned. However, various states have reciprocity agreements with one or more other states that allow income earned in another state to be taxed in the state of residence.

In 2015, 41 states and the District of Columbia (DC) levied a broad-based individual income tax. New Hampshire taxes only interest and dividends, and Tennessee taxes only bond interest and stock dividends. Seven states did not tax individual income of any kind: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.

This backgrounder answers three questions:

All revenue data are from the US Census Bureau’s Annual Survey of State Government Tax Collections.  All dates in sections about revenue reference the fiscal year unless stated otherwise.

How much revenue do state and local governments raise from individual income taxes?

Individual income taxes are a major source of revenue for states, but they provide relatively little revenue for local governments (table 1). State governments collected over $280 billion (17.2% of state general revenue) from individual income taxes in 2012. Local governments collected over $26 billion (1.8 percent of local government general revenue).

Table 1

State and Local Individual Income Tax Revenue, 2012

 

Revenue ($ billions)

Share of general revenue

State and local governments

$307.3

11.8%

State governments

$280.7

17.2%

Local governments

$26.6

1.8%

 

In part, the small share of local government revenue from individual income taxes results from state rules: only 12 states authorized local governments to impose their own individual income taxes in 2012. In those 12 states and DC, individual income taxes provided 5.3 percent of local general revenue, ranging from 0.01 percent in Kansas to 17 percent in Maryland.

Individual income taxes contributed 11.8 percent of combined state and local general revenue in 2012 (figure 1). That was a smaller share than the share from either sales taxes (18.3 percent) or property taxes (17.2 percent) but far more than corporate income taxes (1.9 percent).

Figure 1

Figure 1: Taxes as a Percentage of State and Local General Revenue, 2012

Maryland collected 22.3 percent of its state and local general revenue from individual income taxes in 2012, the most of any state. Connecticut (20.4 percent) was the only other state that raised more than 20 percent of state and local general revenue from individual income taxes that year. Massachusetts and New York had the next-highest shares from individual income taxes: both received 18.6 percent.

Among the 41 states and DC imposing broad individual income taxes in 2012, North Dakota (4.2 percent) relied least on the tax as a share of state and local general revenue. In total, 10 of these 41 states collected less than 10 percent of state and local general revenue from individual income taxes. Two states, New Hampshire and Tennessee, have very narrow tax bases: New Hampshire taxes only interest and dividends, and Tennessee taxes only bond interest and stock dividends. Each state collected less than 1 percent of its general revenue from individual income taxes in 2012.

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How has individual income tax revenue changed over time?

State and local individual income tax revenue increased both in real per capita dollars (2012) and as a percentage of personal income between 1977 and 2012 (figure 2).

Figure 2

Figure 2: State and Local Individual Income Tax Revenue

More notable is how sensitive individual income tax revenue was in the two most recent recessions. Income tax revenue fell from 2.52 percent of personal income in 2001 to 2.1 percent in 2003. It then increased to 2.45 percent in 2008 before falling back down to 2.1 percent in 2010 during the Great Recession. (Some of this volatility is caused by capital gains realizations, which are taxed as income but not included in the measure of personal income.) As the economy has recovered from the latest recession, income tax revenue has increased both in real per capita terms and as a share of personal income.

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How much do individual income tax rates differ across states?

The top state individual income tax rates ranged from 3.07 percent in Pennsylvania to 13.3 percent in California (including the state’s 1 percent surcharge on taxable income over $1 million) in 2015 (figure 3).

Figure 3

Figure 3: Top State Individual Income Tax Rates, 2015

In the 1980s, many states followed the federal government’s lead and reduced their number of individual income tax brackets. Thus, most state individual income taxes are fairly flat. Top state tax rates typically start at relatively low income levels or there is little difference in income between different tax rates.  More recently the trend has reversed, with states imposing new brackets for high-income taxpayers, often called “millionaire’s taxes.”

In 2015, eight states imposed a single tax rate on all income while Hawaii had the most tax brackets (12). In states with multiple tax brackets, the threshold for the top tax rate ranged from $3,000 of taxable income in Alabama (with a top rate of 5 percent) to $1,029,250 in New York (with a top rate of 8.82 percent). In 22 states the threshold for the top rate was below $50,000 in taxable income. (These taxable income amounts are for single filers. Some states have different brackets—with higher totals—for married couples. See this table of state income tax rates for more information.)

Three states in addition to California had a top rate above 9 percent in 2015: Hawaii, Minnesota, and Oregon. Another four states (Iowa, New Jersey, New York, and Vermont) and DC had top income tax rates above 8.8 percent.  The top tax rate applied on taxable income above $100,000 in all these states except Iowa.

In total, 12 states with a broad-based individual income tax had a top rate of 5 percent or lower, including six of the eight states with a single rate. Among those states, Illinois, Indiana, North Dakota, and Pennsylvania had a top rate below 4 percent.

Seven states did not tax individual income of any kind: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.  New Hampshire and Tennessee are also included in figure 3 with the no-tax states because of their very narrow tax bases.

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