Individual Income Taxes

State and Local Backgrounders Homepage

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

In 2019, 41 states and the District of Columbia levied a broad-based individual income tax. New Hampshire taxes only interest and dividends, and Tennessee taxes only bond interest and stock dividends. Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming did not tax individual income of any kind.

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

State and local governments collected a combined $376 billion in revenue from individual income taxes in 2016, or 13 percent of general revenue. That was a smaller share than state and local governments collected from property taxes but equal to what they collected from general sales taxes.

Individual income taxes are a major source of revenue for states, but they provide relatively little revenue for local governments. State governments collected $344 billion (18 percent of state general revenue) from individual income taxes in 2016, while local governments collected $33 billion (2 percent of local government general revenue).

State and Local Individual Income Tax Revenue, 2016

 

Revenue ($ billions)

Percentage of general revenue

States and local governments

$376

13%

States

$344

18%

Local governments

$33

2%

In part, the share of local government revenue from individual income taxes is small because of state rules: only 13 states authorized local governments to impose their own individual income tax or payroll tax in 2016. In those 13 states, local individual income tax revenue as a percentage of general revenue ranged from less than 1 percent in Kansas to 19 percent in Maryland.

Localities in Indiana, Iowa, Maryland, and New York levy an individual income tax that piggybacks on the state tax. That is, local taxpayers in these states file their local tax on their state tax return and receive state deductions and exemptions when paying the local tax. Michigan localities also levy an individual income tax but use local forms and calculations.

Meanwhile, localities in Alabama, Delaware, Kansas, Kentucky, Missouri, Ohio, Oregon, and Pennsylvania levy an earnings or payroll tax. These taxes are separate from the state income tax. Earnings and payroll taxes are typically calculated as a percentage of wages, withheld by the employer (though paid by the employee) and paid by individuals who work in the taxing locality, even if the person lives in another city or state without the tax. Separately, localities in Kansas only tax interest and dividends (not wages).

Which states rely on individual income taxes the most?

Maryland collected 23 percent of its state and local general revenue from individual income taxes in 2016, the most of any state. The next highest shares were in New York (20 percent), Connecticut (19 percent), Massachusetts (19 percent), and Oregon (19 percent). Overall, 10 states collected 15 percent or more of their state and local general revenue from individual income taxes in 2016.

Data: View and download each state's general revenue by source as a percentage of general revenue

Among the 41 states imposing broad-based individual income taxes in 2016, North Dakota relied the least on the tax as a share of state and local general revenue (4 percent). In total, eight of these 41 states collected less than 10 percent of state and local general revenue from individual income taxes. New Hampshire and Tennessee taxed a narrow base of income, and as a result the tax only provided 1 percent of both state’s general revenue in 2016.

How much do individual income tax rates differ across states?

The top state individual income tax rates ranged from 2.9 percent in North Dakota to 13.3 percent in California (including the state’s 1 percent surcharge on taxable income over $1 million) in 2019. Hawaii (11 percent) and New Jersey (10.75 percent) were the only other states with top rates above 10 percent. In total, eight states and the District of Columbia have top rates above 8 percent.

Data: View and download each state's top individual income tax rate

In the 1980s, many states followed the federal government’s lead and reduced their number of individual income tax brackets. Thus, today most state individual income taxes are fairly flat. And, unlike the federal individual income tax, top state tax rates typically start at relatively low income levels.

As of January 2019, nine 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 $3,001 of taxable income in Alabama (with a top rate of 5 percent) to $5 million of taxable income in New Jersey (with a top rate of 10.75 percent). The District of Columbia and New York also had top tax rates beginning at $1 million or more in taxable income. In contrast, not counting the states with flat rates, the threshold for the top rate was below $40,000 in taxable income in 13 states. (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.)

In total, 14states with a broad-based individual income tax had a top rate of 5 percent or lower, including seven of the nine states with a single rate. Among those states, Indiana, North Dakota, and Pennsylvania had a top rate below 4 percent.

New Hampshire (5 percent) and Tennessee (2 percent) both levy a tax on nonwage income. Tennessee is phasing its tax out and will completely eliminate it in 2022.

Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming did not tax individual income of any kind.  

What income is taxed?

States generally follow the federal definition of taxable income. Most begin their tax income tax calculations with federal adjusted gross income but a few use federal taxable income. However, unlike the federal government, states often tax municipal bond interest from securities issued outside that state. And many states allow a full or partial exemption for pension income. In many states, taxpayers who itemize their federal tax deductions and claim deductions for state and local taxes may not deduct those taxes on their state income tax returns.

Because states often use federal rules in their own tax systems, the Tax Cuts and Job Acts (TCJA) forced many states to consider changes to their own systems. This was especially true for states that used the federal standard deduction and personal exemption before the TCJA nearly doubled the former and eliminated the latter. The TCJA also created a new federal deduction for pass-through business income (income earned by sole proprietors, partnerships, and certain corporations). However, because the deduction is for federal taxable income, this only affected states that use federal taxable income as the start of their tax calculations. 

How do states tax capital gains and losses?

Five states and the District of Columbia treat capital gains and losses the same as federal law treats them: they tax all realized capital gains, allow a deduction of up to $3,000 for net capital losses, and permit taxpayers to carry over unused capital losses to subsequent years. New Hampshire fully exempts capital gains, and Tennessee taxes only capital gains from the sale of mutual fund shares. Other states offer a range exclusion and deductions not in federal law. For example, Arizona exempts 25 percent of long-term capital gains, and New Mexico exempts 50 percent or up to $1,000 of federal taxable gains—whichever is greater. Massachusetts has its own system for taxing capital gains, while Hawaii has an alternative capital gains tax rate of 7.2 percent. Pennsylvania and Alabama only allow losses to be deducted in the year that they are incurred, while New Jersey does not allow losses to be deducted from ordinary income (see our table on state treatment of capital gains for more detail). Most states tax capital gains at the same rate as ordinary income, while the federal government provides a preferential rate.

How do states tax income earned in other jurisdictions?

State income taxes are generally imposed by the state in which the income is earned. Some states, however, have entered into reciprocity agreements with other states that allow outside income to be taxed in the state of residence. For example, Maryland’s reciprocity agreement with the District of Columbia allows Maryland to tax income earned in the District by a Maryland resident—and vice versa. Typically, these are states with major employers close to the border and large commuter flows in both directions. Most states also allow taxpayers to deduct income taxes paid to other states from what is owed to their home state.

Interactive data tools

State and Local Finance Initiative Data Query System

Further reading

See our backgrounder on state earned income tax credits

The Tax Debate Moves To The States: The Tax Cuts And Jobs Act Creates Many Questions For States That Link To Federal Income Tax Rules
Richard Auxier and Frank Sammartino (2018)

Addressing the Family-Sized Hole Federal Tax Reform Left for States
Richard Auxier and Elaine Maag​ (2018)

Federal-State Income Tax Progressivity
Frank Sammartino and Norton Francis (2016)

The Relationship between Taxes and Growth at the State Level: New Evidence
William G. Gale, Kim S. Rueben, and Aaron Krupkin (2015)

Federal and State Income Taxes and Their Role in the Social Safety Net
Elaine Maag (2015)

Note

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.