Individual Income Taxes

State and Local Backgrounders Homepage

The individual income tax (or personal income tax) is a tax 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 2020, 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 do 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 $385 billion in revenue from individual income taxes in 2017, or 12 percent of general revenue. That was a smaller share than state and local governments collected from property taxes but roughly 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 $352 billion (18 percent of state general revenue) from individual income taxes in 2017, while local governments collected $33 billion (2 percent of local government general revenue).

State and Local Individual Income Tax Revenue, 2017

 

Revenue ($ billions)

Percentage of general revenue

States and local governments

$385

12%

States

$352

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 2017. In those 13 states, local individual income tax revenue as a percentage of general revenue ranged from less than 1 percent in Kansas to 18 percent in Maryland.

Localities in Indiana, Iowa, Maryland, and New York levy an individual income tax that piggybacks on the state income 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. 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 2017, the most of any state. The next highest shares were in California, Connecticut, Minnesota, Massachusetts, New York, and Oregon (19 percent in each state in 2017).

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

Among the 41 states with a broad-based individual income tax, North Dakota relied the least on the tax as a share of state and local general revenue (4 percent) in 2017. In total, eight of the 41 states collected less than 10 percent of state and local general revenue from individual income taxes that year. New Hampshire and Tennessee tax a very narrow base of income, and as a result the tax provided only 1 percent of state and local general revenue in each state in 2017.

How much do individual income tax rates differ across states?

In 2020, the top state individual income tax rates range 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). The next highest top individual income tax rates are in Hawaii (11 percent) and New Jersey (10.75 percent). In total, eight states and the District of Columbia have top individual income tax rates above 8 percent.

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

In contrast, 14 states with a broad-based individual income tax have a top individual income tax rate of 5 percent or lower. Indiana, North Dakota, and Pennsylvania have a top tax rate below 4 percent.

Nine states use a single (flat) tax rate on all income. Hawaii has the most tax brackets with 12. 

Further, unlike the federal individual income tax, most states that use multiple brackets have top tax rates starting at relatively low levels of taxable income. Thus, most state individual income taxes are fairly flat. For example, the threshold for the top tax rate in Alabama (5 percent) begins at only $3,001 of taxable income. Not counting the nine states with flat tax rates, the threshold for the top income tax rate is 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.)

But a few states have more progressive rate schedules. In New Jersey, the top tax rate (10.75 percent) begins at $5 million of taxable income, and the District of Columbia and New York also have top tax rates beginning at $1 million or more in taxable income.  

Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming do not tax individual income of any kind. New Hampshire (5 percent) and Tennessee (2 percent) both levy a tax only on nonwage income. (Tennessee is phasing its tax out and will completely eliminate it in 2021.)

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, state income tax rules diverge from the federal laws in a few ways. For example, unlike the federal government, states often tax municipal bond interest from securities issued outside that state. Many states also allow a full or partial exemption for pension income that is otherwise taxable on the federal return. And in most states with a broad-based income tax, filers 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 on their state income tax calculation (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. Other states offer a range exclusion and deductions not in federal law. New Hampshire fully exempts capital gains, and Tennessee only taxes capital gains if distributed as dividends. 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). 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. Hawaii, Massachusetts, and Oregon levy special tax rates on capital gain income. 

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 Data: Exploring the Census of Governments

State Fiscal Briefs

Further reading

See our backgrounder on state earned income tax credits

State Tax and Economic Review
Lucy Dadayan (updated quarterly)

State Income Tax Expenditures
Aravind Boddupalli, Frank Sammartino, and Eric Toder (2020)

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.