Individual Income Taxes

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The individual 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 2017, 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. 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 $368 billion in revenue from individual income taxes in 2015, or 13 percent of general revenue. That was a smaller share than states collected from sales taxes and property taxes but far more than they collected from corporate income taxes.

Individual income taxes are a major source of revenue for states, but they provide relatively little revenue for local governments. State governments collected $336 billion (18 percent of state general revenue) from individual income taxes in 2015, while local governments collected $32 billion (2 percent of local government general revenue).

State and Local Individual Income Tax Revenue, 2015

 

Revenue ($ billions)

Percentage of general revenue

States and local governments

$368

13

States

$336

18

Local governments

$32

2

In part, the share of local government revenue from individual income taxes is small because of state rules: only 12 states authorized local governments to impose their own individual income taxes in 2015. In those 12 states, individual income taxes as a percentage of general revenue ranged from less than 1 percent in Alabama, Iowa, and Kansas to 17 percent in Maryland.

Which states rely on individual income taxes the most?

Maryland collected 22 percent of its state and local general revenue from individual income taxes in 2015, the most of any state. Connecticut and Massachusetts were the only other states that collected 20 percent or more of state and local general revenue from individual income taxes that year. California and New York had the next-highest shares from individual income taxes (both 19 percent).

Among the 41 states imposing broad individual income taxes in 2015, North Dakota relied least on the tax as a share of state and local general revenue (5 percent). In total, seven of these 41 states collected less than 10 percent of state and local general revenue from individual income taxes. In addition, New Hampshire and Tennessee collected personal income tax revenue but from a narrow base: New Hampshire taxes only interest and dividends, and Tennessee taxes only bond interest and stock dividends. Each state collected roughly 1 percent of its general revenue from individual income taxes in 2015.

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 2017. In total, eight states and DC have top rates above 8 percent.

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.

In 2017, eight states imposed a single tax rate on all income, while Missouri had the most tax brackets (10). 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 $1,077,550 in New York (with a top rate of 8.82 percent). In 22 states the threshold for the top rate was below $50,001 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.)

In total, 14 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.

New Hampshire and Tennessee both levy a 5 percent rate on nonwage income.

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

What income is taxed?

Most states follow the federal definition of taxable income, but there are exceptions. For example, 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. Recently, Kansas and Ohio exempted some or all sole proprietor income and partnership 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.

How do states tax capital gains and losses?

Eleven states and DC 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. Arizona exempts 25 percent of long-term capital gains, and New Mexico exempts 50 percent. Massachusetts has its own system for taxing capital gains, while Hawaii has an alternative capital gains tax. 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. The remaining states that tax income generally follow the federal treatment of capital gains but have various state-specific exclusions and deductions (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?

Income tax is 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 DC allows Maryland to tax income earned in DC by a Maryland resident. As of 2010, 15 states and DC had adopted reciprocity agreements. 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.

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)

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.