State income tax is a tax levied on earned income in 42 of the 50 states. While employers largely are the ones responsible for collecting income tax, individuals are responsible for filing their income tax returns and paying tax owed.
Definition and Examples of State Income Tax
State income tax is a tax on the amount of income earned in the state you live in. States use income tax to pay for government services including education, health care, transportation, corrections, and low-income assistance. It is set by state legislative bodies, which creates variances from state to state.
States vary widely in their approaches to income tax. Most states have graduated tax brackets, some levy a flat tax, some have no income tax, and one state–New Hampshire–only taxes interest and dividend income. State income tax is withheld from an employee’s paycheck by their employer, then sent to the state’s department of revenue. Eight states have no income tax.
Nevada does not levy an income tax. Instead, the state generates revenue from other taxes, such as a sales and use tax and the gaming percentage fee tax, the two largest sources of revenue for the state. The state sales and use tax accounts for nearly 30% of the general fund, and the gaming tax accounts for just over 17%.
How State Income Tax Works
Employers are responsible for deducting the correct amount of withholding from an employee’s paycheck, including state income tax. In 41 states that levy an income tax, this amount will be taken out of the paycheck by the employer. Self-employed individuals must pay their own state income tax.
Although employers are responsible for withholding this amount, it’s helpful to know how each state administers its income tax.
Do I Need To Pay State Income Tax?
There are eight states that do not levy an income tax—nine if you include New Hampshire, which taxes dividend and interest income but not wage income (we include it among the flat-tax states). If you live in one of these states, state income tax will not be withheld, and you will not need to file a state income tax return.
|States With No Income Tax||States With a Flat Income Tax||States With a Graduated Income Tax|
|District of Columbia|
Ten states levy a flat tax on income; however, in New Hampshire, individuals are only taxed on their dividend and interest income. Individuals in these states are generally taxed the same percentage amount. If you live in Colorado, for example, you would be taxed at the same 4.55% rate whether you make $50,000 or $500,000. The exception is individuals who fall below the poverty line, who are not taxed at all.
States with a graduated-rate income tax, which are taxes charged based on the amount of income you make, are more common, and the rates can vary widely. If you live in California, for example, and you make more than $1,000,000 and file as a single taxpayer, your rate is 13.3%. Meanwhile, those earning less than $9,325 pay a 1% state income tax.
How Much Are State Income Taxes?
The chart below shows the lowest and highest rate for state income taxes for single filers.
|State||Lowest tax rate||Highest tax rate|
|Alaska||No income tax||No income tax|
|Colorado||4.55%||Flat rate applies to all incomes|
|Florida||No income tax||No income tax|
|Illinois||4.95%||Flat rate applies to all incomes|
|Indiana||3.23%||Flat rate applies to all incomes|
|Kentucky||5%||Flat rate applies to all incomes|
|Massachusetts||5%||Flat rate applies to all incomes|
|Michigan||4.25%||Flat rate applies to all incomes|
|Nevada||No income tax||No income tax|
|New Hampshire||5%||Flat rate on interest and dividend income|
|North Carolina||4.99%||Flat rate applies to all incomes|
|Pennsylvania||3.07%||Flat rate applies to all incomes|
|South Dakota||No income tax||No income tax|
|Tennessee||No income tax||No income tax|
|Texas||No income tax||No income tax|
|Utah||4.95%||Flat rate applies to all incomes|
|Washington||No income tax||No income tax|
|Wyoming||No income tax||No income tax|
|District of Columbia||4%||9.75%|
Highest-bracket income earners will pay the most in states with graduated taxes, such as California, New York, New Jersey, Oregon, Minnesota, and Hawaii.
How To File State Income Tax
Many state income tax returns start with your federal adjusted gross income number, so a first step for filing state income taxes is to file federal income taxes.
State income taxes are filed separately from federal income taxes. Each state with income taxes has its own method for filing state income tax returns, which you can find on your state’s Department of Revenue website. A comprehensive list can be found on the IRS website.
Criticism of State Income Tax
How do some states thrive without collecting income taxes? Some mineral-rich states such as Texas, Wyoming, and Alaska collect severance taxes on natural-resource extraction. Other states, such as Florida, South Dakota, and Washington, collect double the national average in sales tax.
One view of state income tax is that fewer income taxes will encourage growth, resulting in a revenue neutral or revenue positive position for states. The Tax Foundation reports the 10 states that cut income tax in 2021 experienced general fund revenue growth despite fewer income taxes collected. Moving patterns of individuals relocating from high-income-tax-rate states to low-income-tax-rate states also suggest that low-income-tax states may encourage growth.
Proponents of reducing or eliminating state income taxes often suggest consumption taxes as an alternative, which are taxes on what people spend versus what they earn.
Other think tanks find no benefit to a reduction in state income tax. Many analysts find a reduction in income tax would undermine the state’s ability to provide services. States that want to eliminate the income tax may not have the natural resources or economy needed to replace the loss of revenue from income taxes.
Critics also point to the difficulty of replacing the revenue brought in by state income taxes, which may inevitably lead to cutting state services, education, and infrastructure.
Income tax also is a more stable tax than sales tax. Proponents of the income tax also argue that states that use income taxes to develop quality education systems and infrastructure will attract families to the area.
Other defenders of state income taxes argue that cutting state income taxes hasn’t boosted the economy in the past, doesn’t promote small businesses or jobs, and may worsen racial inequity.
- States approach income tax differently.
- Eight states have no income tax.
- Employers are responsible for withholding state income tax for employees, while individuals are responsible for filing state income tax returns and paying tax owed.
- State income tax is an important source of revenue for most states.
- Eliminating state income taxes has been a recent topic of discussion, although it may be difficult to do and have limited benefits.
Guinn Center. “Nevada Budget Overview 2019-2021.”
Federation of Tax Administrators. “State Individual Income Tax Rates 2022.”
Tax Foundation. “States Respond to Strong Fiscal Health With Income Tax Reforms.”
Tax Foundation. “Americans Moved to Low-Tax States in 2021.”
Institute on Taxation and Economic Policy. “Eliminating the State Income Tax Would Wreak Havoc on Mississippi.”
Center on Budget and Policy Priorities. “Cutting State Income Taxes Counterproductive to Prosperity, Racial Justice.”