Identifying which state has the highest income tax rate is a less straightforward proposition than you might think. Tax law is dynamic, and each individual state calculates income tax bills using its own metrics, which do not always make for easy comparisons. Generally, states subtract deductions from federal adjusted gross income, prior to charging taxes at a flat rate or progressively.
In terms of tax rates alone, California and Hawaii are the only states for the tax year 2011 that have tax brackets carrying income tax rates greater than 10 percent (with Oregon topping out at a close 9.9 percent).
Flat vs. Progressive Taxes
Flat-tax states calculate taxes at the same rate for all citizens, irrespective of income. Tennessee carries the highest flat-tax rate at 6 percent, while the Commonwealth of Massachusetts is second at 5.3 percent of federal taxable income. Pennsylvania has the lowest flat rate at 3.07 percent.
Lower-income people will find Tennessee and Massachusetts taxes to be high, as they would face lower tax bills with the progressive tax structures of other states.
Progressive tax policy is structured to charge higher levels of taxes for top earners. Tax rates increase at each bracket, or range of income. Individually, all income is not taxed at the same rate. Your household's total progressive tax bill is the sum of taxes charged at every marginal level of income.
California, Hawaii, Oregon and Iowa have the highest income tax rates for wealthier taxpayers.
California's progressive tax rates increase quickly to tax the middle class at high levels. California's upper level marginal tax rates are 8, 9.3 and 10.3 percent for taxable income brackets greater than $37,005, $46,766 and $1 million, respectively. The 8 percent tax rate for filers in the $37,005 to $46,766 tax bracket is behind only Oregon. Oregon taxpayers who earn over $7,750 in taxable income are taxed at a 9 percent rate.
Hawaii's upper level marginal tax rates are 8.25, 9, 10 and 11 percent for taxable income brackets greater than $48,000, $150,000, $175,000 and $200,000, respectively. Hawaii tax rates increase quickly to tax the upper middle class, and the 11 percent rate ties with Oregon as the highest rate in the United States for any bracket.
Hawaiian tax rates are effectively higher at this level because the 11 percent rate begins at $200,000, rather than $250,000 for Oregon.
Oregon carries the highest tax rates across almost all tax brackets, where even the poor are taxed at high levels. Oregon tax rates are 5, 7, 9, 10.8 and 11 percent for taxable income that is greater than zero, $3,100, $7,750, $125,000 and $250,000, respectively.
Although Iowa comes close with California, Hawaii and Oregon as a high-tax state, only the wealthiest Iowa residents pay the 8.98 percent income tax for income that is greater than $64,755.