Most states imitate the federal government with progressive–or graduated–tax rates that increase with the taxpayer’s income. In all, 34 states and the District of Columbia charge income tax rates progressively, though there is a large disparity on the rates and how the tax brackets are defined.
Seven states (Arkansas, Florida, Nevada, South Dakota, Texas, Washington and Wyoming) do not tax personal income, while New Hampshire and Tennessee only tax income from dividends and interest. Of the remaining 43 states and the District of Columbia, eight charge a “flat” rate, meaning one tax rate for every taxpayer regardless of income, according to the Tax Foundation in Washington, D.C.
Highest Tax Rates
The global economic recession has prompted some states to raise their income tax rates, especially those at the highest income brackets. New York in 2009 increased the tax rate on income over $500,000 from 6.85 percent to 8.97 percent. Hawaii in 2009 also raised taxes on top-earners, and now has the highest income tax rate in the nation at 11 percent on income over $200,000. California ranks second with a tax rate of 10.55 percent on income over $1 million.
According to the Brookings Institution’s Tax Policy Center, many of the so-called progressive state income tax systems are fairly flat. Connecticut and Mississippi charge the top income bracket just 2 percent higher than the bottom. Credits and deductions in states like California and Colorado lead to “more progressivity” in the income tax system, according to the Center.
Pros and Cons
Opponents say progressive tax rates discourage enterprising workers, while supporters say it more fairly distributes the tax burden based on a person’s ability to pay.
States Consider Changing Tax Rates
Michigan in 2009 considered moving from a flat income tax to a graduated tax, though opponents said it would hurt the state’s economic competitiveness. Illinois legislators defeated a proposed sliding scale income tax in 2008.