Similarly, in Washington, only capital gains income is subject to the state’s income tax. In New Hampshire, the tax rate applies to dividends and interest income and regular income is typically not subject to state tax. There are twelve states with flat income tax rates. Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming are the seven states. While these states do not have an additional income tax, other taxes, such as property or sales taxes, could be higher in these states. States take one of three approaches when it comes to state income taxes: the state does not collect income tax, the state imposes a flat tax, taxing all income (or only dividends and interest) at the same rate, or the state imposes a progressive tax which taxes higher income at higher rates.įirst, there are seven states that do not collect a state income tax. State taxes are given little attention compared to federal income taxes. However, most states collect state income and sales taxes in addition to the federal income tax. Taxes have two effects: an income effect because they reduce purchasing power to taxpayers (income tax) and a substitution effect when taxes cause a substitution between taxed goods and untaxed goods (sales tax).įederal income tax is the tax levied by the United States Internal Revenue Service (IRS) on the earnings of individuals and legal entities. When expenditures exceed tax revenue, the government goes into debt. Taxes are used to fund a number of public expenditures, such as roads, public transportation, education, and others. A tax is a compulsory financial charge or some other type of levy imposed upon a taxpayer by a governmental organization.
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