State income tax is assessed in addition to federal income tax and can make a significant difference in the amount of money you take home each paycheck. The percentage of state income tax varies from one location to another, but some states charge none at all. Without the need to pay state taxes, you stand to make more, while the stake brings in less revenue.
As of publication, there are nine U.S. states that do not have any form of state income tax. They are Alaska, Florida, Nevada, Tennessee, New Hampshire, South Dakota, Texas, Wyoming and Washington. Residents of these nine states are obligated only to pay federal income tax and local city or county tax if applicable.
Impact for States
According to Bloomberg, although states without income tax may be preferred by taxpayers, they do not perform fiscally any better than those with the highest tax rates in the union. In reality, the presence or lack of income tax revenue does little to stimulate or stifle economic growth. In general, the states with no income tax and the states with the highest income tax rates both grow economically at or around the average national rate. These same states at the high and low end of the income tax scale show remarkably similar debt-to-income ratios as well.
Other Options for Revenue
The states that do not collect income tax have to pay for services somehow, and each has its own method. Alaska's supply of crude oil brings in more than enough to cover the state's expenses. In Florida and Texas, the state government operates on money collected as sales tax. Nevada makes good use of its many casinos by running the government with gambling tax revenue. Cigarette and alcohol taxes along with laundromat and bank licensing fees keep South Dakota working, while a tax on the investment income of New Hampshire and Tennessee residents is sufficient to fund all services.
The Other End of the Spectrum
The states that charge the highest income tax rates are scattered across the country with the greatest concentration occurring in the northeast. Five Atlantic states, New York, New Jersey, Massachusetts, Connecticut and Maryland take up the 1, 2, 3, 7 and 10 spots on the Tax Foundation's 2010 survey. On the west coast, California and Oregon make the list, with Hawaii, Minnesota and Virginia rounding out the list. (Reference 3)
Robert Morello has an extensive travel, marketing and business background. He graduated with a Bachelor of Arts from Columbia University in 2002 and has worked in travel as a guide, corporate senior marketing and product manager and travel consultant/expert. Morello is a professional writer and adjunct professor of travel and tourism.