Some states levy a tax on income that's earned in those states. For some states of residence, this means all income earned by its residents is subject to state income tax regardless of where the taxpayer earns the income. The state income tax is not unlike the federal income tax in that it's a self-assessed tax that imposes a responsibility on the taxpayer to file a state tax return.
In addition to Washington, D.C., 42 states impose a state income tax. State laws, which govern tax collection procedures, taxpayer obligations and the penalties incurred for the failure to comply with tax law, vary from one state and district to another. While a taxpayer must file a state tax return in each tax-levying state in which she earns income, only her state of residence can tax all of her income.
Although the state of Texas does not levy a personal income tax, the state does impose other taxes, such as a general sales tax, that can be as costly to a worker as some state income taxes might be.
States That Don't Impose a State Income Tax
Alaska, Washington, Nevada, Wyoming, South Dakota, Texas, Tennessee, Florida and New Hampshire don't levy a state income tax. Like Texas, these states raise revenue by other means. For instance, while Alaska imposes neither a state income tax nor a state sales tax, the state's localities may impose an average sales tax of 1.76 percent and a gas tax rate of 15.13 cents per gallon.
Texas State Taxes
The Tax Foundation, a leading independent tax policy nonprofit with offices in Washington, D.C., says that of the 50 states in the U. S., Texas has the fourth-lowest tax burden of all for the Tax Year 2019. The primary sources of the state's revenue that come from individual residents of the state are the sales and use taxes. In turn, localities rely heavily on property taxes to fund citizen services.
Read More: Is an Inheritance Taxable in Texas?
Texas Franchise and Sales and Use Tax Rates
A franchise tax is a tax some corporations pay to conduct business in Texas. Also called a privilege tax, the 0.375 percent franchise tax grants a business the right to operate or be chartered within Texas. A company pays the franchise tax each year along with its federal tax. The amount of the franchise tax is from 0.331 percent to 0.75 percent, depending on the company's income threshold, deductions and business type.
Also, Texas charges a 6.25 percent sales and use tax on all retail sales and most leases and rentals of goods, as well as taxable services, including live performances, antique shows, go-cart raceways and country clubs. Items that are exempt from sales and use taxes are over-the-counter medicines and groceries.
Some 501(c) organizations can apply for exemptions based on their federal exemption status. For instance, an organization that's exempt under 501(c)(2), (5), (6), (7), (16) or (25), can apply for an exemption from franchise tax.
Read More: Taxes on Mineral Rights in Texas
Locally Assessed and Administered Property Tax
The state of Texas does not assess a property tax on real estate, but counties, cities and school districts do. Property tax is the primary revenue source for local governments. It funds roads, police and fire departments, emergency response services, libraries, schools, parks and the other services that local governments provide.
The state of Texas does grant a property tax exemption that allows some property owners to receive a reduction in their property taxes. For instance, veterans, people with disabilities, senior citizens and charitable organizations may be eligible for property tax exemptions.
- U.S. News & World Report: Affordability Rankings
- Tax Foundation: State Individual Income Tax Rates and Brackets for 2022
- Texas Comptroller: Franchise Tax Frequently Asked Questions
- Texas Comptroller: Sales and Use. Tax
- Texas Comptroller: Frequently Asked Questions About Exemptions
- Austin Chamber of Commerce: Sales & Use Tax
- Texas Comptroller: Property Tax Exemptions
- Tax Foundation: Taxes in Alaska
Billie Nordmeyer is an IT consultant of 25 years standing. As a senior technical consultant for SAP America and Deloitte Touche DRT Systems, a business analyst, senior staff, and independent consultant, Billie has worked across the retail, oil and gas, pharmaceutical, aeronautics and banking industries. Billie holds a BSBA accounting, MBA finance, MA international management as well as the Business Analyst and Software Project Management certificates from the Cockrell School of Engineering at the University of Texas at Austin.