Pros & Cons of State Income Tax

Pros & Cons of State Income Tax
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Paying taxes is a necessary part of living in modern society because governments rely on tax revenue to provide things like public services, infrastructure and welfare programs. The federal government charges taxes on income that vary from 10 to 37 percent, depending on how much money you make. State governments can also make you pay income taxes on top of what the federal government charges.

Progressive Taxation

Income taxes at the state level tend to be progressive, which can be beneficial if you are aren't at the high end of the income scale. A progressive tax is one that takes a higher percentage of income from high-income taxpayers than from people with low income. For example, if your state has a 4 percent income tax on the first $40,000 of income and a 6 percent rate on income above $40,000, the tax system would be considered progressive. Progressive tax systems are designed to place the greatest burden on people with the most ability to pay. Most states have graduated tax systems that charge more as you earn more income, while eight – Colorado, Illinois, Indiana, North Carolina, Massachusetts, Michigan, Pennsylvania and Utah – charge income taxes at a flat rate.

Reducing Other Taxes

Income taxes are just one of several types of taxes state governments can charge to raise the funds they need to pay employees and provide services. When a state charges income taxes, it reduces the need to collect tax revenue using other methods like sales taxes, property taxes and excise taxes.

Economic Implications

State income taxes take cash out of the pockets of average workers, which can potentially have negative economic consequences. When people have less disposable income, consumer spending tends to decline, which reduces the amount of sales that businesses make. If businesses have slow sales, they might be forced to lay off workers or close altogether. Governments sometimes offer tax breaks or rebates during hard economic times to ease the negative influence that income taxes can have on economic activity.

Tax Returns

Paying income taxes can be more complicated than paying other types of taxes, because the amount you owe may vary based on your annual income, marital status and other factors. If your state imposes an income tax, you may be required to file a state income tax return to make sure you pay the correct amount. Filing a state return takes time and might cost you money.

State Income Tax Considerations

Most states have a state income tax, but some do not. According to the Internal Revenue Service, Alaska, New Hampshire, Tennessee, Florida, South Dakota, Washington, Nevada, Texas and Wyoming have no state income tax. Local governments can also impose income taxes.