State income tax rates range from zero percent in numerous states (Florida, South Dakota, Texas, Washington, Wyoming, and more) to 6 percent in North Carolina. It seems like a person would be crazy to live in North Carolina and pay an extra 6 percent of his income to the government every year.
But, of course, it’s far more complicated than that simple analysis. First, every state imposes taxes on its citizens. Some do it with the income tax, while others emphasize property taxes, sales taxes, business taxes, or fees. No matter how it’s done, every state needs revenue, and it goes to its citizens to get it. (Alaska is sort of an exception because, at times, oil prices are high enough that the state earns so much from the oil tax that it does not need to collect much in taxes directly from citizens.)
Second, even the income tax is not what it appears at first. Many states have exemptions that restrict the amount of money that is taxed at the official rate of that state. For example, most states have a “graduated” income tax that increases the rate as people’s income rise; in other words, a person who earns $30,000 per year will pay a lower income tax rate than a person who earns $250,000. This follows the formula of the federal income tax, though it might not use the same threshold points to change the rate. Some states (Colorado, Illinois, Michigan, for example) have a single rate, regardless of people’s income. But even in those situations, the tax might not begin until a person’s income reaches a certain minimum level. In other states, only income from some activities is taxed, such as New Hampshire, which taxes only income derived from dividends and interest.
Third, people are allowed to use their state tax payments to partially offset their federal tax obligations. Therefore, a person living in a high-tax state will not essentially get some of that tax rebated on his or her federal tax return. A few states allow the reverse: A resident of of Alabama, Iowa, and Louisiana (among others) can count his or her federal tax payment as a deduction against a state tax obligation.
The list of special cases and exemptions goes on and on. The best way to understand what you will be facing in your state is to contact state authorities, and to read the fine print. However, a good overview can be found at the website of the Federation of Tax Administrators, www.taxadmin.org. Also, one should also remember that you get what you pay for. A state that collects less in taxes is likely providing a lower level of services to its citizens.