State and local income taxes are mandatory payments collected by state and municipal governments on earned income, such as wages, salaries, and self-employment profits. These taxes fund public services like education, infrastructure, and emergency response. Unlike federal taxes, which apply uniformly across the U.S., state and local income taxes vary by jurisdiction.
Each state sets its own rules for who must pay, how much they owe, and how income is calculated. Some states impose no income tax at all, while others have progressive systems with multiple tax brackets. Cities and counties may also levy additional local income taxes, typically applied to residents or workers within their boundaries.
For example, California applies a marginal tax rate ranging from 1% to 12.3% depending on income level, while New Jersey uses a flat 10% rate. In contrast, Texas and Florida have no state income tax. Local taxes exist in places like New York City, where residents face an additional 3.078% city income tax on top of the state's 6.85% rate.
State income taxes are generally calculated using a graduated scale based on taxable income. Taxable income is gross earnings minus allowable deductions, such as standard or itemized deductions. States define their own deduction rules, which differ from federal standards. For instance, California allows a $4,000 deduction for single filers, while New York offers a $10,000 cap on state and local tax (SALT) deductions for federal purposes.
Local income taxes function similarly but are confined to specific geographic areas. They often apply only to residents or workers within city limits. Chicago imposes a 1.25% income tax on residents earning over $10,000 annually. Washington, D.C., charges a 4% rate on earned income above $10,000. These taxes are withheld from paychecks by employers or reported during annual filing.
Employers withhold state and local taxes based on employee W-4 forms. Workers choose exemptions or allowances that affect how much is deducted. For example, claiming more allowances reduces withholding. If too little is withheld, taxpayers may owe money when filing. Over-withholding results in refunds, but it represents delayed access to funds.
There are four primary models for state income taxation:
| Type | Description | Examples |
|---|---|---|
| Flat-rate | Single tax rate applied to all income levels | New Jersey (10%), Florida (0%) |
| Progressive | Higher rates for higher income brackets | California (1%-12.3%), Massachusetts (5.0%-5.9%) |
| Zero-tax | No state income tax on wages | Texas, Nevada, Wyoming |
| Hybrid | Combines elements of flat and progressive systems | Ohio (3.5%-4.796%) |
Local income taxes are less common but exist in over 100 U.S. jurisdictions. They're most prevalent in large metropolitan areas. New York City's 3.078% rate applies to residents and non-residents working in the city. Philadelphia's 3.87% tax covers both residents and those who work in the city but live elsewhere.
A lesser-known fact: some states do not tax certain types of income. Alaska, for example, excludes dividends and capital gains from state income tax. Similarly, South Dakota does not tax retirement income, including Social Security benefits and pension payouts.
Many people assume that state income tax applies everywhere within a state. This is false. Residents of rural counties may pay no local tax, while urban centers charge higher rates. A worker living in a low-tax county but employed in a high-tax city may owe local income tax on their earnings despite residing outside the taxing jurisdiction.
Another misconception is that state and local taxes are automatically deducted from paychecks. Employers withhold taxes based on the employee's residence and work location. If someone lives in one state and works in another, they may owe taxes in both. For example, a resident of Pennsylvania who works in New Jersey must file a nonresident return in New Jersey and pay taxes on income earned there.
Some confuse state income tax with sales tax. Sales tax applies to purchases, not earnings. While both are state-imposed, they serve different purposes and are calculated differently. A $100 purchase in Oregon (no sales tax) costs the same as in California (7.25% sales tax), but income tax impacts net pay.
Consider Maria, a software engineer who earns $90,000 annually. She lives in San Francisco, California, and works remotely from her home. Her employer withholds California state income tax at a rate of 9.3%. She also owes a local income tax of 1.5% because San Francisco levies a 1.5% tax on residents earning over $250,000-but she qualifies for a reduced rate due to her income level.
Her total state and local tax withholding is calculated as follows:
Maria files her state return and reports $90,000 in income. After applying the standard deduction ($13,850 for single filers in 2023), her taxable income is $76,150. California's tax calculation results in a liability of $7,092. Since $9,720 was withheld, she receives a refund of $2,628.
This example shows how withholding can exceed actual liability due to estimated rates and bracket assumptions. Accurate filing requires knowing the correct tax brackets and deductions applicable to your situation.
When preparing your state and local tax return, verify your filing status and residency rules. Some states require filing even if no tax is owed. Others offer free e-filing through platforms like Free File, operated by the IRS and state tax agencies.
If you're uncertain about your obligations, consult official state tax websites. The National Conference of State Legislatures (NCSL) maintains a searchable database of state tax policies, including rates, brackets, and filing deadlines. The IRS also provides guidance on state tax withholding and reporting.
Understanding what are state and local income taxes begins with recognizing that they are not uniform. They depend on where you live, work, and earn. Knowing your jurisdiction's rules prevents underpayment, penalties, and surprises during filing season.