Types of State Income Taxes
There are two different types of state income taxes -- flat taxes and progressive taxes.
A flat tax is just what it sounds like: a flat rate, or a fixed percentage of your income. So, for example, people who live in Utah pay 5 percent of their income in state income taxes, no matter how much money they make. This type of tax is also known as a proportional tax, because the amount you pay is proportional to your income. Seven states have flat income tax rates: Colorado, Illinois, Indiana, Massachusetts, Michigan, Pennsylvania and Utah.
A progressive tax (or graduated tax), on the other hand, varies depending on how much money you make. The more you earn, the larger the percentage of your income goes to the government in the form of taxes. Thirty-six states have a progressive tax. Your federal taxes are also progressive.
The main advantage to a progressive tax is that those who have the least ability to pay (have the lowest incomes) pay the smallest percentage of their income in taxes. The progressive tax system is often defended by the ability-to-pay principle, or the idea that those with the greatest ability to pay will least mind paying a higher tax rate.
Some people think that a progressive tax is unfair because it charges different people different percentages of their income. They see a flat tax as a fairer way to tax, since everyone is taxed at the same rate.
While living in a state with a progressive tax system benefits those who earn the least, the most beneficial to everyone -- whether they earn a lot or a little -- is living in a state with no income tax at all. In the next section, we'll examine the seven states that do not charge their residents income tax, and figure out how they manage to survive without it.