May 2016

State Income Taxes Across the Nation

By Amy K. Frantz

Income taxes are collected in 41 states in the nation. Two additional states, New Hampshire and Tennessee, tax only interest and dividend income, not wage and salary income.  Those 43 states adopted income taxes over a range of time, as demonstrated by a Tax Foundation graphic.[1]

Hawaii was the first state to adopt a state income tax, even though Hawaii did not become a state until 1959. Two other states, Wisconsin and Mississippi adopted a state income tax even before the United States imposed a federal income tax in 1913.  By 1929 a total of 15 states had imposed a state income tax.

Iowa adopted our state income tax in 1934, joining 16 other states that adopted a state income tax in the 1930s, many in response to the Great Depression. There was a bit of a lull in activity after that, until the 1960s when seven more states adopted a state income tax.  Finally, four more states adopted an income tax in the 1970s, the last decade in which any state adopted such a tax.  The final state to do so was New Jersey in 1976.

There are seven states that currently do not impose a state income tax – Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Six of those states have never had a state income tax.  The seventh – Alaska – is the only state to have completely repealed a state income tax.

Alaska initially adopted a state income tax in 1949, imposing a tax of 10 percent of a taxpayer’s federal income tax liability, according to Alaska State Representative Paul Seaton. By 1961, the tax rate had risen to 16 percent.  In 1975 the “state switched to a graduated tax rate structure independent of federal income tax rates.”[2]

Jerry Reinwand, Chief of Staff to Alaska Governor Jay Hammond, who was in office when the state income tax was repealed, writes of the demise of the state income tax:

“The personal income tax was repealed during a special session of the Legislature in September of 1980. The income tax wasn’t repealed because the governor and Legislature had a burning desire to eliminate the tax. Instead, the impetus for the tax’s repeal was triggered because the Libertarian Party was successful in getting an initiative on the ballot which would have basically repealed the personal income tax. Obviously this did not go unnoticed by House and Senate members and they quickly determined to trump the Libertarians and repeal the income tax before the initiative appeared on the upcoming general election ballot. The special session lasted three days and the income tax repeal passed the House and Senate by a 58-1 vote. By passing a statute that met the ‘substantially similar’ legal standard for removing an initiative from the ballot, the Legislature effectively killed the Libertarian Party’s initiative.”[3]

Alaska’s economy and government are greatly dependent on oil-related revenue, thus in times of low oil prices, it has been proposed that the state re-impose an income tax, however, it has yet to be successful, and Alaska remains one of the few states without an income tax.

Amy K. Frantz is Vice President of Public Interest Institute.

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation.  They are brought to you in the interest of a better-informed citizenry.

[1] “Individual Income Tax” Year of Adoption by State,” Tax Foundation, June 10, 2014, <http://taxfoundation.org/sites/taxfoundation.org/files/docs/Income%20Tax%20Adoption%20Year%20by%20State%20UPDATED.png> accessed on April 19, 2016.

[2] Alaska Rep. Paul Seaton, “History of Alaska Individual Income Tax,” April 15, 2015, <http://www.housemajority.org/2015/04/15/history-of-alaska-individual-income-tax/> accessed April 20, 2016.

[3] Jerry Reinwand, “My Turn: Alaska’s budget: A history,” The Juneau Empire, November 28, 2014, <http://juneauempire.com/opinion/2014-11-28/my-turn-alaskas-budget-history> accessed April 20, 2016.