States levy taxes on income, sales and property. The income tax is imposed at a fixed or graduated rate on taxable income of individuals, corporations and certain estates and trusts.
State corporate income taxes are based on a corporation’s business income. It is apportioned to each state based on the connection of the corporation (known as substantial nexus) with that state.
Income Tax
Many states tax income derived from businesses that operate in their jurisdictions. These taxes range from a flat rate to a percentage of gross income, depending on the state and the type of business.
The amount of state income tax you pay depends on a variety of factors, such as your marital status, dependents and tax deductions. In addition, your state income tax rate is affected by your federal income tax bracket.
In Texas, business tax rates are low, which has helped fuel a strong economy. Some of this is due to the fact that Texas does not levy a corporate income tax.
Sales Tax
The sales tax is a revenue source for state and local governments. It is collected on a wide range of products and services, including retail goods and common services such as dry cleaning, hairdressing, and restaurant meals.
A merchant must register for a sales tax permit to collect and remit the tax in most states. Sellers must also keep records of all taxable sales and make periodic payments to the state.
The sales tax is a key source of state government revenue, and is second only to the income tax in terms of its importance. However, it worsens racial inequalities by increasing the share of income that low-income families must spend on taxes.
Property Tax
Property taxes are the largest source of money local governments use to pay for schools, streets and roads, police and fire protection and a variety of other services. Texas law lays out the process for determining the value of your home, making sure that values are equal and uniform and setting tax rates.
However, many Texans feel that the property tax system is poorly administered, regressive and inefficient. Moreover, property values and tax rates vary significantly from region to region, so your home may be taxed more than a similar one in another neighborhood.
Currently, property tax growth has been slowed by state laws that require many cities, counties and other taxing units to get voter approval if they want to increase their rates. Facing reelection, Governor Greg Abbott has deemed reducing property tax bills a top priority when lawmakers reconvene next year.
Other Taxes
When you’re looking to stretch your dollar, where you live can make a big difference. State and local taxes – such as property, license, sales, gasoline and cigarette – eat into your take-home pay.
Texas, for example, levies a 6.25% state sales tax and local taxes can be added on top. These taxes help fund education, transportation and other services vital to a healthy community.
A few states, including New Hampshire and Alaska, don’t levy state income tax. But they do rely heavily on property taxes to support public schools and other services, according to Eva DeLuna Castro, a senior policy analyst with the Center for Public Policy Priorities.
