In the United States, individual states have maintained their right to levy taxes, and the federal government has always recognized this right. When the U.S. Constitution was ratified, the federal government was also granted the power to levy taxes. The right to impose taxes—except those taxes that are expressly forbidden by the Constitution and their own state constitutions—was retained by the states. In addition to money from the federal government, the fifty states get the money they need to provide essential services through taxes, fees, and licenses.

Some of the most common types of taxes imposed by states include:

• corporate income tax
• personal income tax
• real and personal property tax
• sales tax

In the 1930s and 1940s, personal income tax and sales tax were introduced in many states. The depression prompted the need for new ways for states to bring in additional revenue to finance public services.

Unlike personal income taxes, the tax on real property has a very long history in the United States. As early as 1646, the Massachusetts Bay Colony taxed settlers who owned land. After independence, many states introduced new systems of property taxes. Eventually, local governing bodies assumed the power to tax property. Property tax is generally paid to a local government, a school district, a county government, or a water district, but not to a state or the federal government.

State individual income taxes generally apply to all natural persons as individuals, partners, fiduciaries and beneficiaries. Most states use a system of graduated tax rates, but six states have a flat rate tax. They are:

1. Colorado
2. Illinois
3. Indiana
4. Massachusetts
5. Michigan
6. Pennsylvania

Taxpayers conducting business as partnerships are liable for income tax only in that taxpayers’ individual capacity, but the taxpayers must report partnership income they received. Estates and trusts are taxed in much the same way as individuals. Basically, the entire income of an estate or trust must be reported on a return filed for it by the fiduciary (the personal representative of the estate or the trustee(s) of a trust).

There are few constitutional limits to a state’s power to tax net income of its residents. In fact, most states impose a variety of taxes upon their residents, as well as those conducting business within their borders. In most states, individual residents are taxed on their entire net incomes. There are seven states that do not collect individual income taxes. They are:

1. Alaska
2. Florida
3. Nevada
4. South Dakota
5. Tennessee (only taxes interest and dividend income)
6. Texas
7. Washington
8. Wyoming

Nonresidents are taxed on their net income earned from property located or business carried on in the state.