State governments each design their own tax systems, so there is no single tax model that fits all fifty states. But most rely for funding upon some combination of personal and corporate income taxes, sales taxes, and property taxes. The Department of Treasury offers a useful summary of the various types of taxes imposed by each of the state governments here. And the Retirement Living Information Center offers a handy summary of the specific taxes imposed by each of the 50 states. (It’s never too early to start planning for your tax-free retirement... what up, Florida!)
Meanwhile, county and local governments generally raise money through property taxes. But they tax different forms of property. Most commonly, they tax only real property—that is, land and the buildings attached to the land. But some also tax personal property such as cars, jewelry, and furniture.
Why It Matters Today
Unlike the federal government, state governments can't run deficits; if they want to provide expensive public services, they have to raise the funds to pay for them through taxes or fees.
But raising state taxes is a tricky proposition. People don't really like paying high taxes, and it's a lot easier to move from state to state than it is to leave the country if you don't like your federal taxes.
Look at what happened in New Jersey. The state jacked up its income tax rates for high-income individuals rather quickly. As late as 1990, the top state income tax bracket maxed out at 3.5%, but a series of increases between then and 2004 boosted that to 8.97%.
|Years||Minimum Rate||Maximum Rate|
|July 1, 1976 - December 31, 1982||2 %||2.5 %|
|January 1, 1983 - December 31, 1990||2 %||3.5 %|
|January 1, 1991 - December 31, 1993||2 %||7 %|
|January 1, 1994 - December 31, 1994||1.9 %||6.65 %|
|January 1, 1995 - December 31, 1995||1.7 %||6.58 %|
|January 1, 1996 - December 31, 2003||1.4 %||6.37%|
|January 1, 2004 - Present||1.4 %||8.97%|
What happened? It seems that many of the state's wealthier residents decided they were fed up and not gonna take it any more, and they started voting with their feet. A recent study noted a significant uptick in migration out of the state among New Jersey's richest citizens, many of them bound for places like Florida and Pennsylvania where tax burdens were significantly lower. The study estimated that the exodus resulted in some $70 billion in private wealth leaving the state (source).
“I feel so good come payday
I think of all the things I'm gonna buy when I pick up my pay
Don't you know but then they hand me that little brown envelope
I peep inside Lord I lose all hope”
View After Taxes, by Johnny Cash at amazon.com