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• CCH Tax Briefing: 2012 Federal Budget Proposals
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• CCH Tax Briefing: 2010 Tax Relief/Job Creation Act
• CCH Tax Briefing: Sunsetting Benefits of the Economic Growth and Tax Relief Reconciliation Act of 2001
• CCH Tax Briefing: Small Business Jobs Act of 2010 (H.R. 5297)
• CCH Tax Briefing: Education/Jobs/Medicaid Assistance Act of 2010
• CCH Tax Briefing: Homebuyer Assistance and Improvement Act of 2010
• CCH Tax Briefing: Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010
• CCH Tax Briefing: Health Care Reform Act
• CCH Tax Briefing: 2010 Hiring Incentives to Restore Employment Act

CCH Reviews State Income Tax Rates and Strategies for Bringing in Revenue

Few Follow Through On Long-term Income Tax Increases, Favoring Temporary and “Millionaire” Taxes; Some Offer Amnesty Programs

(RIVERWOODS, ILL., January 2011) – Despite severe revenue shortfalls and a great deal of talk about raising state income taxes, few states increased income tax rates across the board for 2010, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com).

“Many states see raising income tax rates across the board as a last resort,” said CCH State Tax Analyst Kathleen Thies, JD. “Some will try other approaches first to boost income tax receipts, for example, temporary tax increases, assessing higher taxes on just the wealthiest of taxpayers or offering income tax amnesty programs.”

State Income Tax Adjustments

Specifically, only Delaware taxpayers saw a significant increase in income tax rates for 2010 and going forward, with the state increasing the tax rate for personal income exceeding $60,000 from 5.95 to 6.95 percent for tax periods commencing after 2009. A few other states also have temporary tax brackets boosting income taxes in effect for years including 2010. These include:

• California, which added 0.25 percent to each income tax bracket for 2009 through 2010;
• New York, which added two additional rates for 2009 through 2011: 7.85 percent on income over $200,000 ($300,000 for joint filers) and 8.97 percent on income over $500,000;
• North Carolina, which imposes a tax surcharge for 2009 through 2010 of 2 percent on taxpayers with income over $60,000 ($100,000 for joint filers) and 3 percent on taxpayers with income over $150,00 ($250,000 for joint filers); and
• Oregon, which has two new tax brackets effective for 2009 through 2011: 10.8 percent for income over $125,000 and 11 percent on income over $250,000; the former bracket will be reduced to 9.9 percent and the top bracket will be eliminated as of 2012.

Additionally, the District of Columbia froze personal exemption and standard deductions through 2013, which will result in higher tax bills for many taxpayers.

While states may be reluctant to enact broad-based income tax increases, the following states have higher tax brackets for taxpayers with incomes of more than $500,000 in 2010:

• California, which tacks 1 percent onto its highest income tax rate of 9.55 percent for taxpayers with income of more than $1 million, for a 10.55 percent tax rate;
• Connecticut, which assesses an income tax of 6.5 percent on income in excess of $500,000 ($1 million for joint filers);
• Maryland, which imposes an income tax of 6.25 percent on income of more than $1 million;
• New Jersey, which imposes an 8.97-percent income tax on income of more than $500,000. This is a change from 2009 when the state had imposed an even higher tax rate – 10.75 percent – in income in excess of $1 million;
• New York , which also imposes an 8.97-percent income tax on income of more than $500,000 (through 2011); and
• Oregon, which imposes an 11-percent income tax on income of more than $500,000 (through 2012 only).

A few states also reduced income tax rates for 2010, including Vermont, which reduced its top rate to 8.95 percent from 9.5 percent as of January 1, 2010; and New Jersey, which allowed its “millionaire tax” to expire. Looking to 2011, Rhode Island will eliminate its flat-tax option and reduce the number of tax brackets from five to three, lowering its top rate from 8.95 percent to 5.99 percent.

As is evident, state income tax rates continue to run the gamut. Seven states impose no income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming), and two other states only impose an income tax on dividend and interest income (New Hampshire at 5 percent and Tennessee at 6 percent for 2010).

States imposing the highest income tax rates for 2010 include California (with a maximum marginal state income tax rate of 10.55 percent), District of Columbia (8.5 percent), Hawaii (11 percent), Iowa (8.98 percent), Maine (8.5 percent), New Jersey (8.97 percent), New York (8.97 percent), Oregon (11 percent) and Vermont (8.95 percent).

(See chart below for full detail on State Income Tax Rates.)

 Amnesty Programs Continue As States Seek Revenues

In addition to raising income taxes, states also are looking at how to collect taxes owed but not paid. One way states are attempting to do this is through state income tax amnesty programs. Typically under these programs, the states will allow taxpayers who come forward to pay their taxes with reduced penalties. The taxes can be income taxes, use taxes or other types of taxes the states may levy.

In addition to the District of Columbia, 10 states offered limited-time amnesty programs in 2010 for individual taxpayers:

• Florida;
• Illinois;
• Kansas;
• Kentucky;
• Maine;
• Michigan;
• Minnesota;
• Nevada;
• New Mexico; and
• Pennsylvania.

“With amnesty programs, the states forego some of the income they would earn if they were able to collect the penalties,” said Thies. “However, they also receive income they may have had a hard time collecting because they would have had to pursue the taxpayer and proven they owed the money, which is expensive for the states.”

However, taxpayers need to consider the ramifications of participating in an amnesty program.

First, they need to determine if they can pay the amount they owe. This includes not only the amount they owe the state but also any additional amount they may owe in federal income taxes and penalties. Penalties owed to the IRS are not reduced under state amnesty programs.

Additionally, taxpayers participating in amnesty programs could increase their likelihood of being audited and could affect their tax liabilities in other states as states do share this information with one another.

“It’s generally a good idea to seek the advice of a tax professional if you are going to participate in an amnesty program,” said Thies. “There is a considerable amount of paperwork and there are a lot of inter-related issues that need to be worked through.”

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. CCH is based in Riverwoods, Ill. Wolters Kluwer is a leading global information services and publishing company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands (www.wolterskluwer.com).

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State Income Tax Rates

The following chart shows the top marginal state income tax rate, states assessing increased rates on income in excess of $500,000 and flat tax rates used in some states. States shaded indicate they do not have income taxes or their income taxes are limited to dividend and interest income.

* Brackets indexed for inflation.

^ Taxpayers subject to state alternative minimum tax.

Illinois has an additional personal property replacement tax of 1.5 percent of net income that is imposed on partnerships, trusts and S Corporations.

Indiana counties may impose an adjusted gross income tax on residents or nonresidents or a county option income tax.

Maryland will reduce its top tax to 5.5 percent for income of $500,001+ in 2011.

North Carolina imposes a 2-percent surcharge for taxpayers with income over $60,000 ($100,000 for joint filers) and a 3-percent surcharge for taxpayers with income over $150,000 ($250,000 for joint filers), expiring after 2010.

Oregon’s brackets indexed for inflation annually, except for $125,000 or over brackets.

Rhode Island taxpayers for 2010 may elect to compute income tax liability based on a flat rate equal to 6 percent or a graduated rate schedule based on 25 percent of the federal income tax rates, including capital gains rates and any other special rates for other types of income, that were in effect prior to enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001.

SOURCE: CCH, 2011.

Permission for use granted.