Legal Mandate for States

• States, like the federal government, are able to tax residents. According to the U.S. Department of the Treasury, states have "retained the right to impose any type of tax except those taxes that are clearly forbidden by the United States Constitution and their own state constitution." However, Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming have no income tax of any kind.
  
  

Use of State Income Tax Revenue

• Since income taxes may be a large source of revenue for states, the tax money goes to supporting government services, which may include maintaining and expanding roads and supporting public schools.
  
  

Use of Local Income Tax Revenue

• According to the Tax Foundation, local income taxes are growing in popularity in parts of the Midwest and in eastern states So, in addition to state and federal income tax, some residents of large U.S. cities may also be subject to local income tax. For example, New York City raises revenue through a local income tax to fund local services for residents such as police and fire protection.
  
  

Impact

• Residents of some places, such as New York City, are taxed at least three times by their government to support critical public services. However, the income tax is calculated on a taxpayer's taxable income. Therefore residents do not get taxed on all of their income since there are income deductions and exemptions to lessen the tax burden on citizens.
  
  

Declining Revenues

• Since most states depend in part on income tax revenues, declines in income pose considerable problems for local and state governments. These governments may face budget gaps that require unpopular decisions, such as eliminating or cutting funding for some services.