Top Marginal Effective Tax Rates by State and by Source of Income, 2012 Tax Law vs. 2013 Scheduled Tax Law

by Gerald T. Prante, Lynchburg College, School of Business and Economics and Austin John, Lynchburg College, School of Business and Economics, November 15, 2012

This paper compares state-by-state estimates of the top marginal effective tax rates (METRs) on wages, interest, dividends, capital gains, and business income for tax year 2012 to the rates scheduled for 2013 under scheduled law. Scheduled tax law for 2013 assumes the expiration of the 2001 and 2003 tax cuts and the new PPACA taxes. Overall, the average top METR on wage income is scheduled to increase by approximately six percentage points (41.8 percent to 47.8 percent), while taxes on dividends would increase the greatest (19.0 percent to 47.9 percent). The top METRs on wages, dividends, interest, and partnership/sole proprietor income would exceed 50 percent in Hawaii, California, and New York City….

The results presented in tables 1-3 below show that the national average for the top marginal effective tax rate on wage income is scheduled to go from 41.8% in 2012 to 47.8% in 2013. The highest marginal effective tax rate on wage income in 2013 would be 51.9% in California. California voters recently approved a measure that would temporarily increase the top tax rate in the state from 10.3% to 13.3% (includes the 1% mental health services tax on income earned over $1 million). Closely behind California would be New York City, where the top METR would be 51.7%. The METR on wage income would also exceed 50% in Hawaii. At the low end of the METR spectrum are those nine states with no tax on wage income (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming)….

Table 1: Summary of Top Marginal Effective Tax Rates by Income Source by State, 2012 Law vs. Scheduled 2013 Law

State	Wages		Interest (Taxable)		Dividends (Qualified)		Capital Gains		Sole Prop & Partnership		S-Corp
	2012	2013	2012	2013	2012	2013	2012	2013	2012	2013	2012	2013
U.S.	41.8%	47.8%	39.2%	48.2%	19.0%	47.9%	19.1%	28.5%	41.5%	47.4%	39.2%	44.4%
AL	39.5%	45.7%	37.2%	46.4%	17.8%	46.4%	17.8%	27.4%	39.4%	45.6%	37.2%	42.6%
AK	37.4%	42.8%	35.0%	43.4%	15.0%	43.4%	15.0%	23.8%	37.2%	42.6%	35.0%	39.6%
AZ	40.3%	46.7%	38.0%	47.3%	18.0%	47.3%	18.0%	27.7%	40.1%	46.5%	38.0%	43.5%
AR	41.8%	48.1%	39.6%	48.8%	19.6%	48.8%	18.2%	27.9%	41.7%	48.0%	39.6%	45.0%
CA	45.9%	51.9%	43.6%	52.6%	23.6%	52.6%	23.6%	33.0%	45.8%	51.8%	43.6%	48.8%
CO	40.3%	46.7%	38.0%	47.4%	18.0%	47.4%	18.0%	27.8%	40.2%	46.6%	38.0%	43.6%
CT	41.7%	47.9%	39.4%	48.6%	19.4%	48.6%	19.4%	29.0%	41.5%	47.8%	39.4%	44.8%
DE	41.8%	48.0%	39.4%	48.7%	19.4%	48.7%	19.4%	29.1%	41.6%	47.9%	39.4%	44.9%
DC	43.1%	49.3%	40.8%	50.0%	20.8%	50.0%	20.8%	30.4%	43.0%	49.1%	40.8%	46.2%
FL	37.4%	42.8%	35.0%	43.4%	15.0%	43.4%	15.0%	23.8%	37.2%	42.6%	35.0%	39.6%
GA	41.2%	47.5%	38.9%	48.2%	18.9%	48.2%	18.9%	28.6%	41.1%	47.4%	38.9%	44.4%
HI	44.4%	50.5%	42.2%	51.2%	22.2%	51.2%	19.7%	29.4%	44.3%	50.4%	42.2%	47.4%

Table 2: Top Statutory State Income Tax Rates and Average Local Income Tax Rates by Income Source by State, Tax Year 2012

State	Wages		Interest (Taxable)		Dividends (Qualified)		Capital Gains		Sole Prop & Partnership		S-Corp
	State	Local	State	Local	State	Local	State	Local	State	Local	State	Local
AL	5.0%	0.1%	5.0%	0.0%	5.0%	0.0%	5.0%	0.0%	5.0%	0.1%	5.0%	0.0%
AK	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%
AZ	4.5%	0.0%	4.5%	0.0%	4.5%	0.0%	4.5%	0.0%	4.5%	0.0%	4.5%	0.0%
AR	7.0%	0.0%	7.0%	0.0%	7.0%	0.0%	4.9%	0.0%	7.0%	0.0%	7.0%	0.0%
CA	13.3%	0.1%	13.3%	0.0%	13.3%	0.0%	13.3%	0.0%	13.3%	0.1%	13.3%	0.0%
CO	4.6%	0.0%	4.6%	0.0%	4.6%	0.0%	4.6%	0.0%	4.6%	0.0%	4.6%	0.0%
CT	6.7%	0.0%	6.7%	0.0%	6.7%	0.0%	6.7%	0.0%	6.7%	0.0%	6.7%	0.0%
DE	6.8%	0.1%	6.8%	0.0%	6.8%	0.0%	6.8%	0.0%	6.8%	0.1%	6.8%	0.0%
DC	9.0%	0.0%	9.0%	0.0%	9.0%	0.0%	9.0%	0.0%	9.0%	0.0%	9.0%	0.0%
FL	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%
GA	6.0%	0.0%	6.0%	0.0%	6.0%	0.0%	6.0%	0.0%	6.0%	0.0%	6.0%	0.0%
HI	11.0%	0.0%	11.0%	0.0%	11.0%	0.0%	7.3%	0.0%	11.0%	0.0%	11.0%	0.0%

Table 3: Decomposition of the Top Marginal Effective Tax Rate on Wage Income for Tax Years 2012 and Scheduled 2013 Law

State	Federal Wage Rate		State Wage Rate		Local Wage Rate (Avg.)		Net Federal Wage Rate		Federal Payroll Rate		Total
	2012	2013	2012	2013	2012	2013	2012	2013	2012	2013	2012	2013
U.S.	35%	39.6%	-	-	-	-	-	-	2.9%	3.8%	-	-
AL	35%	39.6%	5.0%	5.0%	0.1%	0.1%	33.8%	39.6%	2.9%	3.8%	39.5%	45.7%
AK	35%	39.6%	0.0%	0.0%	0.0%	0.0%	35.0%	39.6%	2.9%	3.8%	37.4%	42.8%
AZ	35%	39.6%	4.5%	4.5%	0.0%	0.0%	33.4%	39.0%	2.9%	3.8%	40.3%	46.7%
AR	35%	39.6%	7.0%	7.0%	0.0%	0.0%	32.6%	38.0%	2.9%	3.8%	41.8%	48.1%
CA	35%	39.6%	13.3%	13.3%	0.1%	0.1%	30.3%	35.5%	2.9%	3.8%	45.9%	51.9%
CO	35%	39.6%	4.6%	4.6%	0.0%	0.0%	33.4%	39.0%	2.9%	3.8%	40.3%	46.7%
CT	35%	39.6%	6.7%	6.7%	0.0%	0.0%	32.7%	38.1%	2.9%	3.8%	41.7%	47.9%
DE	35%	39.6%	6.8%	6.8%	0.1%	0.1%	32.6%	38.1%	2.9%	3.8%	41.8%	48.0%
DC	35%	39.6%	9.0%	9.0%	0.0%	0.0%	31.9%	37.2%	2.9%	3.8%	43.1%	49.3%
FL	35%	39.6%	0.0%	0.0%	0.0%	0.0%	35.0%	39.6%	2.9%	3.8%	37.4%	42.8%
GA	35%	39.6%	6.0%	6.0%	0.0%	0.0%	32.9%	38.4%	2.9%	3.8%	41.2%	47.5%
HI	35%	39.6%	11.0%	11.0%	0.0%	0.0%	31.2%	36.4%	2.9%	3.8%	44.4%	50.5%

read … PDF of Report

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