State Income Tax - History

History

Some of the English colonies in North America taxed property (mostly farmland at that time) according to its assessed produce, rather than, as now, according to assessed resale value. Some of these colonies also taxed "faculties" of making income in ways other than farming, assessed by the same people who assessed property. These taxes taken together can be considered a sort of income tax. The records of no colony covered by Rabushka (essentially, the colonies that became part of the United States) separated the property and faculty components, and most records indicate amounts levied rather than collected, so much is unknown about the effectiveness of these taxes, up to and including whether the faculty part was actually collected at all. Colonies with laws taxing both property and faculties include:

• Plymouth Colony from 1643 and Massachusetts Bay Colony from 1646, and after they merged, the Province of Massachusetts Bay until the Revolution;
• New Haven Colony from 1649 and Connecticut Colony from 1650, past the 1662 merger with New Haven, until the Revolution;
• the Colony of Rhode Island and Providence Plantations, arguably from 1673 to 1744;
• the Province of West Jersey, a single 1684 law;
• the "South-west part" of the Province of Carolina, later the Province of South Carolina, from 1701 until the Revolution;
• the Province of New Hampshire, arguably from 1719 to 1772;
• and the Delaware Colony in the Province of Pennsylvania, from 1752 to the Revolution.

Rabushka makes it clear that Massachusetts and Connecticut actually levied these taxes regularly, while for the other colonies such levies happened much less often.

During and after the American Revolution, although property taxes were evolving toward the modern resale-value model, several states continued to collect faculty taxes. These include:

• Massachusetts until 1916;
• Connecticut until 1819;
• South Carolina, where the tax edged closer to a modern income tax, until 1868;
• Delaware until 1796;
• Maryland from 1777 to 1780;
• New York, one 1778 levy;
• Vermont from 1778 to 1850;
• Pennsylvania from 1782 to 1871;
• and Virginia from 1786 to 1790.

Following the Panic of 1837, but not always because of that depression, some states attempted to institute or expand income taxes, usually taxing only specific forms of income. These include:

• Pennsylvania (whose laws changed several times in the 1840s, and whose 1835 tax on bank dividends, paid by withholding, eventually paid half its total revenue);

and five states whose income taxes (like Pennsylvania's, except the bank dividend part) produced little revenue:

• Maryland from 1841 to 1850;
• Virginia from 1843;
• Alabama from 1843 to 1884;
• Florida from 1845 to 1855;
• and North Carolina from 1849.

During the American Civil War and Reconstruction Era, when both the United States of America (1861-1871) and the Confederate States of America (1863-1865) instituted income taxes, so did several states, including:

• Texas from 1863 to 1871;
• Missouri from 1861 to 1865;
• West Virginia in 1863 only;
• Georgia from 1863 to 1865;
• Louisiana from 1865 to 1899;
• and Kentucky from 1867 to 1872.

In 1883 Tennessee instituted the tax on interest and dividends which it still collects.

Following the 1895 Supreme Court decision in Pollock v. Farmers' Loan & Trust Co. which effectively ended a federal income tax, some more states instituted their own:

• South Carolina from 1897 to 1918;
• Oklahoma from 1908;
• Wisconsin from 1911 (Wisconsin's is generally considered the first modern state income tax, because it was administered not by local elected officials but by state civil servants, and because it taxed income in general, largely by withholding; the relevant law was largely written by Delos Kinsman, whose 1900 thesis on state income taxes is cited below);
• Mississippi from 1912.

Also during this period, the Republic of Hawaii started an income tax in 1896 which was almost immediately ruled to violate the country's constitution; after annexation as the Territory of Hawaii, in 1901, it instituted the income tax it still levies as a state.

The discussion up to this point concerns only individual income taxes, but Hawaii's 1901 tax was and is also levied on corporate incomes, and is acknowledged as the first state corporate income tax, bar the quibble that Hawaii was at the time a territory instead. (Previous state taxes on corporations had usually been on capital, not income, essentially a form of property tax.) Subsequently, Wisconsin and Mississippi included corporate income taxes in their laws instituting income taxes in general, although Mississippi's was held up in court until 1921.

Following the passage of the 16th Amendment, state income taxes multiplied:

• Connecticut, corporate (and called a franchise tax), from 1915;
• Virginia, corporate, from 1915;
• Massachusetts, individual, from 1916;
• Delaware, individual, from 1917;
• Missouri, individual and corporate, from 1917;
• Montana, corporate (franchise), from 1917;
• New York, corporate (franchise), from 1917;
• New York, individual, from 1919;
• North Dakota, individual and corporate, from 1919;
• New Mexico, individual, from 1919;
• Massachusetts, corporate (franchise), from 1920;
• North Carolina, corporate, from 1921;
• South Carolina, individual, from 1921;
• South Carolina, corporate, from 1922;
• New Hampshire, individual, restricted to interest and dividends, from 1923;
• Tennessee, corporate (franchise), from 1923.

A third of the current state individual income taxes, and still more of the current state corporate income taxes, were instituted during the decade after the Great Depression started:

• Arkansas, individual and corporate, from 1929;
• California, corporate (franchise), from 1929;
• Georgia, corporate, from 1929;
• Oregon, corporate (franchise), from 1929;
• Georgia, individual, from 1931;
• Idaho, individual and corporate, from 1931;
• Oklahoma, corporate, from 1931;
• Utah, individual and corporate (franchise), from 1931;
• Vermont, individual and corporate (franchise), from 1931;
• Alabama, corporate, from 1933;
• Arizona, individual and corporate, from 1933;
• Indiana, individual, from 1933;
• Kansas, individual and corporate, from 1933;
• Minnesota, individual, corporate, and corporate (franchise), from 1933;
• Montana, individual, from 1933;
• New Mexico, corporate, from 1933;
• Iowa, individual and corporate (franchise), from 1934;
• Louisiana, individual and corporate, from 1934;
• Alabama, individual, from 1935;
• California, corporate, from 1935;
• Pennsylvania, corporate (franchise), from 1935;
• South Dakota, corporate, from 1935;
• California, individual, from 1936;
• Kentucky, individual and corporate, from 1936;
• Colorado, individual and corporate, from 1937;
• Maryland, individual and corporate, from 1937.

The District of Columbia instituted a corporate income tax in 1939. Two states, South Dakota and West Virginia, abolished Depression-era individual income taxes in 1942; South Dakota also abolished its corporate income tax in 1943. In 1947, Rhode Island instituted a corporate income tax, while the District of Columbia instituted a corporate income tax called a franchise tax. In 1949, the Alaska Territory instituted an income tax which the state of Alaska would maintain until 1980.

During the 1950s, a few more states added corporate income taxes:

• Pennsylvania, from 1951;
• Oregon, from 1955;
• Delaware, from 1958;
• New Jersey, from 1958;
• Idaho, from 1959;
• Utah, from 1959.

In 1961, West Virginia resumed levying income taxes, and in 1963, Indiana instituted a corporate income tax.

The next wave of new state income taxes began in 1967:

• Michigan, individual and corporate, from 1967;
• Nebraska, corporate, from 1967;
• West Virginia, corporate, from 1967;
• Nebraska, individual, from 1968;
• Illinois, individual and corporate, from 1969;
• Maine, individual and corporate, from 1969;
• New Hampshire, corporate, from 1970;
• Florida, corporate, from 1971;
• Ohio, corporate, from 1971;
• Pennsylvania, individual, from 1971;
• Rhode Island, individual, from 1971;
• Ohio, individual, from 1972;
• New Jersey, individual, from 1976.

The only remaining state to institute an income tax to date is Connecticut, on individuals, from 1991, but that tax replaced an earlier tax apparently limited to capital gains and dividends. Numerous states with individual income taxes have considered or enacted measures to abolish those taxes since the Late-2000s recession began, and several states without individual income taxes have considered measures to institute them, but no state has so far actually changed its individual-income-taxing status.

Rhode Island did not have an income tax until 1971, but now it has one of the top five highest maximum rates in the nation. New Jersey added an income tax component to its corporation business tax in 1958. Connecticut added a personal income tax in 1992, as the median family income in many of the state's suburbs was nearly twice that of families living in urban areas. Governor Lowell Weicker's administration imposed a personal income tax (designed to address the inequities of the sales tax system) and implemented a program to modify state funding formulas so that urban communities received a larger share.