Section 2-3: Graduated State Income Tax

Here's how a graduated state income tax typically works:

1. Tax Brackets: States with a graduated income tax system divide taxpayers' income into different brackets, each with its own tax rate. These brackets are typically based on income thresholds.

2. Progressive Tax Rates: The tax rates for each bracket increase as income rises. Lower-income individuals are taxed at lower rates, while higher-income individuals are taxed at higher rates. This progressive structure is designed to ensure that the tax burden is distributed more equitably based on the taxpayer's ability to pay.

3. Marginal Tax Rate: In a graduated income tax system, taxpayers are often subject to marginal tax rates. This means that only the income within each tax bracket is taxed at the corresponding rate. For example, if a taxpayer falls into the 20% tax bracket for income over $50,000, only the portion of their income above $50,000 is taxed at 20%.

4. Tax Calculation: To calculate the tax liability under a graduated state income tax system, taxpayers determine their taxable income, apply the applicable tax rates for each bracket, and then sum up the taxes owed for each bracket.

5. Tax Credits and Deductions: States may offer various tax credits and deductions to reduce the amount of state income tax owed. These can include credits for specific expenses, such as education or child care expenses, as well as deductions for contributions to retirement accounts or charitable donations.

Graduated state income taxes are intended to provide a fairer tax system by ensuring that individuals with higher incomes contribute a greater proportion of their earnings toward funding state services and programs. However, the specific tax rates, brackets, credits, and deductions can vary significantly from state to state.