State Tax

Taxes can be defined as a compulsory levy by a federal authority of the stature of a government on a citizen or legal entity of the state. Taxes are mainly of two types, i.e. direct and indirect. While direct taxes can take the form of an income tax, various indirect taxes such as sales taxes, excise duties and property taxes exist. State tax refers to taxes imposed by the state as a federal authority on the citizens of the state or on goods and services produced within the boundaries of the state.

Taxes collected by the modern states of today are levied in the form of money as opposed to taxes being paid in kind in the ancient times. This usually entailed tax paid as a part of ones’ agricultural produce or offering service equivalent to the amount of taxes. The earliest form of taxes can be cited in Egypt in about 3000-2800 B.C. where a tax of about 20% of the produce was collected by the pharaoh. Although taxes are one of the most controversial measures undertaken by the government, it is still the most valued source of revenue for the government.

Taxes imposed by different states within a country may be different. They may be imposed on both a lump sum and advalorem basis. The most common example in case of India would be the sales tax which is different for the various states of the country. It should be noted in this context that the Central Sales Tax (CST) has been reduced to 4% as per the Budget Announcement of 2007-08. There is a clear demarcation between state taxes and taxes imposed by the central government. While income taxes, central excise duties, customs duties, capital gains taxes and taxes on corporate income are charged by the central government by the Department of Revenue under the Ministry of Finance, implementation of state sales taxes and stamp duties on transfer of assets are levied by the state governments. Sales taxes have been replaced by Value Added Taxes (VAT) since its implementation in 2005. It mainly refers to taxes paid at each stage of industrial production and its sale with a mechanism for credit for input VAT paid. At present 15 states come under its ambit. VAT is only applicable on goods and not on services and it ranges from 0% on essential commodities to 1% on bullion and precious stones to 4% on industrial inputs and capital goods and items of mass consumption. VAT on all other commodities is generally fixed at 12.5%.

In case of the USA, sales tax rates are very steep in California with sales tax rates of 7.25% with food and prescription drugs being exempt from tax. In the case of Illinois, sales tax rates are also quite high at 6.25 % with tax rates on food and prescription drugs at 1% level for each category. New York and Alabama have the lowest tax rates starting with 4% and 2% respectively with food and prescription drugs being kept outside the ambit for both these states. Tax collection is authorized by the Internal Revenue Service (IRS) and the Federal Tax Administrators (FTA) in case of the USA. With respect to income tax rates which also differ across the different states of the USA we find that tax rates are of a progressive nature ranging from 0.36%-8.98% for different categories of income divided into 9 brackets. While states like Florida and Alaska have no state income taxes, Colorado has a flat rate of 4.63% for all income categories. Minnesota has very high tax rates starting from 5.35%-7.85% for 3 income brackets. State taxes can also imply taxes imposed by the national government acting as a state polity. Taxes implemented by the nation states can range from income taxes imposed by the Indian government and many other national governments in the case of advanced Western economies. Income taxes range from 30% on personal income to 40% of corporate income in case of India.The system of taxes or of raising revenue for the government to fund developmental activities of the nation has been criticized by many calling it a “theft†of resources from the individual. It is said to distort the economic efficiency in an economy by introducing deadweight losses by diverging the prices paid by the consumer and those received by the producer by selling his product. However, taxes on goods which have certain negative externalities and “sin taxes†and “luxury taxes†on products such as cigarette and alcohol can be beneficial to some extent by helping to reform the country.