The State of Taxation (State Income Tax) ©2004 Dr. B. C. Paul

Problems of State Taxation  Highly variable  Very high rates NY, Mass, Cal, Utah  Very low Nevada, Wyoming  States may take large bites with Non-Income Tax  Rates tend to be more flat – calculations more conservative  Illinois – effectively flat  Allows all Federal business deductions but no individual itemization

Handling State Tax  Your book suggests creating an “effective tax rate”  Use a tax rate that represents both state and federal tax  They don’t really add  Illinois 3% and Federal 20% = 23%  But deductions are different so may not be able to add rates

What to do about stuff that doesn’t add  Get a typical ratio of state to federal and use the ratio to calculate the rate  Calculate the State Tax and then figure out a number that will cause the same result  (If your going to figure the state tax – why not just use it)

Approximations  For Corporation paying 34% Federal Tax a 3% Illinois tax is often close enough  Engineers probably don’t mimic accountants exactly anyway when they do their cash flows  State taxes often have maximum impact in non-income areas  Property taxes  Social benefits taxes on workers  Severance and Sales taxes  Can often get a lot of State effect under control by itemizing non-income tax of state  If you have a Mass or New York consider actually doing the State Tax books  Depends on how big the State Tax is