State and local taxes add a second and often third layer of income tax, plus property tax and sales tax. The combined burden varies materially across jurisdictions and shapes where households can afford to live. Understanding the local structure is as important as understanding the federal.
- 01Distinguish state income tax, property tax, and sales tax.
- 02Compute a household's combined marginal rate.
- 03Explain the SALT deduction cap and its effect on high-tax jurisdictions.
Three taxes, three bases
State income tax is levied on income, at rates ranging from 0% (Texas, Florida, and others) to over 13% (California) at the top brackets. Property tax is levied on the assessed value of real estate, at effective rates from under 0.5% to over 2.5%. Sales tax is levied on consumption, at combined state and local rates from 0% to over 10%.
The combined marginal
A household earning above the state top bracket in a high-tax jurisdiction can face a combined marginal rate above 50% when federal, state, and payroll are stacked. Every incremental dollar of income is worth roughly half its face value. Decisions look different at 50% than at 30%.
SALT
The federal deduction for state and local taxes is capped at $10,000. For households in high-tax states, the cap makes state income tax and property tax fully unavoidable at the margin. This has shifted the economics of high-tax jurisdictions materially since 2018.
- Three taxes, three bases. Understand each locally.
- Combined marginal can exceed 50%.
- SALT cap eliminated the federal cushion for high-tax states.