Yes. States can levy taxes, and that power does not depend on any grant from Congress. It comes from the sovereignty the states kept when they ratified the Constitution, and it is broad enough to cover income, sales, property, and much more. What the Constitution does is set outer limits: a state cannot tax the federal government’s operations, cannot burden imports and exports, cannot single out nonresidents, and cannot reach activity it has no real connection to.
Where the Power Comes From
State taxing authority is a reserved power. The Tenth Amendment says that powers not delegated to the federal government and not prohibited to the states “are reserved to the states respectively, or to the people.”1Legal Information Institute. Tenth Amendment Article I, Section 8 gives Congress its own taxing power, but nothing in that grant strips the same ability from the states.2Justia. U.S. Constitution Annotated – Article I Legislative Department – Purposes of Taxation Taxation is a concurrent power, exercised by both levels of government at the same time.
Behind that formal grant sits a practical one. States run courts, staff fire departments, pave roads, and educate children, and those functions cost money. The inherent authority to regulate for public health, safety, and welfare, often called the police power, carries with it the authority to raise revenue for those purposes. No federal permission is required, so long as the tax stays inside the constitutional guardrails.
Federal Constitutional Limits on State Taxes
The Constitution draws several hard lines that no state tax can cross.
Imports, Exports, and Foreign Trade
Article I, Section 10, Clause 2 bars states from imposing duties on imports or exports without congressional consent, with a narrow exception for charges strictly necessary to fund inspection programs.3Legal Information Institute. Import-Export Clause Any revenue collected from those permitted inspection charges must be turned over to the U.S. Treasury.4Legal Information Institute. Overview of the Import-Export Clause The clause exists to keep individual states from building their own tariff systems and disrupting foreign commerce.
Federal Operations Are Off Limits
Article VI makes the Constitution and federal law “the supreme law of the land.”5Legal Information Institute. U.S. Constitution Article VI In McCulloch v. Maryland (1819), the Supreme Court struck down Maryland’s tax on the Second Bank of the United States, holding that states have “no right to tax any of the constitutional means employed by the Government of the Union to execute its constitutional powers.”6Justia U.S. Supreme Court Center. McCulloch v. Maryland, 17 U.S. 316 (1819) In practice, states cannot tax federal property, federal bonds, or the operations of federal agencies.
No Discrimination Against Nonresidents
The Privileges and Immunities Clause in Article IV prevents a state from singling out nonresidents for heavier taxation. A state cannot impose a tax that falls exclusively on out-of-state earners, deny nonresidents an exemption available to residents, or set license fees that turn on whether a business is headquartered in-state.7Legal Information Institute. Taxation and Privileges and Immunities Clause The rule is not mathematical equality. A state must show a substantial reason for any disparity and demonstrate that the disparity is substantially related to that reason. Incidental differences pass; categorical discrimination does not.
A Real Connection to the Taxpayer
The Due Process Clause of the Fourteenth Amendment requires a meaningful connection between the state and the person, property, or activity it wants to tax. A state that has no relationship to a taxpayer’s income, property, or activity cannot reach into another jurisdiction and demand payment.8Constitution Annotated. Collection of State Taxes and Due Process
How the Commerce Clause Limits State Taxes
The question of whether a state can tax a particular transaction gets hardest when the transaction crosses state lines. The Commerce Clause in Article I, Section 8 restrains how far states can push.9Constitution Annotated. Modern Dormant Commerce Clause Jurisprudence and State Taxation
The Complete Auto Four-Part Test
In Complete Auto Transit, Inc. v. Brady (1977), the Supreme Court set the framework courts still use. A state tax on interstate commerce is constitutional only if it satisfies all four requirements: the taxed activity has a substantial connection to the taxing state, the tax is fairly apportioned so the same income is not taxed twice, the tax does not discriminate against out-of-state businesses, and the tax is fairly related to services the state actually provides.10Justia U.S. Supreme Court Center. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) Fail one prong and the tax falls.
Economic Nexus After Wayfair
For decades, a state could require a business to collect sales tax only if the business had a physical presence there. That rule ended in South Dakota v. Wayfair, Inc. (2018), when the Supreme Court held that economic activity alone can create a sufficient connection.11Justia U.S. Supreme Court Center. South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018) South Dakota’s threshold, $100,000 in delivered goods or 200 transactions annually, became the template. Every state with a sales tax has since adopted some form of economic nexus rule, and $100,000 is the most common trigger. A small business selling nationwide can now owe collection duties in dozens of states at once.
Taxing People Who Cross State Lines
The same connection principle governs individuals. States determine tax obligation through two overlapping concepts. Domicile is the place you consider your permanent home. Statutory residency kicks in when you keep a residence in a state and spend a set number of days there, even if your domicile is somewhere else. Some states put that threshold at 183 or 184 days.
When two states both have a claim on the same income, the fix is usually a credit. Most states let residents claim a credit against home-state tax for income taxes paid to another state on income earned there. The credit typically equals the lesser of the tax paid elsewhere or the amount the home state would have charged on the same income. These credits are nonrefundable and generally do not carry forward.
Reciprocity Agreements
About two dozen states have reciprocal agreements with one or more neighbors. Under these agreements, a resident who commutes across the state line for work owes income tax only to their home state, not to the state where the job sits. Once the right exemption form is on file, the employer withholds only for the resident state.
Remote Work
Remote work has made this area messy. States generally expect withholding based on where the work is physically performed, but several use a “convenience of the employer” rule that taxes an employee in the state where the employer’s office is located, even if the employee never sets foot there. Day-count triggers for nonresident withholding vary sharply: some states start the clock at 14 or 15 days of physical presence, others allow 30 or 60.
The Taxes States Actually Use
Inside these limits, states use a mix of tax instruments, and no two states use the same mix.
Individual and Corporate Income Tax
Personal income tax is the largest revenue source in most states that impose one. Rates run from as low as 1% at the bottom to 13.3% at the top. Nine states levy no personal income tax at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Some income-tax states use a flat rate; others use graduated brackets. Corporate income taxes work on a parallel track and apply to business profits earned in the state, with apportionment formulas dividing the income of multistate companies.
Sales and Use Tax
Sales taxes apply to retail purchases of goods and, increasingly, services. State rates run from 2.9% to 7.25%, with local add-ons on top. Five states have no statewide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. Use tax is the companion: when you buy from an out-of-state seller who does not collect sales tax, you owe use tax at your home-state rate. Roughly three dozen states exempt groceries at the state level, though definitions vary, and prepared food, candy, and soft drinks are often taxed even where staples are not.
Property Tax
Property taxes are based on the assessed value of real estate and, in some states, personal property such as vehicles and equipment. Local governments rely on them far more than state governments do; nationally, property taxes account for about 15% of combined state and local general revenue. Most states require reassessment every one to five years, though some intervals stretch to ten.
Excise Taxes
Excise taxes apply to specific products at a fixed per-unit rate. Fuel, tobacco, and alcohol are the classic examples. State gasoline taxes run from under $0.09 per gallon in Alaska to over $0.70 per gallon in California, with a federal excise tax of 18.3 cents per gallon on top.12U.S. Energy Information Administration. How Much Tax Do We Pay on a Gallon of Gasoline and Diesel Fuel Gasoline revenue is usually earmarked for road and bridge maintenance.
Estate and Inheritance Taxes
Twelve states and the District of Columbia impose an estate tax on the value of a deceased person’s assets before distribution. Five states levy an inheritance tax, which falls on the heirs who receive the assets rather than the estate itself. Maryland imposes both. State estate tax exemptions range from $1 million to nearly $14 million, so this is mainly a concern for wealthier families. Inheritance tax rates usually depend on the beneficiary’s relationship to the deceased, with surviving spouses and direct descendants often paying little or nothing.