Valuing Pass-Through Entities

Chapter 11Individual State Income Taxes

In Chapters 4 and 5, individual state income taxes were identified as an input needed to apply the MDMM. The potentially significant impact of this input is often overlooked when valuing PTEs. Individual state income taxes, depending on the state and amount of taxable income, can range from 0 percent to more than 10 percent. Moreover, certain cities (i.e., New York City) impose additional income taxes on individuals. Such state and local income taxes reduce business owners' after-tax cash flows and the value of a business ownership interest. This chapter discusses individual state income tax rates for all 50 states and Washington, D.C. (collectively, individual state income tax rates), identifies those parts of the country having the highest individual state income taxes, and illustrates the sensitivity of taxable income on individual state income taxes.

Statutory Individual State Income Tax Rates

There is a wide range in state individual income tax rates throughout the United States. In addition, many states define taxable income differently than the federal government defines the term.¹ Table 11.1 is a summary of 2013 maximum individual income tax rates by state, based on data contained in https://tax.thomsonreuters.com/wp.ttps/Checkpoint_State_Local_Tax_2013.

Table 11.1 Summary of 2013 Maximum State Income Tax Rates

•Seven states have no individual income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. ...