|Janelle Cammenga, Policy Analyst|
Under a progressive, graduated-rate income tax system, tax rates increase as a taxpayer’s marginal income increases. A marriage penalty exists when a state’s income brackets for married taxpayers filing jointly are less than double the bracket widths that apply to single filers. In other words, married couples who file jointly under this scenario face a higher effective tax rate than they would if they filed as two single individuals with the same amount of combined income.
This non-neutral tax treatment is particularly harmful to owners of pass-through businesses, who pay taxes on their business income under the individual income tax system. Under a marriage penalty, married business owners are subject to higher effective tax rates on their business income than they would be otherwise.
Fifteen states (displayed in pink on the map below) have a marriage penalty built into their bracket structure. Seven additional states (Arkansas, Delaware, Iowa, Mississippi, Missouri, Montana, and West Virginia), as well as the District of Columbia, offset the marriage penalty in their bracket structure by allowing married taxpayers to file separately on the same return to avoid losing credits and exemptions. Ten states have a graduated-rate income tax but double their brackets to avoid a marriage penalty: Alabama, Arizona, Connecticut, Hawaii, Idaho, Kansas, Louisiana, Maine, Nebraska, and Oregon.
The ability to file separately on the same return is important in states that do not double bracket widths, as is the ability to do so even if the couple files jointly for federal purposes. While married couples have the option of filing separately—though some states only allow this if they do so on their federal forms as well—this normally creates a disadvantage, because it either disallows or reduces the value of deductions and credits available to the family jointly, which is also a form of marriage penalty. Filing separately on the same return eliminates this problem, though at the cost of slightly greater complexity than the obvious, simple solution of doubling tax brackets for joint filers so that there is no penalty for filing jointly.