Wisconsin was the first state to adopt an income tax in 1911. Massachusetts and New York soon followed by adopting income taxes when faced with problems related to World War I. Most other states adopted the income tax as a response to revenue crises created by the Great Depression.

At the state level, definitions of taxable income differ from the federal definition and differ among states. Exemptions, deductions, and rates of taxation vary among states. As of January 2000, Nevada, South Dakota, Washington, and Wyoming did not impose individual or corporate income taxes; Alaska, Florida, New Hampshire, and Texas did not impose an individual income tax and Michigan did not impose a corporate income tax. Formulas are used to allocate the income of multistate corporations among the states in which they operate.