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Your employer may be pocketing your state income tax

Sixteen states now allow corporations to withhold state income taxes from employees and keep the money as an incentive for a business to locate to or remain in a state. That means that, in effect, employees pay personal income tax to their company rather than their state government.

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Activists, labor unions, and Occupy LA protesters march on Tax Day in Los Angeles April 17. They demanded increased taxes on the rich and protested against high fees for college education and the California governor's plan to increase sales and income taxes. Op-ed contributor David Brunori calls certain state tax incentives 'a corporate welfare program funded by hard-working American taxpayers.'

Patrick T. Fallon/Reuters

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State tax incentives for businesses are on the rise. Proponents say they help keep companies in a state and create jobs, making them important to statewide economic development. What they often don’t show is who pays for these costly incentives. Increasingly, employees foot the bill – often without their knowledge.

Most employees assume that states use their state income taxes to improve school systems, pave roads, or hire more police. That is, after all, part of the social contract we have with our government. We pay taxes and get public services.

But more and more of those tax dollars aren’t funding services; they aren’t even getting to the state capital. Sixteen states now allow corporations to withhold state income taxes from employees and keep the money as an incentive to locate to or remain in a state. That means that, in effect, employees pay personal income tax to their company rather than their state government. (The 16 states are: Colorado, Connecticut, Georgia, Illinois, Indiana, Kansas, Kentucky, Maine, Mississippi, Missouri, New Jersey, New Mexico, North Carolina, Ohio, South Carolina, and Utah.)

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