What Are the Different Types of State Tax Exemptions?

State tax exemptions come in many different forms and vary widely from state to state. Some are designed to encourage certain investment decisions or to shelter some amount of income when it is channeled into particular types of accounts. Others lift taxes, such as the sales tax, either to encourage certain types of purchases or to allow the discounted purchasing of basic items. Another category of state tax exemptions are those designed to foster specific sorts of development and investment by industry. A final category exempts a broad swath of non-profit groups from the requirement to pay taxes.

Legislators often attempt to influence the behavior of consumers through tax policy by providing incentives or exemptions to foster economic activity that is believed to be beneficial to the consumer or to the community. These state tax exemptions are the opposite of the "sin taxes" that are often levied on goods such as alcohol or cigarettes in an attempt to reduce their popularity. Many states exempt contributions to retirement accounts or to accounts designed to save for college from taxation, in an effort to encourage saving and investment.

Sales tax is widely used by states to collect revenue. A large percentage of states exempt some basic goods, typically food and clothing, from the sales tax, so as to avoid imposing an undue hardship on those struggling to make ends meet. Other essential services and purchases, such as medical equipment and prescription drugs, are also often covered by state tax exemptions.

Property tax policy, while most often managed at the county level, is typically set at the state level. It often includes special state tax exemptions to reduce the tax burden of certain categories of citizens. A homestead tax credit for owner-occupants is common, as are special rates for the elderly, disabled, and military veterans.

Certain whole categories of income and assets are occasionally exempt from taxation. Inheritances are typically exempt at the state level, as are gifts. Court-ordered damages and compensation are frequently not taxed. Other protected categories of property and income exist as well and vary among the states.

States commonly employ temporary state tax exemptions to foster business development and investment. The practice of offering corporations tax incentives or exemptions if they choose to locate their operations in a particular state is common. In some cases these exemptions may also be provided to aid firms in staying in business during difficult economic times, as states would rather lose a little tax revenue in the short term than deal with the lost revenue and economic hardship caused by the bankruptcy of a major firm.

Charitable institutions are frequently granted tax exempt status by both state and federal government. State tax exemptions of this sort often offer complete immunity from taxation. This type of exemption typically requires an organization to be non-profit, although specific rules and definitions vary.