How does the government decide the taxes for each state?
I know that in some states taxes are different; however, I am unsure as to why that is. I understand that they have different amounts of people, but why do those people have to pay substantially different amounts of money.#tax
Building on Keith's very good points, states can have very different resources, industries, and population demographics. Part of the reason that state taxes manifest in very different ways is because state governments try to craft legislation based on the issues at hand.
Some states, like New York have introduced credits as a way to attract new business investment to the state. Other states, like Alaska have a great deal of revenue from natural resources, and do not impose a state income tax.
As you pointed out, each state government can enact substantially different tax policies. Note that those are taxes collected in addition to Federal taxes. Federal taxes are typically the majority of what you pay, and those are the same between states.
Since states have wide discretion on state taxes, they often reflect the political goals of those governments. Taxes can be structured to be progressive, or regressive, or to encourage or discourage certain behaviors. Progressive taxation results in wealthier people paying higher rates. Flat taxes and sales taxes tend to be regressive, since for poorer people, these consume a larger fraction of their income. There are also "sin taxes" on things like cigarettes and alcohol, to discourage their use. Similarly, there are often exemptions for things like saving for higher education.
Finally, in addition to Federal and State taxes, many localities, e.g., cities, counties, towns, have their own taxes as well. These are often property taxes on real estate, and are used to pay for local services, like schools, police, and fire departments.