This improves the explanatory power of the State Tax Competitiveness Index as a whole because components with higher standard deviations are those areas of tax law where some states have significant competitive advantages. Businesses that are comparing states for new or expanded locations must give greater emphasis to tax climates when the differences are large. On the other hand, components in which the 50 state scores are clustered together—closely distributed around the mean—are those areas of tax law where businesses are more likely to de-emphasize tax factors in their location decisions. Although Fisher does not feel tax climates are important to states’ economic growth, other authors contend the opposite.
Table 4. Individual Income Tax Component of the State Tax Competitiveness Index (2020–
He finds specifically that property taxes, because they are paid regardless of profit, have the strongest negative effect on business. Bartik’s econometric model also predicts tax elasticities of -0.1 to -0.5 that imply a 10 percent cut in tax rates will increase business activity by 1 to 5 percent. Bartik’s findings, as well as those of Mark, McGuire, and Papke (2000), and ample state income tax rates anecdotal evidence of the importance of property taxes, buttress the argument for inclusion of a property index devoted to property-type taxes in the Index. These state income tax rates apply to income earned in 2025, which is reported on tax returns filed in 2026.
- The property tax rate subindex consists of property tax collections as a percent of personal income (80 percent of the subindex score) and capital stock taxes (20 percent of the subindex score).
- 33 The average local option sales tax rate is calculated as an average of local statutory rates, weighted by population.
- When companies have a larger NOL than they can deduct in one year, most states permit them to carry deductions of any amount back to previous years’ returns or forward to future returns.
- The evidence shows that states with the best tax systems will be the most competitive at attracting new businesses and most effective at generating economic and employment growth.
#4 North Carolina
They can be on assets ranging from cars to machinery and equipment to office furniture and fixtures, but are separate from real property taxes, which are taxes on land and buildings. The states with no individual income tax achieve perfect neutrality. Nevada’s payroll tax keeps the state from achieving a perfect store. Of the other 43 states, Montana, Arizona, Illinois, Maine, Idaho, Utah, Missouri, and Michigan have the best scores, avoiding many problems with the definition of taxable income that plague other states. Meanwhile, states where the tax base is found to cause an unnecessary drag on economic activity include New Jersey, California, New York, Pennsylvania, Maryland, Connecticut, Arkansas, and Delaware. States that do not impose an individual income tax generally receive a perfect score, and states that do impose an individual income tax will generally score well if they have a flat, low tax rate with few deductions and exemptions.
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When such distinctions exist, the state is said to have a split (rather than unified) property tax roll. The Index assesses whether states utilize split roll taxation, which tends to discriminate against business property, and what ratio exists between commercial and residential property taxation. States that keep statewide property taxes low better position themselves to attract business investment.
Types of taxes: A closer look at what you pay
- In this article, we rank every state by its income tax burden, assuming a family earning $75,000 annually and filing jointly.
- This approach rewards states on particularly strong aspects of their tax systems (or penalizes them on particularly weak aspects), while measuring the general competitiveness of their overall tax systems.
- However, in recent years, local income tax rates have gone up considerably, offsetting some of the benefits of recent state income tax reforms.
- Hawaii, South Dakota, New Mexico, and Washington are examples of states that tax many business inputs.
- EGTRRA eliminated this dollar-for-dollar credit system, replacing it with a tax deductionA tax deduction allows taxpayers to subtract certain deductible expenses and other items to reduce how much of their income is taxed, which reduces how much tax they owe.
- Therefore, this edition is the 2025 Index and represents the tax climate of each state as of July 1, 2024, the first day of fiscal year 2025 for most states.
Of the top ten destinations in the report, most but not all have comparatively low state taxes. Most have lower housing costs than the East Coast and West Coast states. Infrastructure refers to the physical structures and facilities necessary for a society to function, including transportation, energy, water, and communication systems. This category includes metrics such as road quality, electricity access, internet penetration, and airport capacity. Every year, the US Department of Labor publishes the “State UI Trust Fund Solvency Report,” ranking all the states based on their UI trust fund solvency level measured using the Average High Cost Multiple.50 The recommended solvency level is 1 or above. California and New York have the lowest solvency level at 0, which means that their UI trust funds are essentially insolvent.
- It partly assumes a slowing pace for wage growth, on the back of that budget tax measure, helping to offset some of the predicted stickiness in other elements of inflation.
- Finally, Louisiana also has a lower income tax rate of 1.85% to 4.25%.
- Like individuals, corporations pay several types of state and local taxes, including corporate income, property, sales, excise, and severance taxes.
- The few studies that tackle the subject use representative towns or cities instead of the entire state.
However, state income tax rates tend to be lower than federal tax rates. Many range between 1% and 10%, and some states don’t tax anything on the first few thousand dollars of income. When a child attends a public school, it’s possible to think of this as “income” to the household. Very few people, understandably, have any interest in taxing the receipt of these government services, but it’s true that they are untaxed despite being income in some meaningful sense. Denying the C-SALT deduction would mean that these services functionally are taxed to the extent that they are funded by state corporate income tax receipts, but arbitrarily so, since there’s no real correspondence between the corporation and the state-funded services.
North Carolina has a 4.99% income tax rate, making it one of the states with the highest income tax rates in the US. New York has a 4% income tax rate, making it one of the states with the highest income tax rates in the US. New Mexico has a 1.70% income tax rate, ranking it among the states with relatively low income tax rates. New Jersey has a 1.40% income tax rate, making it one of the states with relatively low income tax rates. New Hampshire has a 5% income tax rate, making it one of the states with the highest income tax rates in the US. Mississippi has a 4% income tax rate, placing it among the states with the highest income tax rates in the US.
Some states mitigate the negative economic impact of the capital stock tax by allowing corporations to pay the higher of their capital stock tax or their corporate tax. These states (Connecticut, Massachusetts, and New York) are given credit for this provision. States that do not have a capital stock tax get the best scores in this subindex while the states that force companies to pay both score the worst. Businesses remitted over $1.07 trillion in state and local taxes in fiscal year 2022, of which $373 billion (34.7 percent) was for property taxes.
When a business must pay sales taxes on manufacturing equipment, raw materials, or digital services it uses in the production process, then that tax becomes part of the price of whatever the business makes with that equipment, materials, or digital services. The business must then collect sales tax on its own products, resulting in a tax charged on a price that already contains taxes. This tax pyramiding invariably results in some industries being taxed more heavily than others, which violates the principle of neutrality and causes economic distortions. All states that tax all types of income score poorly by this criterion. New Hampshire, which taxes individuals on interest and dividends, scores somewhat better because it does not tax capital gains. Washington scores even better on this metric because it taxes certain capital gains income but does not tax wage and salary income.
However, in late 2010, Congress reenacted the estate tax for 2011 and 2012, but with higher exemptions and a lower rate than pre-2001 law, and maintained the deduction for state estate taxes. The tax reform law of 2017 raised the federal exemption still further. Thirty-eight states receive a high score for either (1) remaining coupled to the federal credit and allowing their state estate tax to expire or (2) not enacting their own estate tax, including two that repealed their estate tax this year.
Income Tax by State: Which Has the Highest and Lowest Taxes?
States with no or low sales tax rates can be more affordable for consumers, but just as with property and income taxes, it’s essential to look at the overall tax landscape to understand the true cost of living in a given state. Keep in mind that states with no or lower sales tax may have higher rates in other forms of tax to make up the difference. In December 2024, Louisiana policymakers enacted a comprehensive tax reform law, which included individual income tax reforms that took effect January 1, 2025. These reforms included converting three individual income tax brackets into one and moving from a top marginal rate of 4.25 percent to a single rate of 3 percent. The standard deduction will be adjusted annually for inflation beginning in 2026. Fortunately, it only applies for those truly earning a good living, individuals with an AGI of more than $1,077,550 and couples with an AGI of more than $2,155,350.