Ranking Individual Income Taxes on the 2020 State Business Tax Climate Index

This week’s map examines states’ rankings on the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. component of the 2020 State Business Tax Climate Index. The individual income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. is important to businesses because states tax sole proprietorships, partnerships, and in most cases, limited liability companies (LLCs) and S corporations, under the individual income tax code. However, even traditional C corporations are indirectly impacted by the individual income tax, as this tax influences the location decisions of individuals, potentially impacting the state’s labor supply. States with gross receipts taxes also extend those to pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. es in addition to C corporations, which are also accounted for in this component of the Index.

States that score well on the Index’s individual income tax component usually have a flat, low-rate income tax with few deductions and exemptions. They also tend to protect married taxpayers from being taxed more heavily when filing jointly than they would be when filing as two single individuals. In addition, states perform better on the Index’s individual income tax component if they index their brackets, deductions, and exemptions for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. , which avoids unlegislated tax increases.

States with a perfect score on the individual income tax component (Alaska, Florida, South Dakota, and Wyoming) have no individual income tax and no payroll taxes besides the unemployment insurance tax. The next highest-scoring states are Nevada, Texas, Washington, Tennessee, and New Hampshire. Nevada taxes wage income at a low rate under the state’s Modified Business Tax but does not tax investment income. Tennessee and New Hampshire tax interest and dividend income but not wage income. Texas and Washington do not tax wage income but don’t receive a perfect score on this component because they apply their gross receipts taxes to LLCs and S corporationAn S corporation is a business entity which elects to pass business income and losses through to its shareholders. The shareholders are then responsible for paying individual income taxes on this income. Unlike subchapter C corporations, an S corporation (S corp) is not subject to the corporate income tax (CIT). s, which, in most states, would be taxed under individual income tax codes. Other states that score well on the individual income tax component are Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, and Utah, because they all have a single low tax rate.

States that score poorly on this component tend to have high tax rates and very progressive bracket structures. They generally fail to index their brackets, exemptions, and deductions for inflation, do not allow the deduction of foreign or other state taxes, penalize married couples filing jointly, do not include LLCs and S corporations under the individual income tax code, and may impose an alternative minimum tax (AMT). The poorest-performing states on this year’s individual income tax component are New Jersey, California, New York, Hawaii, and Minnesota.

Click here to see an interactive version of states’ individual income tax rankings, and then click on your state for more information about how its tax system compares regionally and nationally.

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To see whether your state’s individual income tax structure has moved up or down in the ranks in recent years, check out the table below.

Individual Income Tax Component of the State Business Tax Climate Index (2017–2020)

Note: A rank of 1 is best, 50 is worst. All scores are for fiscal years. DC’s score and rank do not affect other states. Source: Tax Foundation.
State	2017 Rank	2018 Rank	2019 Rank	2020 Rank	Change from 2019 to 2020
Alabama	28	28	30	30	0
Alaska	1	1	1	1	0
Arizona	18	18	19	17	2
Arkansas	39	39	40	40	0
California	50	50	49	49	0
Colorado	16	16	14	14	0
Connecticut	46	46	43	43	0
Delaware	43	43	41	41	0
Florida	1	1	1	1	0
Georgia	36	36	38	36	2
Hawaii	37	37	47	47	0
Idaho	21	21	24	26	-2
Illinois	12	15	13	13	0
Indiana	10	10	15	15	0
Iowa	40	40	42	42	0
Kansas	19	19	22	23	-1
Kentucky	35	35	17	18	-1
Louisiana	33	33	32	32	0
Maine	24	26	25	22	3
Maryland	45	45	45	45	0
Massachusetts	13	12	11	11	0
Michigan	14	14	12	12	0
Minnesota	44	44	46	46	0
Mississippi	25	24	27	27	0
Missouri	32	31	26	24	2
Montana	20	20	23	25	-2
Nebraska	22	22	21	21	0
Nevada	1	1	5	5	0
New Hampshire	9	9	9	9	0
New Jersey	48	48	50	50	0
New Mexico	27	27	31	31	0
New York	49	49	48	48	0
North Carolina	15	13	16	16	0
North Dakota	23	23	20	20	0
Ohio	47	47	44	44	0
Oklahoma	30	32	33	33	0
Oregon	38	38	36	38	-2
Pennsylvania	17	17	18	19	-1
Rhode Island	29	29	29	29	0
South Carolina	31	30	34	34	0
South Dakota	1	1	1	1	0
Tennessee	8	8	8	8	0
Texas	6	6	6	6	0
Utah	11	11	10	10	0
Vermont	42	42	37	39	-2
Virginia	34	34	35	35	0
Washington	6	6	6	6	0
West Virginia	26	25	28	28	0
Wisconsin	41	41	39	37	2
Wyoming	1	1	1	1	0
District of Columbia	48	48	45	45	0

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