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

November 20, 2019

This week’s map examines states’ rankings on the individual income tax component of the 2020 State Business Tax Climate Index. The individual income tax 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 businesses 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 inflation, 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 corporations, 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.

Best and worst income tax codes in the country in 2019

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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

Note: This map is part of a series in which we will examine each of the five major components of our 2020 State Business Tax Climate Index.

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