Ranking Individual Income Taxes on the 2021 State Business Tax Climate Index

November 11, 2020

This week’s map examines states’ rankings on the individual income tax component of the 2021 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 (instead taxing them as C corporations), 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.

Ranking state tax codes, Ranking state individual income tax codes, best and worst state income tax codes 2020

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 2021 State Business Tax Climate Index (2014–2021)
  2021 2020 2020-2021 Change Prior Year Ranks
State Rank Score Rank Score Rank Score 2019 2018 2017 2016 2015 2014

Alabama

30 4.81 30 4.82 0 -0.01 30 28 28 27 28 25

Alaska

1 10.00 1 10.00 0 0.00 1 1 1 1 1 1

Arizona

17 5.49 17 5.51 0 -0.02 19 18 18 18 20 19

Arkansas

41 4.18 40 4.07 -1 0.11 40 39 39 36 31 29

California

49 2.53 49 2.54 0 -0.01 49 50 50 50 50 50

Colorado

14 5.84 14 5.85 0 -0.02 14 16 16 16 16 15

Connecticut

44 3.87 43 3.88 -1 -0.01 43 46 46 46 40 40

Delaware

42 4.05 41 4.06 -1 -0.01 41 43 43 41 42 43

Florida

1 10.00 1 10.00 0 0.00 1 1 1 1 1 1

Georgia

36 4.56 36 4.53 0 0.03 38 36 36 37 37 35

Hawaii

47 3.51 47 3.52 0 -0.01 47 37 37 45 46 46

Idaho

26 5.01 26 5.03 0 -0.01 24 21 21 21 22 21

Illinois

13 5.85 13 5.87 0 -0.02 13 15 12 12 15 11

Indiana

15 5.77 15 5.74 0 0.03 15 10 10 10 10 10

Iowa

40 4.29 42 4.03 2 0.26 42 40 40 39 39 39

Kansas

24 5.07 23 5.09 -1 -0.01 22 19 19 19 18 17

Kentucky

18 5.47 18 5.47 0 0.01 17 35 35 35 36 34

Louisiana

32 4.71 32 4.73 0 -0.01 32 33 33 32 34 32

Maine

22 5.13 22 5.14 0 -0.02 25 26 24 28 21 20

Maryland

45 3.64 45 3.67 0 -0.04 45 45 45 43 44 44

Massachusetts

11 5.94 11 5.96 0 -0.02 11 12 13 13 12 13

Michigan

12 5.93 12 5.95 0 -0.02 12 14 14 14 13 14

Minnesota

46 3.59 46 3.61 0 -0.01 46 44 44 44 45 45

Mississippi

27 4.89 27 4.90 0 -0.01 27 24 25 25 25 23

Missouri

23 5.10 24 5.07 1 0.03 26 31 32 30 30 28

Montana

25 5.02 25 5.03 0 -0.01 23 20 20 20 19 18

Nebraska

21 5.15 21 5.16 0 -0.01 21 22 22 22 23 37

Nevada

5 8.40 5 8.43 0 -0.02 5 1 1 1 1 1

New Hampshire

9 6.37 9 6.39 0 -0.02 9 9 9 9 9 9

New Jersey

50 1.86 50 1.86 0 -0.01 50 48 48 48 48 48

New Mexico

31 4.80 31 4.81 0 -0.01 31 27 27 26 27 24

New York

48 3.05 48 3.06 0 -0.01 48 49 49 49 49 49

North Carolina

16 5.71 16 5.73 0 -0.02 16 13 15 15 14 38

North Dakota

20 5.23 20 5.24 0 -0.02 20 23 23 23 26 27

Ohio

43 3.96 44 3.86 1 0.10 44 47 47 47 47 47

Oklahoma

33 4.64 33 4.66 0 -0.01 33 32 30 33 33 31

Oregon

38 4.42 38 4.43 0 -0.01 36 38 38 38 38 36

Pennsylvania

19 5.41 19 5.38 0 0.03 18 17 17 17 17 16

Rhode Island

29 4.86 29 4.88 0 -0.01 29 29 29 29 29 26

South Carolina

34 4.62 34 4.63 0 -0.01 34 30 31 31 32 30

South Dakota

1 10.00 1 10.00 0 0.00 1 1 1 1 1 1

Tennessee

8 7.07 8 7.09 0 -0.02 8 8 8 8 8 8

Texas

6 7.88 6 7.90 0 -0.02 6 6 6 6 6 6

Utah

10 6.08 10 6.10 0 -0.02 10 11 11 11 11 12

Vermont

39 4.36 39 4.37 0 -0.01 37 42 42 42 43 42

Virginia

35 4.60 35 4.62 0 -0.01 35 34 34 34 35 33

Washington

6 7.88 6 7.90 0 -0.02 6 6 6 6 6 6

West Virginia

28 4.88 28 4.90 0 -0.01 28 25 26 24 24 22

Wisconsin

37 4.50 37 4.51 0 -0.01 39 41 41 40 41 41

Wyoming

1 10.00 1 10.00 0 0.00 1 1 1 1 1 1

District of Columbia

45 3.67 45 3.68 0 -0.01 45 48 48 43 45 45

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.

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A 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.

An 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.

An 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. Individual income taxes are the largest source of tax revenue in the U.S.

The Alternative Minimum Tax (AMT) is a separate tax system that requires some taxpayers to calculate their tax liability twice—first, under ordinary income tax rules, then under the AMT—and pay whichever amount is highest. The AMT has fewer preferences and different exemptions and rates than the ordinary system.