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Ranking Individual Income Taxes on the 2023 State Business Tax Climate Index

By: Janelle Fritts

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 our 2023 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 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 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, and higher individual income taxes increase the price of labor. States with gross receipts taxA gross receipts tax is a tax applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. es 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 is 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 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. to avoid 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 taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. es besides the unemployment insurance tax. The next highest-scoring states are Nevada, Tennessee, Texas, Washington, and New Hampshire.

Nevada taxes wage income at a low rate under the state’s Modified Business Tax but does not tax investment income. New Hampshire taxes interest and dividend income but not wage income. Tennessee, 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 S corporations, which, in most states, would be taxed under individual income tax codes. (Washington and Texas also apply these to limited liability corporations.)

Other states that score well on the individual income tax component are Utah, Massachusetts, Michigan, Illinois, Colorado, Indiana, Arizona, and North Carolina, because they all have a single, low tax rate. It’s worth noting that, while Massachusetts had a single rate income tax on July 1, 2022 (the snapshot date of the current edition of the Index), the state now has a two-bracket income tax system with a high top rate as of January 1, 2023, and will thus score much lower in the future.

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 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. . The poorest-performing states on this year’s individual income tax component are New York, California, New Jersey, Connecticut, and Hawaii.

High marginal rates adversely affect labor output and investment and can influence location decision-making, especially in an era of enhanced mobility, where it is easier for individuals to move without jeopardizing their current job, or without limiting the scope of their search for a new one.

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 & Worst State Income Tax Codes: 2023 State Income Tax Rankings of Individual Income Taxes 2023 State Business Tax Climate Index

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.

How Does Your State Rank on Individual Income Taxes?
Individual Income Tax Component of the State Business Tax Climate Index (2020–2023)
State 2020 Rank 2021 Rank 2022 Rank 2023 Rank Change from 2022 to 2023
Alabama 31 29 28 30 -2
Alaska 1 1 1 1 0
Arizona 17 18 18 16 2
Arkansas 40 42 38 37 1
California 49 50 49 49 0
Colorado 13 13 14 14 0
Connecticut 45 47 47 47 0
Delaware 44 44 44 44 0
Florida 1 1 1 1 0
Georgia 36 36 35 35 0
Hawaii 47 46 46 46 0
Idaho 25 24 20 19 1
Illinois 14 12 13 13 0
Indiana 15 14 15 15 0
Iowa 41 40 40 40 0
Kansas 22 21 22 22 0
Kentucky 18 17 17 18 -1
Louisiana 35 35 34 25 9
Maine 20 22 23 23 0
Maryland 43 45 45 45 0
Massachusetts 11 16 11 11 0
Michigan 12 11 12 12 0
Minnesota 46 43 43 43 0
Mississippi 28 27 26 26 0
Missouri 23 20 21 21 0
Montana 24 23 24 24 0
Nebraska 30 30 29 32 -3
Nevada 5 5 5 5 0
New Hampshire 9 9 9 9 0
New Jersey 50 49 48 48 0
New Mexico 27 26 36 36 0
New York 48 48 50 50 0
North Carolina 16 15 16 17 -1
North Dakota 19 25 25 27 -2
Ohio 42 41 41 41 0
Oklahoma 32 31 30 31 -1
Oregon 39 38 42 42 0
Pennsylvania 21 19 19 20 -1
Rhode Island 26 32 31 33 -2
South Carolina 34 34 33 28 5
South Dakota 1 1 1 1 0
Tennessee 8 8 6 6 0
Texas 6 6 7 7 0
Utah 10 10 10 10 0
Vermont 38 39 39 39 0
Virginia 33 33 32 34 -2
Washington 6 6 7 8 -1
West Virginia 29 28 27 29 -2
Wisconsin 37 37 37 38 -1
Wyoming 1 1 1 1 0
District of Columbia 47 48 48 48 0

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.

Note: This map is part of a series in which we will examine each of the five major components of our 2023 State Business Tax Climate Index.