Ranking Individual Income Taxes on the 2023 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 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.

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.

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