Ranking Individual Income Taxes on the 2022 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 2022 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, and higher individual income taxes increase the price of labor. States with gross receipts taxes also extend those to pass-through businesses in addition to C corporations, and this 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 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. 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 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 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. , 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 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.

Individual Income Tax Component of the State Business Tax Climate Index (2019–2022)

State	2019 Rank	2020 Rank	2021 Rank	2022 Rank	Change from 2021 to 2022
Alabama	31	31	29	27	2
Alaska	1	1	1	1	0
Arizona	19	17	18	18	0
Arkansas	40	40	42	39	3
California	49	49	50	49	1
Colorado	13	13	13	14	-1
Connecticut	43	45	47	47	0
Delaware	44	44	44	44	0
Florida	1	1	1	1	0
Georgia	37	36	36	35	1
Hawaii	47	47	46	46	0
Idaho	23	25	24	20	4
Illinois	14	14	12	13	-1
Indiana	15	15	14	15	-1
Iowa	42	41	40	38	2
Kansas	21	22	21	22	-1
Kentucky	17	18	17	17	0
Louisiana	35	35	35	34	1
Maine	25	20	22	23	-1
Maryland	45	43	45	45	0
Massachusetts	11	11	16	11	5
Michigan	12	12	11	12	-1
Minnesota	46	46	43	43	0
Mississippi	28	28	27	25	2
Missouri	27	23	20	21	-1
Montana	22	24	23	24	-1
Nebraska	30	30	30	29	1
Nevada	5	5	5	5	0
New Hampshire	9	9	9	9	0
New Jersey	50	50	49	48	1
New Mexico	26	27	26	36	-10
New York	48	48	48	50	-2
North Carolina	16	16	15	16	-1
North Dakota	18	19	25	26	-1
Ohio	41	42	41	41	0
Oklahoma	32	32	31	30	1
Oregon	38	39	38	42	-4
Pennsylvania	20	21	19	19	0
Rhode Island	24	26	32	31	1
South Carolina	34	34	34	33	1
South Dakota	1	1	1	1	0
Tennessee	8	8	8	6	2
Texas	6	6	6	7	-1
Utah	10	10	10	10	0
Vermont	36	38	39	40	-1
Virginia	33	33	33	32	1
Washington	6	6	6	7	-1
West Virginia	29	29	28	28	0
Wisconsin	39	37	37	37	0
Wyoming	1	1	1	1	0
District of Columbia	47	47	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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