Ranking Individual Income Taxes on the 2019 State Business Tax Climate Index

October 11, 2018

This week’s map examines states’ rankings on the individual income tax component of the 2019 State Business Tax Climate Index. The individual income tax component is the most heavily weighted in the Index, accounting for 30.1 percent of a state’s overall rank, because this is the component for which states have the greatest degree of structural variability.

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 that score well on the Index’s individual income tax component usually have a flat, low rate with few deductions and exemptions. They also tend to protect married taxpayers from being taxed more heavily if they file jointly than they would be if 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 improves revenue stability.  

Some states show a perfect score on the individual income tax component because they have no individual income tax and no payroll taxes besides the unemployment insurance tax: Alaska, Florida, South Dakota, and Wyoming. 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. Meanwhile, Tennessee and New Hampshire tax interest and dividends but not wage income. Texas and Washington do not tax wage income, but because they apply their gross receipts taxes to LLCs and S corporations instead of taxing them under the individual income tax code, they do not receive a perfect score on this component. Other states that score well on the individual income tax component are Colorado, Illinois, Indiana, Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah, because they all have a single, low tax rate.

States that score poorly on this component are those that 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, and do not include LLCs and S corporations under the individual income tax code. The poorest-performing states on this year’s individual income tax component are New Jersey, California, New York, Hawaii, and Minnesota.

Click the map below 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 both regionally and nationally.

Individual Tax Rankings: 2019 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.

Individual Income Tax Component of the State Business Tax Climate Index (2015–2018)
  2016 Rank 2017 Rank 2018 Rank 2019 Rank Change from 2018 to 2019

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.

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

To learn more about how we determined these rankings, read our full methodology here.

Note: This is part of a map series in which we will examine each of the five major components of our 2019 State Business Tax Climate Index

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