In this article, we're going to discuss the topic of tax-friendly states. That point of view will be from both a residential standpoint as well as a business perspective. Taxes provide state-level governments with a source of income so they can provide the essential services that everyone enjoys. But there is no doubt that some states are more tax-friendly than others.
We've published information on state income tax rates, sales, and property taxes. But we've never bundled this data together to understand which states offer the most attractive overall tax rates to its residents and businesses. These facts can play an important role in decisions ranging from where to locate a new branch office through the best place to own a home when retired.
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Thankfully, much of this information has already been summarized based on data that is freely available from the Bureau of Economic Analysis and the Census Bureau. And each year, the Tax Foundation summarizes that data to create lists of the most, and least, tax-friendly states.
In developing its rankings, the Tax Foundation evaluates the overall burden of the state's residents. This value is calculated by taking the total state and local-level taxes and dividing it by the average per capita income. The outcome of this calculation is the percentage of income that is used to pay state and local taxes.
The exact formula used to determine the tax burden takes into account how much residents pay in property, income, as well as sales tax levied at both the state and local level. They also compute what they believe is a portion of the business taxes that are passed along to residents in the form of higher prices or lower wages.
Rather than provide a list of the "top 10" least and most tax-friendly states, we've decided to cover all 50. The information below is based on 2016 data.
Most Tax-Friendly States
Rank | State | Tax | Rank | State | Tax |
1 | Delaware | 0.00% | 13 | Maryland | 6.00% |
2 | Montana | 0.00% | 14 | Michigan | 6.00% |
3 | New Hampshire | 0.00% | 15 | Idaho | 6.03% |
4 | Oregon | 0.00% | 16 | Vermont | 6.17% |
5 | Alaska | 1.78% | 17 | West Virginia | 6.20% |
6 | Hawaii | 4.35% | 18 | Massachusetts | 6.25% |
7 | Wisconsin | 5.41% | 19 | Pennsylvania | 6.34% |
8 | Wyoming | 5.42% | 20 | Connecticut | 6.35% |
9 | Maine | 5.50% | 21 | Florida | 6.66% |
10 | Virginia | 5.63% | 22 | Utah | 6.69% |
11 | South Dakota | 5.84% | 22 | Iowa | 6.79% |
12 | Kentucky | 6.00% | 24 | North Dakota | 6.82% |
25 | Nebraska | 6.87% |
Least Tax-Friendly States
Rank | State | Tax | Rank | State | Tax |
50 | Tennessee | 9.46% | 38 | Nevada | 7.98% |
49 | Arkansas | 9.30% | 37 | Missouri | 7.86% |
48 | Louisiana | 9.00% | 36 | Colorado | 7.52% |
47 | Alabama | 8.97% | 35 | New Mexico | 7.51% |
46 | Washington | 8.89% | 34 | Minnesota | 7.27% |
45 | Oklahoma | 8.82% | 33 | South Carolina | 7.22% |
44 | Illinois | 8.64% | 32 | Ohio | 7.14% |
43 | Kansas | 8.60% | 31 | Mississippi | 7.07% |
42 | New York | 8.49% | 30 | Georgia | 7.01% |
41 | California | 8.48% | 29 | Indiana | 7.00% |
40 | Arizona | 8.25% | 28 | Rhode Island | 7.00% |
39 | Texas | 8.17% | 27 | New Jersey | 6.97% |
26 | North Carolina | 6.90% |
Keep in mind the above information is based on state-wide averages. Along with the information in these tables, other factors to consider include:
Sources of Income: several states don't have a state income tax but they do tax other sources of income such as investments. That particular arrangement will put individuals planning to retire and live off their investment income at a disadvantage.
Home Ownership: states with lower income tax rates may have higher property taxes. In addition, property taxes can be a significant burden if a relatively large home is owned, or the house is located in a desirable area. Each state may have a different property tax. The lowest rates for property taxes at 0.28%, are in New Jersey and Hawaii, for instance. With all this, it is 8.9 times lower than the highest rate in the US.
Location: even within a state, urban areas and large cities can sometimes have a local tax that adds considerably to the total tax bill.
As mentioned earlier, we've already published information on state income tax rates, sales tax, and property taxes. As discussed in those articles, this money pays for essential services. While the tax burden may be lower in one state than another, no one wants to live "cheaply." What everyone really wants is to maximize the value of each dollar of taxes paid.
Business Taxes
In the same manner that they've constructed their list of tax-friendly states from a residential point of view, the Tax Foundation has also put together a list of states they consider tax-friendly towards businesses. Once again, they've used publicly-available information to construct the Tax Foundation's 2016 State Business Tax Climate Index. That index is build from five sub-indexes which include:
Individual Income Tax
Sales Tax
Unemployment Tax
Property Taxes
Corporate Taxes
In scoring each state, the above indexes were given a numerical value based on the state's business tax climate. The scoring involves using an eleven point scale, with zero being the worst tax climate, and 10 the best. Each sub-index was not given even weight in determining the final ranking. Greater weight was given to those factors that demonstrated more variation (spread of scores) around the average for all states.
As was the approach with the residential information, the business tax data has been divided into two tables. One table is for those labeled as tax-friendly, and a second table as the tax-unfriendly states for businesses.
Tax-Friendly States for Businesses
Rank | State | Rank | State |
1 | Wyoming | 13 | Michigan |
2 | South Dakota | 14 | Delaware |
3 | Alaska | 15 | North Carolina |
4 | Florida | 16 | Tennessee |
5 | Nevada | 17 | Missouri |
6 | Montana | 18 | Colorado |
7 | New Hampshire | 19 | Idaho |
8 | Indiana | 20 | Mississippi |
9 | Utah | 21 | West Virginia |
10 | Texas | 22 | Kansas |
11 | Oregon | 23 | Illinois |
12 | Washington | 24 | Arizona |
25 | Massachusetts |
Tax-Unfriendly States for Businesses
Rank | State | Rank | State |
50 | New Jersey | 38 | Arkansas |
49 | New York | 37 | Louisiana |
48 | California | 36 | South Carolina |
47 | Minnesota | 35 | New Mexico |
46 | Vermont | 34 | Maine |
45 | Rhode Island | 33 | Oklahoma |
44 | Connecticut | 32 | Pennsylvania |
43 | Wisconsin | 31 | Hawaii |
42 | Ohio | 30 | Virginia |
41 | Maryland | 29 | Alabama |
40 | Iowa | 28 | Kentucky |
39 | Georgia | 27 | Nebraska |
26 | North Dakota |
About the Author - 2016 Tax-Friendly States
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