Manage my business

States with the Lowest and Highest Taxes

Scouting out a location for your business? The state where you operate has a major impact on how much state income tax you pay.

Continue reading to identify the states with the lowest and highest taxes.

How does your state affect your income taxes?

Your income — not your state — determines the federal income tax you owe. But depending on where you live, federal income tax may not be the only type of income tax you owe.

You may also have to pay state income tax, a type of tax levied by state governments, not the federal government. Most states have a progressive tax system. The more you earn, the more you pay in state income taxes.

Forty-three states impose state income tax. 41 of these impose state income tax on wages. Another two — Tennessee and New Hampshire — impose the tax on dividends and interest. But the states with the lowest and highest taxes have very different tax rates.

What states have no income tax?

Seven states currently levy no state income tax:

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Texas
  • Washington
  • Wyoming

What states have the lowest income tax?

Many more states have top tax rates of under five percent. Some of these use a progressive tax system. Others levy a fixed tax rate at all income levels. Here are the rates for 2019:

  • North Dakota: 1.1 to 2.9 percent
  • Pennsylvania: 3.07 percent
  • Indiana: 3.2 percent
  • Michigan: 4.25 percent
  • Arizona: 2.59 to 4.54 percent
  • Kansas: 3.1 to 5.7 percent
  • Colorado: 4.63 percent
  • New Mexico: 1.7 to 4.9 percent
  • Illinois: 4.95 percent
  • Ohio: 0.495 to 4.997 percent

What states have the highest income tax?

Below are the 10 states with the highest state income tax rates in 2018:

  • California: 1 to 13.3 percent
  • Hawaii: 1.4 to 11 percent
  • Oregon: 5 to 9.9 percent
  • Minnesota: 5.35 to 9.85 percent
  • Iowa: 0.36 to 8.98 percent
  • New Jersey: 1.4 to 8.97 percent
  • Vermont: 3.55 to 8.95 percent
  • Washington, D.C.: 4 to 8.95 percent
  • New York: 4 to 8.82 percent
  • Wisconsin: 4 to 7.65 percent

Do people in states with the highest income tax rates have the highest tax burden?

Not always. This is because your total tax liability depends on more than federal and state income tax. It also includes property tax, sales tax, and other local taxes.

For example, Texas levies no state income tax, but the statewide average property tax rate is 1.86 percent. This is the sixth-highest property tax rate of any state. Compare this with Louisiana, which has a state income tax rate of anywhere from 2 to 6 percent. But certain parishes pay no more than 0.25 percent in property tax. So you could end up paying more in total taxes in a low-tax state depending on other taxes imposed. You also have to consider any deductions that could reduce the tax you owe.

As a result, you shouldn’t decide where to work based on the states with the lowest and highest taxes. But it is one way to gauge the cost of working in a certain state versus another.

About the author

Manasa Reddigari

Manasa Reddigari has tackled topics ranging from computer software to home remodeling in her more-than-a-decade-long career as a writer and editor. During her stint as a scribe, she's been featured by MileIQ, Trulia, and other leading digital properties. Connect with her on copyhabit.com to find out what she's been writing about lately.

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The Growth Center does not constitute professional tax or financial advice. You should contact your own tax or financial professional to discuss your situation.