A new analysis of state tax systems across the United States reveals a clear pattern: states with simpler tax codes, often lacking one of the major tax categories, consistently rank as the most favorable for residents and businesses. This trend highlights a significant divergence in fiscal strategies nationwide, with some states opting for broad-based taxes while others create competitive advantages by eliminating levies on income or sales.
The findings suggest that the absence of a major tax, such as a personal income tax or a statewide sales tax, is a primary driver in these rankings. This approach forces states to rely on other revenue sources, like property or corporate taxes, creating unique economic landscapes that can attract new residents and investment.
Key Takeaways
- States without a major tax category, like personal income or sales tax, dominate the top of recent tax policy rankings.
- Wyoming is frequently cited as having one of the most favorable tax structures in the nation, followed by states like South Dakota, Alaska, and Florida.
- Nine states currently have no personal income tax, while five states do not impose a statewide sales tax.
- States with complex tax codes and high rates across multiple categories, such as New Jersey, New York, and California, typically rank at the bottom.
The Blueprint for a Tax-Friendly State
The core principle behind a state's tax-friendliness often boils down to simplicity and a lower overall burden. States that perform well in national rankings typically avoid layering multiple high taxes on their citizens. The most common characteristic among the top-ranked states is the complete absence of a major tax.
This is significant because most state revenue systems are built on what is often called a "three-legged stool": personal income tax, sales tax, and property tax. When a state removes one of these legs, it fundamentally alters its fiscal structure and its relationship with taxpayers.
States Without a Personal Income Tax
Currently, nine states do not levy a tax on personal income, making them highly attractive for high-earners, retirees, and remote workers. These states are:
- Alaska
- Florida
- Nevada
- New Hampshire (taxes only interest and dividend income)
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
By forgoing an income tax, these states often rely more heavily on sales and property taxes to fund government services. For example, Texas has some of the highest property taxes in the nation to compensate for its lack of an income tax.
Did You Know?
Alaska not only forgoes an income and statewide sales tax, but it also pays its residents an annual dividend from its oil wealth savings account, the Permanent Fund Dividend. In 2023, this payment was $1,312 per person.
States Without a Statewide Sales Tax
On the other side of the coin, five states operate without a general statewide sales tax. This can significantly lower the cost of living and doing business, particularly for retail-heavy industries. These states are:
- Alaska (allows localities to charge local sales tax)
- Delaware
- Montana
- New Hampshire
- Oregon
New Hampshire is unique in that it appears on both lists, as it lacks a general sales tax and only taxes a very narrow slice of income from interest and dividends, which is also being phased out.
How Top States Structure Their Tax Systems
The states consistently recognized for their favorable tax policies demonstrate that there is more than one way to create a competitive environment. Their approaches show a trade-off between different forms of taxation.
Understanding Tax Burden
A state's tax-friendliness is not just about one low tax rate. It's about the total tax burden, which combines all state and local taxes—including income, sales, property, and excise taxes—and measures it as a percentage of personal income. A state with no income tax might still have a high overall burden if property and sales taxes are excessive.
Wyoming: The Leader of the Pack
Wyoming frequently tops the list of tax-friendly states. It has no individual or corporate income tax. Its state sales tax rate is relatively low at 4%. How does it manage this? A significant portion of its revenue comes from severance taxes on mineral extraction, particularly coal, natural gas, and oil.
This reliance on natural resources means the tax burden on individual residents is exceptionally light. The state also has low property taxes, further enhancing its appeal.
Florida and Texas: The Population Magnets
Florida and Texas have become prime examples of how a no-income-tax policy can fuel economic and population growth. Both states attract thousands of new residents and businesses each year, drawn by the promise of keeping more of their earnings.
However, this comes with a trade-off. Florida relies heavily on its 6% state sales tax and tourism taxes to fund its budget. Texas, as mentioned, leans on high property taxes, which can be a significant financial burden for homeowners.
"The absence of a major tax is a theme of many of the states that top the rankings. It simplifies the code and provides a clear, marketable advantage over other states."
The Other End of the Spectrum
In stark contrast, states that rank poorly often have complex tax codes with high rates across all major categories. States like New Jersey, New York, and California are frequently cited as having the least friendly tax environments.
These states typically feature:
- High progressive income taxes: Top marginal rates can exceed 13% in California.
- High sales taxes: When combined with local levies, sales tax rates can approach 10% in some areas.
- High property taxes: New Jersey is notorious for having the highest effective property tax rates in the country.
- Additional taxes: These can include inheritance or estate taxes, capital gains taxes, and high corporate income taxes.
The complexity and frequency of revisions to the tax code in these states also contribute to their low rankings. For businesses and individuals, this creates uncertainty and a higher compliance burden.
What This Means for You
Choosing a place to live or run a business involves many factors, but the state tax environment can have a substantial impact on your financial well-being. For retirees living on a fixed income, a state with no income tax can make savings last longer. For young entrepreneurs, a state with no corporate income tax can mean more capital to reinvest in their business.
As remote work becomes more common, individuals have greater flexibility to relocate to states with more favorable tax policies. This trend is likely to increase the competition among states to simplify their tax codes and lower the overall burden on residents to attract talent and stimulate economic growth.
