Income Tax by State: Which has the Highest and Lowest Taxes

16 Mar Income Tax by State: Which has the Highest and Lowest Taxes

In other words, states essentially received free tax collections from the estate tax, and individuals did not object because their total tax liability was unchanged. EGTRRA eliminated this dollar-for-dollar credit system, replacing it with a tax deductionA tax deduction allows taxpayers to subtract certain deductible expenses and other items to reduce how much of their income is taxed, which reduces how much tax they owe. For individuals, some deductions are available to all taxpayers, while others are reserved only for taxpayers who itemize. For businesses, most business expenses are fully and immediately deductible in the year they occur, but others, particularly for capital investment and research and development (R&D), must be deducted over time..

Types of taxes: A closer look at what you pay

Idaho is #2 on the Tax Foundation’s most moved-to list with a 0.83% growth rate. Census Bureau data gathered from July 1, 2023, through June 30, 2024. For most people, getting their first paycheck is a watershed moment. It represents your first foray into adulthood, even if you’re still a teenager. And most of the time, there’s a sense of disappointment when you finally see your paycheck and realize how much of it has been taken out. Law is the system of rules and regulations that govern human behavior and interactions within a society.

• Multistate corporations have their income apportioned to states through “factor apportionment,” which can involve the location of payroll, property, and sales.
• Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. component of our 2023 State Business Tax Climate Index.
• This category includes metrics such as road quality, electricity access, internet penetration, and airport capacity.

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These taxes play a part in the overall ecosystem of a state’s economy. Policymakers have different options for constructing a C-SALT limitation. Like individuals, corporations pay several types of state and local taxes, including corporate income, property, sales, excise, and severance taxes. Different base definitions would yield dramatically different revenue and economic effects of C-SALT limits. Arizona offers a very friendly flat income tax rate of just 2.5%, a new development as of tax year 2024.

Individual Income Taxes

• Alternative weighting schemes, such as equal weights or weights based on the revenue-generating importance of a tax, are possible, but sensitivity tests show they produce relatively similar results.
• The individual income tax base subindex takes into account measures enacted to prevent double taxation, whether the code is indexed for inflation, and how the tax code treats married couples compared to singles.
• Annual wage growth around 6% is also too high for the Bank’s liking.
• The variation in state tax rates stems primarily from the different approaches states take in generating revenue to fund public services and infrastructure.
• States that receive the best scores in this category are Connecticut, Delaware, Louisiana, Ohio, and Vermont.

When businesses cannot fully deduct capital expenditures, they spend less on capital, which reduces worker’s productivity and wages. For investment, corporations with significant investment in property may see a net tax hike from disallowing property tax deductions. The federal Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) lowered the federal estate tax rate through 2009 and eliminated it entirely in 2010. Prior to 2001, most states levied an estate tax that piggybacked on the federal system, because the federal tax code allowed individuals to take a dollar-for-dollar tax credit for state estate taxes paid.

When are state taxes due?

Narrow tax bases are non-neutral, favoring one product or industry over another, and can undermine revenue stability. (and for which states are rewarded in the Index), now include e-books and digital video. This is why states like Wyoming and South Dakota, which both forgo income taxes, do so well on the Index. For all readers, we hope that this refreshed publication, the 2025 State Tax Competitiveness Index, will serve as a useful guide for navigating state tax policy. It ranks, both overall and across five subindices—individual income taxes, corporate taxes, sales, use, and excise taxes, property and wealth taxes, and unemployment insurance taxes—how states compete, and where each has room to improve. And for would-be reformers, our datasets (now much more accessible!) are an invaluable guide to how states structure their tax codes, and where they diverge—for good and for ill—from their peers.

• As a result, as of January 1, 2024, businesses may now fully deduct their interest expenses in the year those expenses are incurred.
• These reforms included converting three individual income tax brackets into one and moving from a top marginal rate of 4.25 percent to a single rate of 3 percent.
• This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms.
• They generally fail to index their brackets, exemptions, and deductions for inflation, do not allow for deductions of foreign or other state taxes, penalize married couples filing jointly, and do not recognize S corporations.
• Generally, these states have low minimum and maximum tax rates on each schedule and a wage base at or near the federal level.

• In March 2024, legislation was enacted reducing Utah’s individual and corporate income tax rates from 4.65 to 4.55 percent, retroactively effective as of January 1, 2024.
• Of the 75% of Americans who plan to file a federal tax return, 42% are relying on their refund.
• Sometimes, the new investment will have to be “qualified” and approved by the state’s economic development office.
• The highest rating of the three went to Zen Internet, which secured a customer score of 77% – its contract price promise also means customers’ deals will not be hiked mid-contract.
• Even absent conformity, some states chose to raise their own deductions and exemptions post-TCJA, which was particularly appropriate given the base-broadening nature of the federal law, some of which flowed through to state tax codes.
• Gross receipts taxes are assessed separately using the general rate (ignoring some specific sectors that may face higher rates), which ranges from 0.111 percent in Nevada to 0.75 percent in Texas.
• And, as is the case for federal returns, the amount you’ll pay to your state is also a function of your filing status, whether you have dependents, and whether you qualify for tax deductions and credits.

Because corporate income taxes are intended to fall on net income, they should include deductions for business expenses—including investment in machinery and equipment. Historically, however, businesses have been required to depreciate the value of these purchases over time. In recent years, the federal government offered “bonus depreciationBonus depreciation allows firms to deduct a larger portion of certain “short-lived” state income tax rates investments in new or improved technology, equipment, or buildings in the first year.

Other states with a flat-rate income tax are Arizona (2.5%), Colorado (4.4%), Idaho (5.8%), Illinois (4.95%), Kentucky (4.5%), Michigan (4.25%), Mississippi (5%), North Carolina (4.75%), Pennsylvania (3.07%), and Utah (4.85%). Most states limit the degree to which localities can raise property taxes, but these property tax limitation regimes vary dramatically. Broadly speaking, there are three types of property tax limitations. Assessment limits restrict the rate at which a given property’s assessed value can increase each year.