US Taxes. Top States with the Lowest and Highest Taxes

The United States of America is the third-largest country with a unique structure. It consists of 50 states and the federal District of Columbia, each with its own constitution and legislative, executive, and judicial branches, and they have different tax values. In this article, we will look at the lowest and highest-taxing states.

Key Takeaways

The main theses from this article are: 

• A person living in a state can also pay to the governments of states and localities in which they don’t live.
• In 2022, the state and local government tax burden was 11.2 percent of the national product.
• In 2022, minimum state-local tax burdens were: Alaska 4.6%, Wyoming 7.5%, Tennessee 7.6%, South Dakota 8.4%, Michigan 8.6%, Texas 8.6%, and North Dakota 8.8%; maximum state-local tax burdens were: New York 15.9%, Connecticut 15.4%, Hawaii 14.1%, Vermont 13.6%, and California 13.5%.
• The USA states with no personal income taxes in 2024: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming.
• Alaska is the state with the lowest tax rate in the USA. It has no personal income tax or a state sales tax. Instead, the state relies heavily on oil and gas revenues to fund public services and government operations. Public services are largely funded by oil and gas revenues
• Property tax is calculated by the product of the tax rate and the assessed value of the property. Property can be defined as real estate and/or tangible personal items.

Taxes and Total Tax Burden in the USA

It is important to understand this issue because a person living in a state can also pay to the governments of states and localities in which they don’t live. It could have a connection to the places where they work or rest during vacation.

The state-local tax burden is the total amount of taxes that individuals or businesses must pay to the state. This amount includes various taxes, such as income, real estate, sales, property, transportation taxes, etc.

The state-local tax burden is expressed as a percentage of income.

State-local tax burdens by State (from lowest to highest)

Source: taxfoundation.org.

Income taxes in the United States

State income tax is one of the main taxes, constituting 38 percent of state tax collections in fiscal year 2022 (2022 is the latest year with the available data). Its rate depends on the money you earn. But unlike the federal income tax, which is consistent across the U.S., the state income tax can vary widely from state to state. 

There are some facts:

• There are several states that have no income taxes. If you live in one of such states, you earn from your job or your business and don't pay state income taxes on your profit.
• The income tax rate can be a fixed percentage of your income, i.e., a “flat rate”. Or it can be “progressive”. Under this system of taxation, income levels are allocated into tax brackets, and higher incomes that are in higher tax brackets have a higher income tax rate. 
• Taxable income can include different types of profits. It depends on the particular state. In addition to wages from your job, it may or may not include business profits, unemployment compensation, or some other types of income.
• You can legally reduce your income tax through tax credits and deductions, the list of which varies from state to state. These are usually education expenses and favorable contributions.
• You will probably have to file a return if you earned more than a certain amount. It is best to check with the tax department in the state where you live for filing requirements. 

Another kind of income tax is the tax that businesses pay, the so-called corporate income tax, whose rates also differ from state to state.

What states do not have a state income tax?

Of course, it's advantageous not to reduce your income on your income tax return.  And people who do know the variants of taxation rates in the USA may move to these states in order to save their money. But perhaps in those states, the infrastructure, schools, and roads are worse developed because all this is maintained at the expense of budget funds, which are taken from taxes. Less taxes means less money to renew them.

Here are the states with zero state income taxes in 2024:

• Alaska
• Florida has no personal income taxes but does impose taxes on the value of certain business assets
• Nevada
• South Dakota
• Tennessee
• Texas
• Wyoming

New Hampshire also does not have an earned income tax, but it does tax dividend income and interest.

Washington applies to the capital gains income of high-earning individuals.

States with the lowest income tax      

Some states have a flat tax rate; others have progressive rates that increase as income rises. Anyway, it’s better to consult your state's Department of Revenue because state income taxes in the USA may be changed depending on the political situation or economic downturns.

Each state may create its own system of imposing the tax, but most of them use a similar structure as the federal government. Income tax is imposed at a flat rate on all taxpayers in a minority of states.

A flat income tax rate is set by the states: 

States with the lowest income taxes on a progressive scale:

If we analyze all states, both with flat and progressive rates, the minimum income tax rates will look like:

• Arizona (AZ) 2.5% flat rate
• North Dakota (ND): 2.5%
• New Hampshire (NH): 3.0% on interest and dividends only
• Indiana (IN) 3.05% flat rate
• Pennsylvania (PA) 3.07% flat rate
• Ohio (OH) 3.5%
• Kentucky (KY) 4.0% flat rate
• Louisiana (LA): 4.25%
• Michigan (MI) 4.25% flat rate
• Colorado (CO) 4.4% flat rate
• Arkansas (AR) 4.4%

States with the highest income tax   

The highest income tax rates by state:

• California: 13.3% for individuals who earn more than $1 million and couples earning over $1,396,542. 
• Hawaii: 11% for singles earning over $200,000 and couples earning over $400,000.
• New York: 10.9% applies to individuals and couples earning more than $25 million.
• New Jersey: 10.75% for individuals with income over $1 million. 
• Washington: 10.75% for individuals and couples earning over $1,000,000.
• Oregon: 9.9% for single filers earning over $125,000 or joint filers earning over $250,000.
• Minnesota: 9.85% for individuals earning more than $193,240 and couples earning more than $321,450.
• Massachusetts: 9.0% on income of individuals and couples over $1 million. 
• Vermont: 8.75% for individual incomes over $229,550 and joint incomes over $279,450.
• Wisconsin: 7.65% on individual incomes exceeding $315,310 and joint filers above $420,420 state.

The above rates show the highest income taxes by state, meaning the maximum you can pay based on your income. However, the effective rate may be lower after taking into account various deductions.

States with the highest income taxes on a progressive scale: 

Source: taxfoundation.org.

Property taxes in the United States  

Property tax is a fee that is expressed as a percentage of the assessed value of an immovable property, such as buildings or land. In some states, this also includes movable property such as vehicles and industrial equipment.

The property owner pays this tax to the local government once a year or semi-annually.

The tax rate does not depend on the owner's income. Therefore, if income has decreased, the real estate tax will not be reduced.

In order to calculate the amount of property tax, the tax rate, which in most cases is determined annually by the tax authorities, must be multiplied by the current market value of the property.

A tax assessor appointed by the municipality determines the market value of the property, which becomes the assessed value, and calculates property taxes. The owner has the right to formally contest the rate assessed.

States with no real estate tax 

Property tax is referred to by the Census Bureau as real estate tax.

There is no state in the USA that is completely property-tax-free. The only state that has no statewide property tax is Alaska, but local governments within Alaska do levy property taxes. Actually, states with no property tax don’t exist in the USA.

States with low property taxes

The property tax rate can be determined by different levels of government: state, county, and any other municipal unit. Most often, property taxes are regulated at the county level.

It is difficult to compare the amount of property taxes relative to the state because, within the same state, there may be different tax rates depending on the county or other local unit. Using information from the Census Bureau, we can construct two property tax rates to gauge each state by:

• Mean effective property tax rate: the aggregate property taxes paid are divided by the aggregate home value for the state.
• Median effective property tax rate: the median amount of property taxes paid is divided by the median value of homes at the state level.

The lowest state property taxes are in the following states (state: mean effective property tax rate/median effective property tax rate):

Highest property tax states

States with the highest property tax (mean effective property tax rate/median effective property tax rate):

Some states use a percentage known as the assessment ratio. It means the full assessed value may be reduced. For instance, if the assessment ratio is 80% and a home's assessed value is $300,000, taxes would be calculated on $240,000 of that value (300,000*80%=240,000).

Source: datawrapper.dwcdn.net.  

Estate or inheritance tax

The United States also has a federal estate tax that affects a limited group of individuals — only those who inherit the fortunes of the wealthiest Americans. The estate tax applies to estates worth more than $12.9 million for single filers and $24 million for joint filers and is levied at a maximum rate of 40 percent. 

In addition to the federal tax, some states levy an additional estate tax. Iowa, Kentucky, Nebraska, New Jersey, and Pennsylvania have no estate tax. Iowa is phasing out the inheritance tax, with full repeal scheduled for 2025. Estate taxes are progressive in most states.

The table provides information on estate tax rates (in ascending order):

Sales and excise taxes in the United States 

Unlike VAT or GST, US sales tax is only levied on the final transaction with the customer, and there are no charging or reporting requirements for the companies in the supply chain.

Statewide sales taxes are collected in 45 states and the District of Columbia. 38 states have local sales taxes. 

Excise taxes are a type of sales tax, but they apply only to certain goods, such as tobacco, alcohol, and gasoline. 

Unlike general sales taxes, excise taxes are usually applied on a per-unit basis rather than as a percentage of the purchase price. For example, excise taxes on cigarettes are calculated in cents per pack. And most excise taxes on gasoline are levied in cents per gallon.

Zero sales tax states 

States with no statewide sales tax: 

• Alaska
• Delaware
• Montana
• New Hampshire
• Oregon

But in Alaska, local sales taxes are imposed by localities.

States with the highest sales tax

States that have the highest state sales tax are California at 7.25%, Indiana, Rhode Island, Mississippi, and Tennessee at 7.0%.

The five states with the highest average combined state and local sales tax rates are Tennessee (9.548%), Louisiana (9.547%), Arkansas (9.44%), Washington (9.40%), and Alabama (9.24%). 

States with the highest sales tax (Combined Rate): 

States with the lowest sales tax    

The states with the lowest state sales taxes as of July 1, 2023: Colorado 2.9%, Alabama, Georgia, Hawaii, New York, and Wyoming 4.0%. 

Minimum combined rates are in the following states: Alaska, Hawaii, Wisconsin, Wyoming, Maine.

States with the lowest sales tax (Combined Rate):

Business taxes  

Business taxes are paid by companies and organizations. As the types of business taxes can vary depending on the location of the company. That is why it’s easier to get the help of accountants or attorneys. 

Usually, business taxes include the corporate income tax, which is imposed on the profits generated by corporations; the value-added tax (VAT), which is levied on the value added to goods and services during production and distribution;  the property tax and the payroll tax, charged on the salaries and wages paid to employees.

Best states for business taxes

Since taxes reduce profits, the location of businesses and job creation depend on the amount of business taxes. If taxes are too high, these costs are passed on either to consumers (in the form of higher prices), to workers (wages may fall or jobs may be cut), to shareholders (in the form of lower dividends or lower stock prices), or some combination of the above. 

No corporate income taxes are in Wyoming, South Dakota, Washington, Nevada, Texas, Ohio. The last four have a gross receipts tax with rates not strictly comparable to the corporate income tax rate. 

Apart from the above, the states with the lowest corporate tax rates are North Carolina, 2.5%; both Missouri and Oklahoma, 4%; North Dakota, 4.31%; and Colorado, 4.4%.

States with no capital gain tax

A capital gains tax is a tax that is imposed on the sale of an asset, for example, a house. 

If you want to move from one state to another now or after retirement, you need to be aware of the difference in capital gains rates.

Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, and Wyoming are the states with zero capital gains tax in 2023.

Retirement taxes

Since the financial situation of retirees is worse than that of working citizens, it is important to know which states are most friendly to them. 

It’s important to know whether Social Security benefits are taxed at the state level if there are estate tax exemptions, and how withdrawals from retirement accounts and pensions are taxed.

Most states do not tax Social Security income whatsoever. 

Best states to retire in for taxes  

Since the pension benefit is a stable income, you can calculate where it is more profitable to live in retirement, taking into account taxes.

Retirement-friendly tax states:

• Alaska: no state income tax or sales tax. Alaska residents may receive an annual payout from an oil wealth trust fund after living in the state for a year. That payout was $1,312 in 2023. 
• Florida: no state income tax, including no tax on Social Security or retirement income
• Nevada: no income tax on Social Security or retirement income.
• South Dakota: no state tax on Social Security benefits, pension payments, retirement account withdrawals, or income earned from a part-time job.
• Tennessee doesn't tax Social Security, pension income, or job earnings. Dividends and interest are also not taxed in the state.
• Texas: no state income tax, meaning no state taxes on Social Security income, pension payments, or 401(k) and IRA distributions.
• Washington doesn’t tax Social Security or retirement income; there is no state income tax on account distributions, pensions, or earnings from a retirement job.
• Wyoming doesn't levy an income tax, so there's no state tax bill for any type of retirement or earned income.