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Which states have the highest and lowest tax rates? 

Which states have the highest and lowest tax rates? 

5 mins readLast updated January 12, 2023by Kate Morgan

While the federal government is in charge of some of the bigger and more important taxes, states can also levy some of their own taxes to fund state-level expenditures. But with some states running relatively high state taxes, while others have none, it isn’t always easy to know which states are more tax-efficient for you.

Who sets tax rates?

The USA’s federal system means that while some key national powers remain in the hands of the Federal Government, states are also relatively empowered to take charge of local affairs.

That’s why both the Federal Government and individual states charge their own taxes.  

Federal tax rates typically go towards policies that apply to the entire country: Military defense spending, social security, health insurance, education and others.

At the state level, taxes go towards local affairs, services and initiatives.

These includes public transport, local healthcare, police departments and more.  

Why do some states have higher taxes than others?

Although one of the world’s mostly highly populated countries, the population of the US is heavily concentrated in a small number of major cities and states.

From global cities like New York City to major states like California, these high-population destinations put significantly more pressure on local services, typically meaning that state authorities in these areas need to try and raise more money to cater to people’s needs.

That’s why these often have higher taxes than others.  

At the same time, tax rates need to be agreed and voted on by local legislators, so whether taxes are higher or not in some states depends on the priorities of legislators.  

What are state income tax rates?

While some states have zero state income taxes, the majority do charge an income tax. Of those who do, most charge a graduated tax rate — one that sees higher earners pay higher taxes.

The breakdown is as follows:

States with zero state taxes

Alaska 

Florida 

Nevada 

South Dakota 

Tennessee  

Texas 

Wyoming 

States with a flat income tax 

Colorado 

Illinois 

Indiana 

Kentucky 

Massachusetts  

Michigan 

New Hampshire 

North Carolina 

Pennsylvania 

Utah 

Washington  

States with progressive income taxes 

Alabama 

Arizona 

Arkansas 

California  

Connecticut 

Delaware 

Georgia 

Hawaii 

Idaho 

Iowa 

Kansas 

Louisiana 

Maine 

Maryland 

Minnesota 

Mississippi  

Missouri  

Montana 

Nebraska 

New Jersey 

New Mexico 

New York 

North Dakota  

Ohio 

Oklahoma 

Oregon 

Rhode Island 

South Carolina 

Vermont 

Virginia  

West Virginia  

Wisconsin 

District of Columbia 

How do state tax levels vary?

While the above looks at income taxes, there are of course many ways of raising taxes, from property taxes to sales taxes.

Even when it comes to income, some states might tax wages and salaries, while others primarily focus on taxing interest and profits.

So, when it comes to assessing a state’s overall taxes, you’ll need to bear in mind the overall tax burden. 

When all state-level taxes are taken together, the highest tax burdens fall on residents in states in New York and Hawaii.

In total, more than 12 per cent of the total income of residents in these states is paid in taxes.

At the other end of the spectrum, residents in states such as Alaska, Tennessee, Delaware and Wyoming only pay between five and six per cent of their income in taxes.   

Is it better to live in low-income states?

Since the pandemic, high-tax states such as California, Hawaii, Illinois, New York and the District of Columbia have recorded the highest levels of residents leaving these states.

And while no single reason always completely explains why people decide to move, it is notable that these states do have higher than average state taxes.  

It’s a valid argument that leaving states with higher state taxes and moving to states with lower taxes can be positive for your standard of living.

After all, you’d be keeping more of your own money. But it doesn’t always work out this way.  

Although some states have lower state taxes, this doesn’t mean they are any more affordable.

In fact, it can be the opposite. Alaska, where residents pay the lowest state taxes, is the third most expensive state to live in, with other low tax states, such as New Hampshire and Wyoming also ranking as amongst the most expensive.

In the end, lower taxes don’t always equate to keeping more of your own money. 

Which is the best state to retire in?

When it comes to planning for your financial future, you’ll need to take into account your own personal circumstances and how you’ll support yourself during retirement, the level of federal and state taxes you may be eligible for, and the standard of living on offer in each state.  

And while only you can make the right decision for you, Florida frequently features as one of the best states to retire in.

With a light state tax burden you’ll be able to keep more of your money, while enjoying some of the other benefits to living in Florida, such as good weather. 

However, Florida isn’t as affordable as it used to be.

And while the state is some way away from reaching the most expensive states, such as New York and California, you may need to downgrade to a smaller property to protect your income.  

Which is the best state to start a family in?

In a 2022 study, Massachusetts was ranked as one of the best states to start a family in.

The state scored very highly across key indicators, such as affordability, education and healthcare, but at the same time it has state tax levels around the median, offering a flat five per cent income tax, meaning your tax burden would be around the average.  

Planning the right future for you

Whatever life stage you’re planning for, it’s important to think not just about federal taxes and how they can impact you, but also state-level taxes, as these can impact your finances too.

But at the same time, low state taxes won’t always promise you the life that you want, and it’s important to factor in affordability and quality of life when it comes to planning for the future.  

Content writer

Kate Morgan

Kate has written for leading publications and blue chip companies over the last 20 years.