Which states have the highest and lowest tax rates?
Ever wondered which states have the highest or lowest taxes? This article takes you through everything you need to know about how taxes work across the US.
Summary
On top of federal taxes, some states levy their own taxes, meaning that your tax burden can vary a lot depending on where you live.
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.
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.
A financial advisor can help you create a financial plan taking all of your tax needs into account.
What states have the lowest taxes?
Alaska, Delaware, and New Hampshire regularly rank among the states with the lowest tax burdens. This means a smaller amount of your income goes towards taxes – income tax, property tax, sales tax and so on – if you live in these states.
According to research by WalletHub, in 2023, the states with the lowest tax burden were:
| State | Tax burden |
|---|---|
| Alaska | 5.06% |
| Delaware | 6.12% |
| New Hampshire | 6.14% |
| Tennesse | 6.22% |
| Florida | 6.33% |
However, 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 amongst the most expensive.
In the end, lower taxes don’t always equate to keeping more of your own money.
What states have the highest tax rates?
According to research by WalletHub, the states with the highest tax burden were:
| State | Tax burden |
|---|---|
| New York | 12.47% |
| Hawaii | 12.31% |
| Maine | 11.14% |
| Vermont | 10.28% |
| Connecticut | 9.83% |
These states have experienced some repercussions, which can be linked to their high tax burdens.
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.
If you’re struggling to understand your tax burden and want to keep more of your money, speaking to an SEC-regulated, fiduciary financial advisor is your best move. They will work with you to create a financial plan and keep your financial goals on track. Connect with a financial advisor today.
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 | States with Flat Income Tax | States with Progressive Income Taxes |
|---|---|---|
| Alaska | Colorado | Alabama |
| Florida | Illinois | Arizona |
| Nevada | Indiana | Arkansas |
| South Dakota | Kentucky | California |
| Tennessee | Massachusetts | Connecticut |
| Texas | Michigan | Delaware |
| Wyoming | New Hampshire | Georgia |
| North Carolina | Hawaii | |
| Pennsylvania | Idaho | |
| Utah | Iowa | |
| Washington | 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 |
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 include 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. Understanding more about why you owe state taxes provides context on funding for services.
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.
How do state tax levels vary?
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% 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 5% and 6% of their income in taxes.
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.
Plan your financial future
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.
A financial advisor can help you create a financial plan for your future, taking all of your needs and goals into account. Finding this advisor doesn’t have to be difficult. All you have to do is answer a few simple questions, and Unbiased can connect you with a financial advisor perfectly suited to meet your needs. Get started now.
Content writer
Kate has written for leading publications and blue chip companies over the last 20 years.