Comparing State Tax Laws

When we think about taxation, the federal tax system often comes to mind. However, the state tax system is equally important in determining tax burdens. The interplay of federal and state tax regulations creates a complex legal framework that often requires specialized knowledge and thorough research.

This article examines the intricate landscape of state taxation in the United States. It provides insights into the crucial differences among state tax laws and offers helpful information for taxpayers.

Variations in State Tax Law

All 50 states incorporate the federal tax code into their state tax laws. However, each state can customize its taxation laws, resulting in varying tax systems.

Differing tax laws often stem from each state’s unique economic conditions and tax revenue sources. Some states rely primarily on income taxes, while others depend on property, sales, or excise taxes.

Income Tax

Income taxes are imposed on the income of individuals and businesses. For individuals, they are also called personal income taxes and are levied on their salary, wages, or other types of income.

States Without Income Tax

There are eight states that do not impose individual income taxes:

• Alaska
• Florida
• Nevada
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

New Hampshire does not impose taxes on wages and salary income. The state only taxes dividends and interest income, and it is phasing out these taxes by 2027.

The eight states mentioned above developed alternative sources of revenue to compensate for the absence of income tax.

• Alaska relies heavily on taxes from natural resource extraction, such as oil and natural gas.
• Florida depends heavily on tourism-related revenue.
• Nevada gains substantial income from gaming taxes.
• Texas imposes a unique "margin tax" on businesses instead of the traditional corporate income tax.

Keep in mind that the absence of income tax does not necessarily translate to a lower tax burden. "Tax burden" is the total tax costs shouldered by taxpayer residents. It is calculated based on the state and local taxes divided by the state’s net national product.

States without income tax usually compensate with higher tax rates on other categories. For instance, Washington imposes one of the country’s highest combined state and local tax rates at 9.38%.

States with the Highest Income Taxes

Of the 50 states in the country, 42 states and Washington, D.C., impose individual income taxes. The following states have the highest state income tax rates:

• California (1% to 13.30%)
• Hawaii (1.4% to 11%)
• New Jersey (1.4% to 10.75%)
• Maine (5.8% to 7.15%)
• Idaho (5.80%)

Sales Tax

Sales tax is a consumption tax imposed on the sale of various products and services.

States Without Sales Tax

At present, five states do not implement statewide sales tax:

• Alaska
• Delaware
• Montana
• New Hampshire
• Oregon

The absence of sales tax often creates consumer savings, particularly on large purchases. For instance, a resident of one of these states buying a $50,000 vehicle could save between $2,500 and $5,000 compared to other states that impose sales taxes.

States with the Highest Sales Tax

The following states levy the highest sales tax:

• California (7.25%)
• Tennessee (9.55%)
• Rhode Island (7%)
• Mississippi (7%)
• Indiana (7%)

Property Taxes

Property taxes are imposed by the jurisdiction where the property is located. These taxes fund essential local services, including emergency services, public schools, road maintenance, and municipal operations.

States with the Lowest Property Taxes

The following states have the lowest property tax rates:

• Hawaii (0.28%)
• Alabama (0.41%)
• Colorado (0.51%)
• Louisiana (0.55%)
• Wyoming (0.58%)

States with the Highest Property Taxes

The following states have the highest property tax rates:

• New Jersey (2.47%)
• Illinois (2.27%)
• New Hampshire (2.18%)
• Connecticut (2.14%)
• Vermont (1.90%)

The varying property tax rates reflect the crucial differences in how state governments fund public services. New Hampshire is a good example of this approach. New Hampshire relies on property taxes while avoiding sales and general income taxes.

Most Tax-Friendly States for Individuals

The following states do not impose income or retirement income taxes or offer significant tax deductions and exemptions. They also provide favorable property, sales, estate, and inheritance tax rates.

• Alaska
• Florida
• Georgia
• Mississippi
• Nevada
• South Dakota
• Wyoming

These states are generally considered "tax-friendly" for individuals.

States Ranked by Total Tax Burden

As discussed above, each state has a unique overall tax burden based on property, income, and sales taxes. The "effective local tax rate" refers to all the state and local taxes the taxpayer pays, including income tax, property tax, sales tax, and excise tax.

The following is a list of all 50 states arranged from the highest to the lowest effective local tax rate:

1. New York (15.9%)

2. Connecticut (15.4%)

3. Hawaii (14.1%)

4. Vermont (13.6)

5. California (13.5%)

6. New Jersey (13.2%)

7. Illinois (12.9%)

8. Virginia (12.5%)

9. Delaware (12.4%)

10. Maine (12.4%)

11. Minnesota (12.1%)

12. Utah (12.1%)

13. Massachusetts (11.5%)

14. Nebraska (11.5%)

15. Rhode Island (11.4%)

16. Maryland (11.3%)

17. Iowa (11.2%)

18. Kansas (11.2%)

19. Wisconsin (10.9%)

20. Oregon (10.8%)

21. Idaho (10.7%)

22. Washington (10.7%)

23. Pennsylvania (10.6%)

24. Montana (10.5%)

25. Arkansas (10.2%)

26. New Mexico (10.2%)

27. Ohio (10%)

28. North Carolina (9.9%)

29. Alabama (9.8%)

30. Mississippi (9.8%)

31. West Virginia (9.8%)

32. Colorado (9.7%)

33. Kentucky (9.6%)

34. Nevada (9.6%)

35. New Hampshire (9.6%)

36. Arizona (9.5%)

37. Indiana (9.3%)

38. Missouri (9.3%)

39. Florida (9.1%)

40. Louisiana (9.1%)

41. Oklahoma (9%)

42. Georgia (8.9%)

43. South Carolina (8.9%)

44. North Dakota (8.8%)

45. Michigan (8.6%)

46. Texas (8.6%)

47. South Dakota (8.4%)

48. Tennessee (7.6%)

49. Wyoming (7.5%)

50. Alaska (4.6%)

Note: State laws are subject to change. Although FindLaw strives to provide the most current information, it is best to seek legal help from an attorney before making any legal decisions.

Need Help Understanding Your State’s Tax Laws?

Learning about the complexities of taxation laws can be overwhelming. This is particularly true when you find yourself dealing with the IRS or a state tax agency. A local tax lawyer can provide personalized legal advice to help you understand your tax burdens and communicate with tax agencies. They can also help resolve tax liens, negotiate payment plans, and protect your rights.

If you find yourself in a difficult situation with a local tax agency, having a tax law attorney on your side can help you achieve the best possible outcome.