Tax Friendly States

In this publication, we're going to discuss the topic of tax-friendly states. That point of view will be from both a residential standpoint as well as a business perspective. When we pay taxes, we're providing sources of income or revenue to those entities that are providing the essential services that we all enjoy. But there is no doubt that some states are more tax-friendly than others.

We've published information on state income tax rates, sales tax, and property taxes. But we've never bundled this data together to draw some conclusions as to which states offer attractive tax rates to its residents and businesses. These facts can play an important role in decisions ranging from where to locate a new branch office through where you might want to own a home when retired.

State and Local Taxes

Additional Resources

Thankfully, much of this information has already been summarized for us based on data that is freely available from the Bureau of Economic Analysis and the Census Bureau. And each year, the Tax Foundation summarizes that data to create lists of the most, and least, tax-friendly states.

In developing its rankings, the Tax Foundation evaluates the tax burden of the state's residents. That burden is calculated by taking the total state and local-level taxes and dividing it by the average per capita income. The outcome of this calculation is the percentage of income that is used to pay state and local taxes.

The exact formula used to determine the tax burden takes into account how much residents pay in property, income, as well as sales tax levied at both the state and local level. They also compute what they believe is a portion of the business taxes that are passed along to residents in the form of higher prices or lower wages.

Rather than provide a list of the "top 10" least and most tax-friendly states, we've decided to cover all states by providing a "top 25" list. This way we have information listed for all 50 states. The information below is based on 2008 data.

Most Tax-Friendly States

Rank	State	Tax	Rank	State	Tax
1	Alaska	6.4%	13	Alabama	8.6%
2	Nevada	6.6%	14	South Carolina	8.8%
3	Wyoming	7.0%	15	Mississippi	8.9%
4	Florida	7.4%	16	Washington	8.9%
5	New Hampshire	7.6%	17	Colorado	9.0%
6	South Dakota	7.9%	18	North Dakota	9.2%
7	Tennessee	8.3%	19	Missouri	9.2%
8	Texas	8.4%	20	Iowa	9.3%
9	Louisiana	8.4%	21	Illinois	9.3%
10	Arizona	8.5%	22	West Virginia	9.3%
11	Montana	8.6%	23	Indiana	9.4%
12	New Mexico	8.6%	24	Michigan	9.4%
			25	Oregon	9.4%

Least Tax-Friendly States

Rank	State	Tax	Rank	State	Tax
1	New Jersey	11.8%	13	Idaho	10.1%
2	New York	11.7%	14	Arkansas	10.0%
3	Connecticut	11.1%	15	Maine	10.0%
4	Maryland	10.8%	16	Georgia	9.9%
5	Hawaii	10.6%	17	Nebraska	9.8%
6	California	10.5%	18	Virginia	9.8%
7	Ohio	10.4%	19	Oklahoma	9.8%
8	Vermont	10.3%	20	North Carolina	9.8%
9	Wisconsin	10.2%	21	Kansas	9.6%
10	Rhode Island	10.2%	22	Utah	9.6%
11	Pennsylvania	10.2%	23	Massachusetts	9.5%
12	Minnesota	10.2%	24	Delaware	9.5%
			25	Kentucky	9.4%

Keep in mind that the above information is based on state-wide averages. Along with the information in our tables you need to consider:

Sources of Income - several states don't have a state income tax but they do tax other sources of income such as investments. If you're planning on retiring and living off your investments, that particular arrangement will put you at a disadvantage.
Home Ownership - states with lower income tax rates may have higher property taxes. In addition, property taxes can be a significant burden if you live in a relatively large home, or a house that is located in a desirable area.
Location - even within a state, urban areas and large cities can sometimes have a local tax that adds considerably to the total tax bill.

As mentioned earlier, we've already published information on state income tax rates, sales tax, and property taxes. As discussed in those articles, taxes pay for essential services. While the tax burden may be lower in one state than another, you certainly don't want to live "cheaply." What you really want is to maximize the value of each dollar of taxes paid.

Business Taxes

In the same manner that they've constructed their list of tax-friendly states from a residential point of view, the Tax Foundation has also put together a list of states they consider tax-friendly towards businesses. Once again, they've used publicly-available information to construct the Tax Foundation's 2011 State Business Tax Climate Index. That index is build from five sub-indexes which include:

Individual Income Tax
Sales Tax
Unemployment Tax
Property Taxes
Corporate Taxes

In scoring each state, the above indexes were given a numerical value based on the state's business tax climate. The scoring involves using an eleven point scale, with zero being the worst tax climate, and 10 the best. Each sub-index was not given even weight in determining the final ranking. Greater weight was given to those factors that demonstrated more variation (spread of scores) around the average for all states.

As was the approach with the residential information, we've divided the business tax data into two tables. One table is for those we've labeled as tax-friendly, and second table as the tax-unfriendly states for businesses.

Tax-Friendly States for Businesses

Rank	State	Rank	State
1	South Dakota	13	Texas
2	Alaska	14	Oregon
3	Wyoming	15	Colorado
4	Nevada	16	Missouri
5	Florida	17	Michigan
6	Montana	18	Idaho
7	New Hampshire	19	Kentucky
8	Delaware	20	North Dakota
9	Utah	21	Mississippi
10	Indiana	22	Hawaii
11	Washington	23	Illinois
12	Virginia	24	South Carolina
		25	Georgia

Tax-Unfriendly States for Businesses

Rank	State	Rank	State
1	New York	13	Vermont
2	California	14	West Virginia
3	New Jersey	15	Louisiana
4	Connecticut	16	Kansas
5	Ohio	17	Arizona
6	Iowa	18	New Mexico
7	Maryland	19	Massachusetts
8	Minnesota	20	Maine
9	Rhode Island	21	Oklahoma
10	North Carolina	22	Nebraska
11	Wisconsin	23	Alabama
12	Arkansas	24	Tennessee
		25	Pennsylvania