Tax Friendly States

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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 to those that are providing the essential services 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, to 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 capital income. The outcome of this calculation is simply 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 state by providing a "top 25" list. This way we've got information listed for all 50 states. The information below is based on 2007 data.

Most Tax-Friendly States

Rank	State	Tax	Rank	State	Tax
1	Alaska	6.6%	13	Florida	10.0%
2	New Hampshire	8.0%	14	Oregon	10.0%
3	Tennessee	8.5%	15	Nevada	10.1%
4	Delaware	8.8%	16	Idaho	10.1%
5	Alabama	8.8%	17	Missouri	10.1%
6	Oklahoma	9.0%	18	Virginia	10.2%
7	South Dakota	9.0%	19	Georgia	10.3%
8	Texas	9.3%	20	Arizona	10.3%
9	Wyoming	9.5%	21	Colorado	10.4%
10	Montana	9.7%	22	Mississippi	10.5%
11	New Mexico	9.8%	23	Massachusetts	10.6%
12	North Dakota	9.9%	24	Utah	10.7%
			25	South Carolina	10.7%

Least Tax-Friendly States

Rank	State	Tax	Rank	State	Tax
1	Vermont	14.1%	13	Arkansas	11.3%
2	Maine	14.0%	14	Michigan	11.2%
3	New York	13.8%	15	Kansas	11.2%
4	Rhode Island	12.7%	16	Washington	11.1%
5	Ohio	12.4%	17	Louisiana	11.0%
6	Hawaii	12.4%	18	Iowa	11.0%
7	Wisconsin	12.3%	19	North Carolina	11.0%
8	Connecticut	12.2%	20	Kentucky	10.9%
9	Nebraska	11.9%	21	West Virginia	10.9%
10	New Jersey	11.6%	22	Illinois	10.8%
11	Minnesota	11.5%	23	Maryland	10.8%
12	California	11.5%	24	Pennsylvania	10.8%
			25	Indiana	10.7%

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

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 many have high property taxes. And 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. And 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 2008 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 involved 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 for those we've labeled as tax-friendly and one as tax-unfriendly states for businesses.

Tax-Friendly States for Businesses

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

Tax-Unfriendly States for Businesses

Rank	State	Rank	State
50	Rhode Island	38	Connecticut
49	New Jersey	37	West Virginia
48	New York	36	Kentucky
47	California	35	Arkansas
46	Ohio	34	Massachusetts
45	Iowa	33	Kansas
44	Vermont	32	Louisiana
43	Nebraska	31	Idaho
42	Minnesota	30	North Dakota
41	Maine	29	Michigan
40	North Carolina	28	Illinois
39	Wisconsin	27	Pennsylvania
		26	South Carolina