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This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action. Final consumption goods and services, which could be used for modest base broadeningBase broadening is the expansion of the amount of economic activity subject to tax, usually by eliminating exemptions, exclusions, deductions, credits, and other preferences.

• Tech/Business refers to the technology and business environment, including its innovation capacity, entrepreneurship, and competitiveness.
• Montana’s income tax rate is 1%, making it one of the states with relatively low income tax rates.
• After two years, Illinois reversed its phaseout plan and opted instead to freeze the franchise tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether.
• Rate from 0.3 to 0.15 percent and made reforms to its state capital stock (franchise) tax to reduce burdens on businesses.
• Delaware’s top personal income tax rate is 6.60% on incomes over $60,000 although this drops to 5.55% on incomes under $60,000.

State Individual Income Tax Rates and Brackets, 2025

• Gift taxes are designed to stop individuals’ attempts to avoid the estate tax by giving their estates away before they die.
• States that rank better on the Index have better-structured tax codes, and states with better-structured tax codes get Wins Above Replacement.
• While there are many ways to show how much state governments collect in taxes, the Index evaluates how well states structure their tax systems and provides a road map for improvement.
• Kentucky’s individual income tax rate declined from 4.5 to 4.0 percent as part of a continued revenue-contingent phasedown of income tax rates, with each phased reduction subject to an affirmative vote of the legislature.
• Individual income taxes are a major source of state government revenue, accounting for 33 percent of state tax collections in fiscal year 2023, the latest year for which data are available.
• At the state level, this is even memorialized in the name of some such taxes, as the corporate net income tax or the corporate profits tax.

Nevada’s payroll tax does not apply to capital income, and thus scores perfectly on this measure, along with states that forgo all income taxation. Throwback and throwout rules for sales of tangible property add yet another layer of tax complexity. Since two or more states can theoretically lay claim to “nowhere” income, rules have to be created and enforced to decide who gets to tax it. States with corporate income taxation are almost evenly divided between those with and without throwback rules. Twenty-four states avoid imposing them, while 21 states and the District of Columbia do. The rate subindex now also accounts for the solvency of a state’s UI trust fund.

State Individual Income Tax Rates and Brackets, 2024

Similarly, legislation was recently adopted that will see the state’s anomalously stingy net operating loss provisions begin improving next year, which should also result in ranking improvements. 3, enacted in October 2022, Missouri’s Department of Revenue, effective January 1, 2025, reduced its top individual income tax rate from 4.8 percent to 4.7 percent as the respective revenue triggers were met in the previous fiscal year. 1015, enacted in April 2024, the flat individual income tax rate for 2024 decreased from 5.49 percent to 5.39 percent. Although the bill allowed for an accelerated schedule of future individual income tax rate reductions, the revenue conditions were not met for 2025, so the rate remains at 5.39 percent this year. 8, enacted in September 2023, the top individual income tax rate in Arkansas was reduced from 4.7 percent to 4.4 percent for tax years beginning on or after January 1, 2024. 1001 was adopted, further reducing the top marginal rate to 3.9 percent, retroactively effective as of January 1, 2024.

• While capping C-SALT has superficial appeal in perceived parity with personal limits, it rests on flawed assumptions about the nature of individual and corporate income taxes.
• Each year, some businesses, especially those that have not spent a sufficient sum on estate tax planning and on large insurance policies, find themselves unable to pay their estate taxes, either federal or state.
• Assessing the quality of local schools, public services, and community infrastructure is also important.
• For investment, corporations with significant investment in property may see a net tax hike from disallowing property tax deductions.

Income Tax by State: Which Has the Highest and Lowest Taxes?

Minnesota has a 5.35% income tax rate, ranking it among the state income tax rates states with the highest income tax rates in the US. Maryland has a 2% income tax rate, making it one of the states with relatively low income tax rates. Maine has a 5.80% income tax rate, placing it among the states with the highest income tax rates in the US. Kansas has a 3.10% income tax rate, placing it among the states with the highest income tax rates in the US. Indiana has a 3.23% income tax rate, making it one of the states with the highest income tax rates in the US. Illinois has a 4.95% income tax rate, ranking it among the states with the highest income tax rates in the US.

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The Index rewards those states that minimize tax-induced economic distortions. Taxation is inevitable, but the specifics of a state’s tax structure matter greatly. The measure of total taxes paid is relevant, but other elements of a state tax system can also enhance or harm the competitiveness of a state’s business environment. The State Tax Competitiveness Index distills many complex considerations to an easy-to-understand ranking. Click here to see an interactive version of states’ individual income tax rankings, and then click on your state for more information about how its tax system compares regionally and nationally.

• Another challenge with using a relative scale within the components is that the average scores across the five components vary.
• New Hampshire has a 5% income tax rate, making it one of the states with the highest income tax rates in the US.
• And while our site doesn’t feature every company or financial product available on the market, we’re proud that the guidance we offer, the information we provide and the tools we create are objective, independent, straightforward — and free.
• Delaware saw a growth rate of 0.79% from 2023 to 2024, according to the Tax Foundation report.
• The highest maximum inheritance tax rates are in Kentucky and New Jersey (each at 16 percent), while the lowest rate is in Iowa (2 percent), where the tax is scheduled to be fully repealed next year.

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The state’s top marginal individual income tax rate is 5.9% as of 2025. Montana doesn’t have a general-use sales tax, however, making it more tax-friendly overall. States with no income tax, such as Alaska, Florida, Nevada, South Carolina, South Dakota, Tennessee, Texas, and Wyoming, stand out as attractive options for individuals seeking to minimize their tax obligations. These states rely on alternative revenue streams, such as sales taxes or revenue from natural resources, to fund government operations. By eliminating income taxes, these states offer residents the advantage of keeping more of their hard-earned income.

However, it’s worth noting that income tax rates are not the sole factor determining overall tax burdens. Other taxes, such as sales tax, property tax, and additional fees, can also contribute significantly to the overall tax burden in a state. In the rate subindex, the top rate variable now includes the state’s top marginal income tax rate and the average local income tax rate in the two largest jurisdictions. Previously, we used the average local income tax rate in the largest jurisdiction and the state capital. Our new approach notably affects states like Pennsylvania and Kentucky, where the largest cities tend to have the highest local income tax rates.