Which states have the lowest taxes?
Alaska and Tennessee had the smallest tax burdens in 2020.
How do state tax burdens stack up?
Americans’ tax burdens — the amount of taxes paid by a person represented as a proportion of their income — vary by state. Some states impose annual income taxes, while others don’t but charge relatively high sales taxes instead. Layered onto that are property taxes, license taxes, corporate income taxes, and more.
Here’s an exploration of state and local tax revenue as a percentage of personal income that accounts for the differences in average incomes nationwide. The percentage of personal income is calculated by dividing the per capita tax revenue by the per capita annual income for each state. It's worth noting that this differs from the tax rate, which is a percentage of each dollar that the state or local governments garnish for a given tax category.
There are seven states — Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming — without income taxes.
Conversely, New York and Maryland collected income taxes that amounted to more than 4% of personal income in 2020.
One way states offset low or no income taxes is with property taxes.
Every state collects property taxes. However, states without income taxes don’t necessarily have higher property taxes. Tennessee, for example, has almost no income tax and had 2020’s lowest property taxes as a percentage of personal income.
Many states offset low property and income taxes with higher sales taxes. Sales taxes in this visualization include both generic taxes on most purchased goods and selective sales taxes on specific items such as gas, alcohol, tobacco, and public utilities.
Tennessee, Nevada, and Washington have similar tax profiles: no income taxes and below-average property taxes that are partly made up for by higher sales taxes.
Remember that these charts show tax revenue as a percentage of personal income. Hawaii, for example, has a lot of tourists who pay sales tax. Its sales tax burdens are exported to other states.
The remaining state tax revenues come from various sources, such as vehicle and other license taxes. These usually form a small portion of a state’s tax revenue.
Miscellaneous other taxes are a broad category of commonly smaller taxes such as death taxes, gift taxes, and any other uncategorized taxes. These typically amount to a small percentage of state taxes overall.
All the taxes displayed thus far focus on individual taxpayers. However, states also tax businesses in various ways.
The most ubiquitous business tax is corporate income tax, usually amounting to less than 1% of personal income. Here, the chart remains sorted by the total individual tax burden (blue tones), with corporate income tax shown alongside.
States impose severance taxes on natural resource extractions such as mining or oil and gas drilling. These taxes comprise a larger percentage of revenue in states with significant natural resource extraction, such as North Dakota, New Mexico, Wyoming, and Alaska.
Business license taxes are usually a small fraction of a state’s tax revenue. One exception is Delaware, which has a flexible legal environment for corporations and low corporate income tax. As a result, most US businesses were registered in Delaware in 2020, and the state collected business license taxes equivalent to 3.2% of personal income.
So far, tax burdens have been displayed as a percentage of the personal income in each state to normalize average income differences between states.
New Hampshire has the second-lowest burden when ranking states by taxes as a percentage of personal income. The small burden is a result of the state having higher than average incomes in a relatively small population (the 11th smallest population in 2020).
But those high personal incomes really impact the ranking, so here’s a different way of measuring individual tax rates. Ranking states by taxes per person removes the effect of personal income in each state. When measured this way, New Hampshire's tax burden rank increases to 24th in the nation.
What is my individual tax burden?
Delving deeper into individual tax burdens requires knowing a little bit about each taxpayer. Property taxes are paid most directly by homeowners, although some of the tax may be shifted onto renters. Alcohol and tobacco taxes are only paid by people who purchase those products.
Tax burden also varies by income level. For people with income higher than the state’s per capita income, per capita revenue might yield a more representative estimate of a state’s tax burden.
Taxes like property tax and sales tax depend on a person’s home value and spending habits. There are general sales taxes on most goods and services people might purchase on a daily basis. Selective sales taxes target specific items such as alcohol, tobacco, and motor fuel. Other selective sales taxes include taxes on amusement, betting, and utilities.
Use the chart below to see tax rankings based on different spending categories, including more detailed sales tax sub-categories. Wondering which state has the largest alcohol tax? Find out by toggling off all other taxes.
Which states collect the most taxes per person?
A summary of tax burden wouldn't be complete without a ranking of states by the total tax burden, which includes taxes that target both individuals (blue tones) and businesses (green tones). This view highlights states like Delaware and North Dakota where overall tax burdens may be relatively high, but the burden has been shifted from people to businesses.
Which states depend the most on taxes?
While some states have relatively low tax burdens for individuals, most derive approximately half of their budgets from state and local taxes. The remaining half comes from charge revenue, miscellaneous income, and the federal government. Charge revenues are derived from services that state governments charge direct fees for: hospitals, school tuition, sewerage, highway tolls, and smaller services like parks and recreation. Miscellaneous revenues come from interest earnings, royalties, lottery revenues, and the sale of state property. Federal sources include public welfare programs such as Medicare and Medicaid, K-12 education programs, or other special transfers such as coronavirus relief.
Sorting by decreasing reliance on taxes reveals that many northeast states, along with Illinois, Nevada, Hawaii and Washington D.C., rely most on taxes to fund their governments.
Seeing tax burdens as a percentage of personal income cuts through the noise of analyzing tax rates. Of course, it’s only part of the story, which is why it’s important to look at tax burdens on a per-person basis for even more context.
Looking at this data from different angles provides key insights, including the fact that states without income tax don't necessarily have the lowest tax burdens. They make up for it with high taxes on what people buy on or the property they own. Plus, states shift many taxes from residents to visitors and tourists via sales and other taxes. Understanding how your state taxes people and corporations, compared to the services it provides residents, can give a sense of what a state prioritizes.
Sources & Footnotes
- Census Bureau
2020 State & Local Government Finance Historical Datasets and Tables
September 20, 2022
- Bureau of Economic Analysis
Personal Income by State
December 23, 2022