2025 State Tax Competitiveness Index Full Study

Tax changes that are out of sync with neighboring jurisdictions will impact voting behavior. For the first time, each state receives its own summary, highlighting several of the most notable features of its tax code and explaining why it ranks as it does on the Index—along with some state-specific reforms that would improve its tax competitiveness. And users now have access to interactive, sortable, filterable datasets. Or drill down to a single variable or set of variables and see how all states perform on them. Economic factors also weigh in; states may lower rates to invigorate growth or increase them during economic downturns. Ultimately, changes in tax rates are a balancing act intended to provide necessary public services while keeping the state attractive for living and business.

Sales, Use, and Excise Taxes

• Bartik (1989) provides strong evidence that taxes have a negative impact on business start-ups.
• In general, these states have relatively simple experience formulas, exclude more factors from the charging method, and enforce fewer surtaxes.
• This state has cut its top individual income tax rate to 3.9% from 4.4%, however.
• When a child attends a public school, it’s possible to think of this as “income” to the household.
• On the other end of the spectrum, states with higher income tax rates can impose a more substantial financial burden.

This state has cut its top individual income tax rate to 3.9% from 4.4%, however. Alabama’s combined state and local sales tax rate is a walloping 9.29%. The state-level sales tax makes up just 4.0% of that total so where you buy can save you some money. It’s a flat tax state so the same rate applies to everyone regardless of income. The rate was 4.50% for tax year 2024 and that’s a reduced rate from the year before.

Unemployment Insurance Taxes

The rate subindex gives equal weight to the top rate variable and the progressivity index, which accounts for the rate structure’s progressivity, the number of brackets, the top tax bracket threshold, and income recapture. Gupta and Hofmann (2003) regressed capital expenditures on a variety of factors, including weights of apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business state income tax rates profits based on some combination of the percentage of company property, payroll, and sales located within their borders. Their model covered 14 years of data and determined that firms tend to locate property in states where they are subject to lower income tax burdens. Furthermore, Gupta and Hofmann suggest that throwback requirements are the most influential on the location of capital investment, followed by apportionment weights and tax rates, and that investment-related incentives have the least impact.

• Please note, the following state tax rates are provided as a guide and can vary based on a number of factors, including your specific location within a state, and applicable deductions or exemptions you may qualify for.
• In 2023, some states might increase or decrease their tax rates, adjust the income brackets, or change tax credits and deductions.
• Within each component are two equally weighted subindices devoted to measuring the impact of the tax rates and the tax bases.
• States that create the most tax pyramiding and economic distortion, and therefore score the worst, are states that levy a sales tax that generally allows no exclusions for business inputs.

South Carolina

However, it does have a decent sales tax, with an average combined rate of 6.11%. While that’s higher than the national average, it’s better than many other states that refrain from charging an income tax. The Golden State is known for its beaches, Hollywood, Silicon Valley and more. California’s income tax is partly to blame, with a top rate of 12.3%, along with an extra 1% surcharge for those in the highest income bracket. What’s worse is that California also charges a significant sales tax of 7.25%.

• States that do not impose an individual income tax generally receive a perfect score, and states that do impose an individual income tax will generally score well if they have a flat, low tax rate with few deductions and exemptions.
• While everyone has to pay federal income tax, state income tax varies from state to state, and some states have no income tax at all.
• The fees are spent contributing to the cost of processing passport applications, consular support overseas, including for lost or stolen passports, and the cost of processing British citizens at UK borders.
• Taxes on capital stock, tangible and intangible property, inventory, real estate transfers, estates, inheritance, and gifts are also included in the property tax component of the Index.
• In recent years, the federal government offered “bonus depreciationBonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings in the first year.

“Every year during tax season, Americans are reminded of just how much of their hard-earned income isn’t theirs to keep. Living in the right state can ease the stress of tax time, though, as taxpayers in the least expensive states pay less than half as much as those in the most expensive states,” Chip Lupo, an analyst at WalletHub, said in a statement. It partly assumes a slowing pace for wage growth, on the back of that budget tax measure, helping to offset some of the predicted stickiness in other elements of inflation.

• U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders., which undermines the connection between taxpayer location decisions and state tax liability.
• However, the state makes revenue through other forms of taxation, such as higher property tax rates or higher sales tax rates.
• “Every year during tax season, Americans are reminded of just how much of their hard-earned income isn’t theirs to keep.
• Two states (Arkansas and Mississippi) do not conform to federal definitions of corporate income, and they score poorly.
• The U.S. imposes a progressive income tax where rates increase with income.
• 1001, enacted in May 2023, Indiana accelerated its previously enacted tax rate reductions, lowering the individual income tax rate from 3.05 in 2024 to 3.00 percent in 2025.

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