A Look At State Income Tax Rates In 2023—And What Else To Consider (2024)

There's been a lot of chatter about state income taxes over the past few years—thanks, in part, to the expansion of remote work. Many taxpayers now have the flexibility to move to what they believe are more tax-friendly locations where they can pay less in state income taxes.

But what are the states with the most favored state income taxes? The Tax Foundation recently took a closer look at state income tax data, and here's some of what they found.

Imposition Of Tax

Forty-three states and the District of Columbia impose individual income taxes. Of those, 41 tax wage and salary income—in 11 of those states, including my state of Pennsylvania, one rate applies to all taxable income. Other states with a flat income tax include Arizona, Colorado, Idaho, Illinois, Indiana, Kentucky, Michigan, Mississippi, New Hampshire, North Carolina, Utah, and Washington.

Rates Of Tax

If you did the quick math, you realized that flat tax list includes 13 states, not 11. That's because New Hampshire and Washington impose a flat rate on individual taxes but not wages— New Hampshire taxes dividend and interest income, and Washington only taxes capital gains income. The majority of states, however, have graduated-rate income taxes, meaning that there are different brackets for different levels of income. Hawaii has 12 brackets—that's the most in the country. By comparison, there are just seven federal income tax brackets.

Zero Tax States

In contrast, seven states don't have any individual income taxes: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming.

2022 Changes

States that do impose tax are heavily reliant on those income tax streams. Individual income taxes comprised 40% of state tax revenues in fiscal year 2020, the latest year for which data is available.

Despite such reliance, there’s clamor for change. As a result, many states saw income tax changes in 2022, including 12 states that reduced their tax rates, just off the pace from 2021 when 13 states decreased rates. Most of those 2022 rate reductions didn't go through in the same year—they are effective beginning January 1, 2023. However, some states, like Georgia, Iowa, Mississippi, and Nebraska, won't see rate dips until 2024.

Not all states tipped rates downward: Massachusetts increased its individual income tax rate in 2022. The state added a 4% surtax to the 5% individual income tax rate for annual income above $1 million. You can also find a millionaire's tax in California, New Jersey, New York, and the District of Columbia.

Other Taxes To Consider

A zero or low-rate state income tax doesn't necessarily mean that your overall tax burden in those states is smaller. I've cautioned before that taxpayers need to look at various factors before pulling up stakes and heading to a new location. State income taxes are just one piece of the puzzle.

Local governments—including smaller townships and counties—may also impose income taxes. And income taxes aren't the only taxes taxpayers may have to pay.

Property Tax

Property taxes, for example, can drive up the cost of living. Texas has no individual income tax but ranks in the top ten when it comes to the highest property tax burdens.

Sales Tax

Sales taxes can also skew your overall tax picture. Tennessee, which has no state income tax, has the second-highest sales tax rate in the country. In contrast, Oregon has a high state income tax rate—but no state sales tax.

Importantly, when it comes to sales taxes, you shouldn't just focus on the rate but also the tax base, meaning what, exactly, is being taxed? South Dakota—another zero income tax state—imposes a sales tax on “the gross receipts of all retail sales, including the sale, lease, or rental of personal property or any product transferred electronically, and the sale of services.” That includes a sales tax on groceries—just one of three states that do so at the full sales tax rate without any offsetting tax credit.

Tangible Personal Property

Some states also tax tangible personal property—think of those as taxes on things you can touch, like furniture, cars, and boats. That includes my home state of North Carolina where I had to pay an annual tax on my first car, a used Buick.

As of 2019, only seven states—Delaware, Hawaii, Illinois, Iowa, New York, Ohio, and Pennsylvania—exempt all tangible personal property from tax. Another five states—Minnesota, New Hampshire, New Jersey, North Dakota, and South Dakota—exempt most tangible personal property from tax except for specific industries. And in some other states, there is a de minimis exemption for tangible personal property, meaning that tax is not owed on items with a small value.

Evaluating State Taxes

So which tax matters most? That depends on who you are, what you own, and how you make a living. Reading articles like this one—and parsing the related data—can give you a good sense of what you're dealing with from state to state. But don't get sucked into those lists- the ones that purport to tell you the "best" states to live in. "Best" can mean a lot of things to a lot of people. Do your homework.

You can read the findings and click through historical income tax data by state from the Tax foundation here.

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