2022 State Income Tax Rankings
This week’s map examines the ranking of states on the personal income tax component of our State Enterprise Tax Climate Index 2022. Personal income tax is important for businesses because states tax sole proprietorships, partnerships, and in most cases, limited liability companies (LLCs) and S corporations under the code of the personal income tax. However, even traditional C corporations are indirectly impacted by personal income tax, as this tax influences individuals’ location decisions, potentially impacting state labor supply, and taxes higher personal income increases the price of labor. States with gross receipts taxes also extend these to intermediate businesses in addition to C corporations, and this is also factored into this component of the Index.
States that perform well on IndexThe personal income tax component generally has a low rate flat rate income tax with few deductions and exemptions. They also tend to protect married taxpayers from being taxed more heavily when filing jointly than they would be when filing as two individuals. In addition, states are performing better on the Indexpersonal income tax if they index their brackets, deductions and exemptions to inflation, thereby avoiding unlegislated tax increases.
States with a perfect score on the personal income tax component (Alaska, Florida, South Dakota, and Wyoming) have no personal income tax or payroll taxes in addition to the tax on unemployment insurance. The other top performing states are Nevada, Texas, Washington, Tennessee and New Hampshire. Nevada taxes wage income at a low rate under the state’s modified business tax, but does not tax investment income. New Hampshire taxes interest and dividend income, but not wage income. Tennessee, Texas, and Washington do not tax wage income but do not score perfect on this component because they apply their gross receipts taxes to S corporations, which in most states would be taxed under personal income tax codes. (Washington and Texas also apply them to LLCs.) Other states that do well on the personal income tax component include Colorado, Illinois, Indiana, Kentucky , Massachusetts, Michigan, North Carolina and Utah because they all have one low tax rate.
States that perform poorly on this component tend to have high tax rates and highly progressive bracket structures. They generally fail to index their brackets, exemptions and deductions for inflation, do not allow the deduction of foreign or other state taxes, penalize married couples filing jointly, do not include LLCs and S corporations under the personal income tax code (instead of taxing them as C corporations), and may impose alternative minimum tax (AMT). The worst performing states on personal income taxes this year are New York, California, New Jersey, Connecticut and Hawaii.
High marginal rates have a negative impact on labor production and investment, and can influence location decision-making, especially in an age of increased mobility, when it is easier for individuals to move without jeopardizing their current employment or limiting the scope of their job search. new.
Click on here to see an interactive version of state personal income tax rankings, then click on your state for more information on how its tax system compares regionally and nationally.
To see if your state’s personal income tax structure has gone up or down over the past few years, see the chart below.
|State||Ranking 2019||Ranking 2020||Ranking 2021||Ranking 2022||Change from 2021 to 2022|
|Caroline from the south||34||34||34||33||1|
|District of Colombia||47||47||48||48||0|
Note: A rank of 1 is best, 50 is worst. All scores are for fiscal years. DC’s score and rank do not affect other states.
Source: Tax Foundation.