Best and worst states for taxes - Washington state ranks 2nd highest in combined tax burden

February 11, 2003

By Philipp Harper
MSN B-Central

That's because the tax burdens imposed by the 50 states are as varied as their landscapes. You can pump up your business's bottom line by being smart about where you decide to operate.

Of course, taxes aren't the only criteria people apply when choosing a business venue. If they were, Alaska would be far more crowded; by almost any measure, its residents pay the lowest tax rate in the nation. More below on where other states rank.

First, though, it's important to understand that judging the severity of a state's total tax bite business, property and all other taxes combined is not the straightforward exercise it might appear to be. Here are two caveats to keep in mind when searching for a tax-friendly state:

State-by-state rankings based on the combined federal, state and local tax bill often tell you less about a state's fiscal policies than about the wealth of your neighbors and how that impacts tax rates.

Unless a state-by-state analysis takes into account who actually pays their taxes, and not simply where it is levied, it can sometimes be more misleading than insightful. In other words, "A tax burden is different from tax collection," says Bill Ahern, a spokesman for the Tax Foundation, a nonprofit advocacy group.

Strip out federal taxes for greater accuracy

The problem with combining federal, state and local taxes is that federal levies can skew the results badly.

A state's federal tax burden rises or falls with the average federal rate paid by its residents. So, if a disproportionate share of the state population is made up of wealthy individuals who are taxed at the highest marginal rate, the state will show a disproportionately large total tax bill.

"Connecticut is the classic example of a high total number," Ahern says. "There is a higher percentage of people there paying at the highest federal rate than in any other state."

When used to calculate a combined tax burden, Connecticut's high federal tax bill at least partially obscures what is happening at the state and local levels. Connecticut has the country's highest tax burden, when counting federal taxes. But for state and local taxes only, Connecticut drops down to 10th-highest (see below).

Meanwhile, Ahern adds, "the flip side of the coin is Mississippi," where a low level of personal income means a low per capita federal tax bill.

"State officials in Mississippi say, 'Look how low our tax burden is,'" Ahern says. "But strip out the federal [taxes] and they rise like a rocket."

The best and worst states for taxes

To assess relative state tax burdens accurately, the Tax Foundation adjusts National Income and Product Account data collected by the U.S. Department of Commerce's Bureau of Economic Analysis. One important comparison the foundation makes is of the total tax burden in each state (including federal taxes) to just the state/local tax burden. In both cases, taxes are measured as a percentage of income.

When federal taxes are included, the 10 states that imposed the lowest total tax burdens in 2002 were:

Rank State Income Tax (in %)













West Virginia


North Dakota

South Dakota

(tie) Mississippi













Meanwhile, the highest total taxes were levied in:

Rank State Income Tax (in %)

50 Connecticut

49 Washington
48 New York 34.7
47 New Jersey 34.3
46 Wyoming 34.1
45 Wisconsin 33.2
44 Minnesota 32.9
43 (tie) Michigan 32.8
42 Illinois 32.8
41 California 32.7


Taking federal taxes out of the equation yields a decidedly different result.
When only state and local levies are considered, the 10 tax-friendliest states of 2002 were:

Rank State Income Tax (in %)
1. Alaska 6.3
2. Tennessee 8.4
New Hampshire 8.6
Texas 9.0
5.(tie) Alabama 9.1
Colorado 9.1
South Dakota 9.1
8.(tie) Nevada 9.3
Florida 9.3
10. Oregon 9.4

The states with the most onerous state and local taxes were:

Rank State Income Tax (in %)
50. Maine 12.8
49. New York 12.3
48. Wisconsin 12.0
47. Hawaii 11.6
46.(tie) Minnesota 11.3
Rhode Island 11.3
44. (tie) Utah 11.2
Ohio 11.2
42. Vermont 11.0

41. Connecticut 10.9

Only four states (Alaska, Alabama, Tennessee and South Dakota) make both top 10 lists, and only four are in both bottom 10 tallies (Connecticut, New York, Wisconsin and Minnesota).

For the record, Mississippi, which ranks No. 8 in terms of total taxes, slips to No. 36 (15th worst) when only state and local taxes are considered.

The complete ranking can be found in the "State Finance" section of the Tax Foundation's Web site.

A tax is a tax is not always a tax

It's also important to distinguish between where a tax is levied and who actually pays it. Just because a state imposes a high tax on a certain resource or area of commerce doesn't mean the residents of that state are on the hook. In fact, residents may actually benefit.

"All corporate taxes like Alaska's oil tax are best understood as taxes on the customers and employees and shareholders of the companies," Ahern says.

Tax-friendly Alaska is a case in point. The high taxes imposed on Alaskan oil companies support many state activities, while being paid mostly by people or entities that reside or are based outside the state.

Ahern points to similar revenue bonanzas in Kentucky (bourbon), Wyoming (mining) and Nevada (tourism).

It's worth noting that even unfriendly state tax policies can create business opportunities usually in surrounding states. For example, the absence of a sales tax in Delaware means that many consumers cross into the state from Maryland, which does have a sales tax, to do their shopping. Not surprisingly, retail outlets have proliferated on the Delaware side of the border.

A couple of other things to keep in mind when trying to make sense of the tax landscape: Roughly 95% of all property taxes are levied locally; and your local tax bill will be, on average, about half of the state toll. So, clearly, it pays to take local fiscal conditions into account when picking a business location.


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