Best and worst states for taxes in 2023

Working from home during the pandemic sparked domestic migration with some workers homing in on states with no or low-income taxes.

But that doesn’t mean they didn’t face a tax bill elsewhere.

If states don’t tax income, they still need to generate revenue and that is typically reflected in property taxes or sales tax.

“No-income-tax states, on average, have property taxes 3% to 6% above those in income-tax states and sales taxes 15% to 20% above those in income-tax states,” the Center on Budget and Policy Priorities (CBPP) told Yahoo Finance.

If you are considering moving to another state to lower your tax liability, it’s important to understand that although no or low income taxes may be a draw, property and sales taxes need to be part of the equation, too.

10 states with highest and lowest income tax rates

Individual income taxes account for 40% of revenue for the states that tax income, according to the Tax Foundation.

State income tax can range from as low as 2.5% in Arizona to a high of 13.3% in California. California, Massachusetts, New Jersey, New York and Washington, D.C., also have a so-called “millionaire tax” surcharge, for taxpayers in the highest income brackets, with a million or more in income. In 2021, New York enacted an additional top rate of 10.9% for those with income exceeding $25 million.

Another consideration is the tax structure your state uses. Does it apply a flat rate to all incomes or a graduated rate that increases with income?

Like the federal government, some states lessen the tax burden for residents by offering exemptions and deductions or employing special tax brackets, so married filers can avoid a “marriage penalty” that often happens if both spouses work. Other states tie any standard deductions or exemptions to the federal tax code.

Highest and lowest property taxes

Property taxes make up 31.1% of state tax collections and 71.7% of local tax collections, according to the Tax Foundation.

Even though Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming have no income tax, research from the Center on Budget and Policy Priorities shows that property and sales taxes are typically 6% higher to make up for no revenue from income taxes.

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Alaska ranks the 10th most expensive state for property taxes and Texas is the 12th most expensive, according to data from the Tax Foundation.

Property taxes and cities

Even if your state may have low property taxes, your location within that state may have higher property taxes.

The pandemic housing boom and the ability to work remotely spurred domestic migration to areas increasing home prices and values. Homeowners in those localities most likely will see an uptick in local property taxes.

For example, although Texas has no income tax, Austin has the fifth-largest property tax in the U.S. with homeowners paying a median of $5,751. Dallas ranked 13th and Houston ranked 16th among cities with the highest property taxes, according to a study by LendingTree.

Highest and lowest sales tax

Sales tax is another way states generate revenue.

Forty-five states have a sales tax, plus the District of Columbia, with 38 states allowing local sales tax, according to a report by the Tax Foundation.

Alaska, Delaware, Montana, New Hampshire, and Oregon do not have state sales tax. Even though Alaska doesn’t have a state sales tax, it allows localities to charge a local sales tax.

Even though a state may have a low income tax rate, the sales tax might actually be high. For example, Louisiana has among the lowest income and property taxes, but it has the highest combined state and local sales tax of 9.55%.

Similarly, Tennessee has no state income tax, is in the lowest 10 states for property tax, but has the second-highest combined sales tax rate at 9.548%.

Arkansas, Alabama, and Oklahoma have some of the lowest property tax rates, but they are among the top 10 states with the highest combined sales tax rates.

Ronda is a personal finance senior reporter for Yahoo Finance and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda

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