Understanding State Taxes: Best and Worst States for Your Wallet

The Tax Foundation publishes comprehensive state tax data showing that total state and local tax burdens vary from less than 7% to over 13% of income depending on the state, representing a potential difference of $5,000-$15,000 annually for a median-income household. The Internal Revenue Service administers the State and Local Tax (SALT) deduction that allows taxpayers to deduct up to $10,000 in state and local taxes on their federal return. The Bureau of Labor Statistics tracks how cost-of-living differences interact with state tax variations, and the Census Bureau monitors interstate migration patterns that increasingly follow tax-friendly corridors. The Government Accountability Office has studied how state tax competition affects economic growth and population distribution. Where you live is your biggest tax decision — bigger than any deduction, credit, or tax planning strategy. A family earning $150,000 in California faces a dramatically different after-tax reality than the same family in Texas or Florida. But state tax comparisons are more complex than simply looking at income tax rates: property taxes, sales taxes, vehicle taxes, estate taxes, and the overall cost of living paint a much more nuanced picture. Here is how to evaluate your total state tax burden and make informed decisions about where to live within your tax strategy.

What Is State Taxes?

To put it plainly, the Tax Foundation publishes comprehensive state tax data showing that total state and local tax burdens vary from less than 7% to over 13% of income depending on the state, representing a potential difference of $5,000-$15,000 annually for a median-income household.

State Income Tax Landscape

Comparing states on income tax alone is misleading — a state with 0% income tax may have high property taxes and sales taxes that create a similar total tax burden, while a high-income-tax state may offer lower property taxes and more generous deductions that partially offset the headline rate. The nine states with no income tax are often cited as ‘tax-friendly,’ but the full picture is more nuanced. Texas has no income tax but some of the highest property tax rates in the nation (1.6-2.2% of property value — on a $400,000 home, that is $6,400-$8,800/year). Washington has no income tax but a 6.5% state sales tax (plus local additions reaching 10.4%) and recently added a 7% capital gains tax on gains above $250,000. New Hampshire has no income tax on wages but a 4% tax on interest and dividends (being phased out) and high property taxes. Florida has no income tax, moderate sales tax (6%), and moderate property taxes — making it genuinely one of the lower-tax states overall. The lesson: always calculate total tax burden (income + sales + property + other) rather than comparing a single tax type within your tax plan.

Property Tax and Sales Tax Impact

• Property tax variation: Property tax rates range from 0.27% (Hawaii) to 2.23% (New Jersey) of assessed home value. On a $400,000 home: that is a difference of $1,080/year vs. $8,920/year — nearly $8,000 annual difference based purely on where the home is located. States with the highest property taxes: New Jersey (2.23%), Illinois (2.08%), Connecticut (2.15%), New Hampshire (1.93%), and Vermont (1.83%). States with the lowest: Hawaii (0.27%), Alabama (0.39%), Colorado (0.51%), Louisiana (0.55%), and South Carolina (0.56%). Property taxes are particularly important for retirees on fixed incomes — a high property tax rate on a valuable home can consume a significant portion of retirement income. Many states offer property tax exemptions or freezes for seniors, veterans, and disabled residents — always check your state’s specific programs.
• Sales tax impact: Highest combined state and local sales tax rates: Louisiana (9.55%), Tennessee (9.55%), Arkansas (9.47%), Washington (9.29%), and Alabama (9.24%). Lowest: Oregon (0%), Montana (0%), Delaware (0%), New Hampshire (0%), and Alaska (0% state but local taxes may apply). For a household spending $40,000/year on taxable goods: the difference between a 0% state and a 9.5% state is $3,800 annually. However: most states exempt groceries and/or prescription drugs from sales tax, which reduces the effective rate on total spending. States that tax groceries at the full rate (Mississippi, Alabama) impose a disproportionate burden on lower-income households.
• Vehicle and fuel taxes: Often overlooked: state registration fees, personal property taxes on vehicles, and fuel taxes vary significantly. Virginia charges an annual personal property tax on vehicles (based on the car’s value — a $40,000 car might owe $800-$1,200 annually). Most states do not. Fuel taxes range from $0.09/gallon (Alaska) to $0.68/gallon (California). For a household driving 15,000 miles/year at 25 MPG: fuel tax costs $54-$408/year. These secondary taxes add up and should be included in any total-burden comparison within your tax analysis.

Best and Worst States by Total Tax Burden

• Lowest total tax burden states: Based on Tax Foundation analysis of total state and local taxes as a percentage of income: Alaska (5.4%), Wyoming (6.1%), Tennessee (6.2%), South Dakota (6.7%), Florida (6.7%), New Hampshire (6.8%), Montana (6.9%), Nevada (7.2%), and Indiana (7.4%). These states combine low or zero income taxes with moderate levels of other taxes. For high-income earners: the savings from relocating to a low-tax state can be substantial. A household earning $300,000 moving from California (13.3% top rate) to Florida (0%) saves approximately $20,000-$30,000 in state income tax annually. Over 20 years: that is $400,000-$600,000 in tax savings alone (before investing the savings for compound growth).
• Highest total tax burden states: New York (12.7%), Connecticut (12.6%), Hawaii (12.0%), Vermont (11.1%), California (10.8%), New Jersey (10.7%), Illinois (10.6%), Minnesota (10.5%), and Maryland (10.3%). These states combine progressive income taxes with meaningful property and/or sales taxes. However: these states often provide more extensive public services (better-funded schools, broader social services, more extensive infrastructure), which may have value that partially offsets the higher tax cost. The decision to live in a high-tax state versus a low-tax state involves trade-offs beyond pure tax math.
• Tax burden by income level: A critical nuance: state tax burden varies significantly by income level within the same state. States with progressive income taxes (California, New York, New Jersey) impose much higher effective rates on high earners than on median-income households. Flat-tax states impose proportionally similar rates across income levels. States that rely heavily on sales and property taxes (Washington, Texas) can be regressive — lower-income households pay a higher effective percentage of their income in total taxes. When comparing states: calculate YOUR specific total tax burden at YOUR income level and spending patterns, not just the published average within your personal tax situation.

Tax-Motivated Relocation Planning

• When relocation makes financial sense: The tax savings need to be significant enough to offset: moving costs ($5,000-$20,000), any income changes (salary adjustments for cost-of-living differences — some high-tax states have higher salaries that partially offset the tax burden), social and family costs (leaving your community, distance from family), career impact (limited job market in some low-tax states for certain professions), and quality-of-life factors (climate, culture, schools, healthcare access). A rough threshold: if state tax savings exceed $10,000-$15,000/year and you are at a life stage that accommodates relocation (retirement, remote work, business flexibility): the financial case becomes compelling. Below that threshold: the disruption cost may exceed the tax savings.
• Remote work and state tax considerations: The rise of remote work has created new tax questions. Whenever you work remotely for a company in one state while living in another: your tax obligation generally follows your state of physical residence (where you live and work, not where the company is headquartered). Some states have reciprocity agreements (live in one state, work in another, pay tax only to your home state). A few states (New York, notably) maintain ‘convenience of the employer’ rules that can tax remote workers based on the employer’s location. If you are considering relocating to a low-tax state while keeping your current remote job: verify that your tax savings are real and not offset by the employer state’s tax claims. Consult a tax professional who understands multi-state taxation before relocating.
• Establishing domicile: If you split time between two states (snowbirds, seasonal residents): you need to establish clear domicile in your preferred tax state to avoid claims from the higher-tax state. Steps: register to vote in the low-tax state, get a driver’s license there, use the low-tax state address on federal tax returns, maintain your primary bank accounts and investment accounts in the low-tax state, spend more than 183 days per year there if possible, and establish community ties (church membership, club membership, local doctor/dentist). High-tax states (New York, California, New Jersey) aggressively audit residents who claim to have moved but maintain ties. Maintain meticulous records of your physical location throughout the year to defend your domicile choice within your tax strategy.

State Taxes in Retirement

• State taxation of retirement income: Many states provide favorable treatment for retirees: 12 states exempt all retirement income from state income tax (including Social Security, pension, and IRA/401k distributions). 37 states plus DC exempt Social Security from state income tax (following the 2024 changes — only a handful still fully tax it). Several states exempt all or part of military retirement income. Some states offer generous pension exclusions ($10,000-$50,000+ for qualifying pension income). For retirees: state tax treatment of retirement income can be the single largest factor in your net retirement income. A retiree receiving $80,000 in combined pension and Social Security may owe $0-$8,000+ in state income tax depending on the state.
• Best states for retirees (tax perspective): The most tax-friendly states for retirees combine: no income tax on retirement income, low or moderate property taxes (with senior exemptions available), reasonable sales taxes, and no estate or inheritance tax. Top contenders: Florida (no income tax, moderate property tax with homestead exemption, no estate tax), Wyoming (no income tax, low property tax, no estate tax), Nevada (no income tax, moderate property tax, no estate tax), and Tennessee (no income tax on wages, no Social Security tax, moderate property tax). Consider homestead exemptions: Florida’s unlimited homestead exemption protects your primary residence from creditors and provides property tax savings of $1,000-$3,000 or more annually.
• State estate and inheritance taxes: 17 states plus DC impose their own estate or inheritance tax, often starting at thresholds much lower than the federal $13.61 million exemption. Oregon and Massachusetts tax estates starting at $1 million. Maryland and New Jersey impose both estate AND inheritance taxes. If your estate may trigger a state estate tax: relocating to a non-estate-tax state before death can save your heirs hundreds of thousands of dollars. This is especially relevant for residents of states with $1-$5 million thresholds who have built significant home equity plus retirement accounts. Estate tax planning should consider state residence as a primary variable within your overall estate plan.

Sources

• Tax Foundation — State Tax Data
• Internal Revenue Service — SALT Deduction
• Census Bureau — Interstate Migration