State taxes: Which are the most tax-friendly states for the wealthy?
by Samuel Stebbins, 24/7 Wall Street
Wealthier Americans tend to pay a smaller share of their income in state and local taxes than lower-income Americans. According to a 2018 report released by The Institute on Taxation and Economic Policy, a Washington D.C.-based think tank, the highest-earning 1% of American families pay just 7.4% of their income in state and local taxes annually on average. Meanwhile, the families that fall into the middle 20% of earners pay 9.9% of their income, and the lowest earning 20% of families pay 11.4% of their income on average.
While U.S. tax policy generally appears to favor the wealthy, the tax advantages the wealthiest 1% enjoy are even stronger in some states than in others.
Using data from ITEP’s 2018 report “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States,” 24/7 Wall St. ranked all 50 states based on the effective tax rate on the top 1% of earners – that is, the share of income paid in state and local taxes. Notably, these figures do not include federal taxes paid.
Although no two state tax policies are exactly alike, the most tax-friendly states for the rich tend to share a few similarities. First, the states ranking highest on this list have either very low or no income tax. When taxes that tend to impose higher burdens on the rich – such as income tax – are very low, state and local governments have to collect revenue by other means, usually through taxes that tend to impose a greater burden on middle- and low-income Americans.
One way states with little or no income tax meet budget obligations is through sales and excise taxes. A heavy reliance on sales and excise tax disproportionately benefits wealthier residents. According to ITEP, the share of their income middle-income families pay in such taxes is more than five times the share wealthy families pay. Here is a list of states with the highest and lowest sales tax.
While some states are more advantageous than others for the wealthy, there are measures Americans of all income levels can take to reduce the amount they hand over to the federal government as well as state and local governments. Here is a list of 17 investments and strategies to help lower your taxes.
50. California
‒ Effective tax rate for top 1% of earners: 12.4%
‒ Effective tax rate for middle 20% of earners: 8.3% (11th lowest)
‒ Avg. income for top 1%: $2.16 million (5th highest)
‒ State & local tax revenue from sales taxes: 21.9% (21st lowest)
‒ State & local tax revenue from income taxes: 33.8% (3rd highest)
49. New York
‒ Effective tax rate for top 1% of earners: 11.3%
‒ Effective tax rate for middle 20% of earners: 12.4% (2nd highest)
‒ Avg. income for top 1%: $2.49 million (3rd highest)
‒ State & local tax revenue from sales taxes: 16.7% (13th lowest)
‒ State & local tax revenue from income taxes: 32.7% (5th highest)
48. Vermont
‒ Effective tax rate for top 1% of earners: 10.4%
‒ Effective tax rate for middle 20% of earners: 10.1% (20th highest)
‒ Avg. income for top 1%: $993,600 (10th lowest)
‒ State & local tax revenue from sales taxes: 10.4% (6th lowest)
‒ State & local tax revenue from income taxes: 19.8% (17th lowest)
47. Minnesota
‒ Effective tax rate for top 1% of earners: 10.1%
‒ Effective tax rate for middle 20% of earners: 9.7% (23rd highest)
‒ Avg. income for top 1%: $1.45 million (15th highest)
‒ State & local tax revenue from sales taxes: 17.1% (14th lowest)
‒ State & local tax revenue from income taxes: 31.9% (7th highest)
46. New Jersey
‒ Effective tax rate for top 1% of earners: 9.8%
‒ Effective tax rate for middle 20% of earners: 10.1% (19th highest)
‒ Avg. income for top 1%: $1.86 million (7th highest)
‒ State & local tax revenue from sales taxes: 15.4% (11th lowest)
‒ State & local tax revenue from income taxes: 22.2% (20th lowest)
45. Maryland
‒ Effective tax rate for top 1% of earners: 9%
‒ Effective tax rate for middle 20% of earners: 10.6% (16th highest)
‒ Avg. income for top 1%: $1.45 million (16th highest)
‒ State & local tax revenue from sales taxes: 12.4% (7th lowest)
‒ State & local tax revenue from income taxes: 37.8% (2nd highest)
44. Hawaii
‒ Effective tax rate for top 1% of earners: 8.9%
‒ Effective tax rate for middle 20% of earners: 11.6% (4th highest)
‒ Avg. income for top 1%: $984,200 (8th lowest)
‒ State & local tax revenue from sales taxes: 37.2% (9th highest)
‒ State & local tax revenue from income taxes: 22.9% (23rd lowest)
43. Nebraska
‒ Effective tax rate for top 1% of earners: 8.7%
‒ Effective tax rate for middle 20% of earners: 10.8% (9th highest)
‒ Avg. income for top 1%: $1.06 million (16th lowest)
‒ State & local tax revenue from sales taxes: 22.4% (23rd lowest)
‒ State & local tax revenue from income taxes: 23.1% (24th lowest)
42. Maine
‒ Effective tax rate for top 1% of earners: 8.6%
‒ Effective tax rate for middle 20% of earners: 9.6% (25th highest)
‒ Avg. income for top 1%: $877,200 (4th lowest)
‒ State & local tax revenue from sales taxes: 19.6% (18th lowest)
‒ State & local tax revenue from income taxes: 22.4% (21st lowest)
41. Connecticut
‒ Effective tax rate for top 1% of earners: 8.1%
‒ Effective tax rate for middle 20% of earners: 12.2% (3rd highest)
‒ Avg. income for top 1%: $3.15 million (the highest)
‒ State & local tax revenue from sales taxes: 14.5% (10th lowest)
‒ State & local tax revenue from income taxes: 29.2% (12th highest)
40. Oregon
‒ Effective tax rate for top 1% of earners: 8.1%
‒ Effective tax rate for middle 20% of earners: 9.1% (19th lowest)
‒ Avg. income for top 1%: $1.12 million (19th lowest)
‒ State & local tax revenue from sales taxes: 0.0% (the lowest)
‒ State & local tax revenue from income taxes: 41.7% (the highest)
39. Rhode Island
‒ Effective tax rate for top 1% of earners: 7.9%
‒ Effective tax rate for middle 20% of earners: 9.5% (25th lowest)
‒ Avg. income for top 1%: $1.12 million (20th lowest)
‒ State & local tax revenue from sales taxes: 16.6% (12th lowest)
‒ State & local tax revenue from income taxes: 21% (18th lowest)
38. Iowa
‒ Effective tax rate for top 1% of earners: 7.7%
‒ Effective tax rate for middle 20% of earners: 10.7% (13th highest)
‒ Avg. income for top 1%: $960,000 (7th lowest)
‒ State & local tax revenue from sales taxes: 22.8% (25th lowest)
‒ State & local tax revenue from income taxes: 23.9% (24th highest)
37. Wisconsin
‒ Effective tax rate for top 1% of earners: 7.7%
‒ Effective tax rate for middle 20% of earners: 10.1% (18th highest)
‒ Avg. income for top 1%: $1.17 million (25th highest)
‒ State & local tax revenue from sales taxes: 19.8% (19th lowest)
‒ State & local tax revenue from income taxes: 27.1% (15th highest)
36. Illinois
‒ Effective tax rate for top 1% of earners: 7.4%
‒ Effective tax rate for middle 20% of earners: 12.6% (the highest)
‒ Avg. income for top 1%: $1.7 million (8th highest)
‒ State & local tax revenue from sales taxes: 19.3% (17th lowest)
‒ State & local tax revenue from income taxes: 19.0% (16th lowest)
35. West Virginia
‒ Effective tax rate for top 1% of earners: 7.4%
‒ Effective tax rate for middle 20% of earners: 8.5% (14th lowest)
‒ Avg. income for top 1%: $702,400 (the lowest)
‒ State & local tax revenue from sales taxes: 18.4% (16th lowest)
‒ State & local tax revenue from income taxes: 25.8% (18th highest)
34. Kansas
‒ Effective tax rate for top 1% of earners: 7.4%
‒ Effective tax rate for middle 20% of earners: 10.6% (15th highest)
‒ Avg. income for top 1%: $1.29 million (22nd highest)
‒ State & local tax revenue from sales taxes: 32.1% (13th highest)
‒ State & local tax revenue from income taxes: 17.1% (14th lowest)
33. Idaho
‒ Effective tax rate for top 1% of earners: 7.2%
‒ Effective tax rate for middle 20% of earners: 8.1% (7th lowest)
‒ Avg. income for top 1%: $1.04 million (13th lowest)
‒ State & local tax revenue from sales taxes: 26.5% (20th highest)
‒ State & local tax revenue from income taxes: 25.8% (19th highest)
32. Georgia
‒ Effective tax rate for top 1% of earners: 7%
‒ Effective tax rate for middle 20% of earners: 9.8% (22nd highest)
‒ Avg. income for top 1%: $1.16 million (25th lowest)
‒ State & local tax revenue from sales taxes: 24.1% (25th highest)
‒ State & local tax revenue from income taxes: 27.7% (14th highest)
31. Virginia
‒ Effective tax rate for top 1% of earners: 7%
‒ Effective tax rate for middle 20% of earners: 9.2% (20th lowest)
‒ Avg. income for top 1%: $1.42 million (17th highest)
‒ State & local tax revenue from sales taxes: 13.8% (8th lowest)
‒ State & local tax revenue from income taxes: 31.9% (8th highest)
30. Arkansas
‒ Effective tax rate for top 1% of earners: 6.9%
‒ Effective tax rate for middle 20% of earners: 10.8% (10th highest)
‒ Avg. income for top 1%: $1.13 million (23rd lowest)
‒ State & local tax revenue from sales taxes: 37.5% (8th highest)
‒ State & local tax revenue from income taxes: 23.5% (25th highest)
29. South Carolina
‒ Effective tax rate for top 1% of earners: 6.8%
‒ Effective tax rate for middle 20% of earners: 8.1% (6th lowest)
‒ Avg. income for top 1%: $992,300 (9th lowest)
‒ State & local tax revenue from sales taxes: 22.1% (22nd lowest)
‒ State & local tax revenue from income taxes: 22.7% (22nd lowest)
28. Indiana
‒ Effective tax rate for top 1% of earners: 6.8%
‒ Effective tax rate for middle 20% of earners: 11.1% (6th highest)
‒ Avg. income for top 1%: $1.01 million (11th lowest)
‒ State & local tax revenue from sales taxes: 28.4% (16th highest)
‒ State & local tax revenue from income taxes: 25.5% (21st highest)
27. Mississippi
‒ Effective tax rate for top 1% of earners: 6.7%
‒ Effective tax rate for middle 20% of earners: 10.8% (11th highest)
‒ Avg. income for top 1%: $802,200 (2nd lowest)
‒ State & local tax revenue from sales taxes: 30.6% (15th highest)
‒ State & local tax revenue from income taxes: 16.7% (13th lowest)
26. Kentucky
‒ Effective tax rate for top 1% of earners: 6.7%
‒ Effective tax rate for middle 20% of earners: 11.1% (5th highest)
‒ Avg. income for top 1%: $935,400 (5th lowest)
‒ State & local tax revenue from sales taxes: 20.4% (20th lowest)
‒ State & local tax revenue from income taxes: 33.3% (4th highest)
25. Utah
‒ Effective tax rate for top 1% of earners: 6.7%
‒ Effective tax rate for middle 20% of earners: 8.2% (10th lowest)
‒ Avg. income for top 1%: $1.30 million (21st highest)
‒ State & local tax revenue from sales taxes: 24.8% (24th highest)
‒ State & local tax revenue from income taxes: 29.6% (11th highest)
24. Delaware
‒ Effective tax rate for top 1% of earners: 6.5%
‒ Effective tax rate for middle 20% of earners: 5.6% (2nd lowest)
‒ Avg. income for top 1%: $1.03 million (12th lowest)
‒ State & local tax revenue from sales taxes: 0.0% (the lowest)
‒ State & local tax revenue from income taxes: 25.8% (17th highest)
23. Montana
‒ Effective tax rate for top 1% of earners: 6.5%
‒ Effective tax rate for middle 20% of earners: 7.1% (3rd lowest)
‒ Avg. income for top 1%: $1.13 million (22nd lowest)
‒ State & local tax revenue from sales taxes: 0.0% (the lowest)
‒ State & local tax revenue from income taxes: 29.7% (10th highest)
22. Massachusetts
‒ Effective tax rate for top 1% of earners: 6.5%
‒ Effective tax rate for middle 20% of earners: 9.3% (22nd lowest)
‒ Avg. income for top 1%: $2.51 million (2nd highest)
‒ State & local tax revenue from sales taxes: 13.8% (9th lowest)
‒ State & local tax revenue from income taxes: 32.7% (6th highest)
21. Ohio
‒ Effective tax rate for top 1% of earners: 6.5%
‒ Effective tax rate for middle 20% of earners: 10.7% (12th highest)
‒ Avg. income for top 1%: $1.05 million (14th lowest)
‒ State & local tax revenue from sales taxes: 28.2% (17th highest)
‒ State & local tax revenue from income taxes: 25.6% (20th highest)
20. Colorado
‒ Effective tax rate for top 1% of earners: 6.5%
‒ Effective tax rate for middle 20% of earners: 8.9% (16th lowest)
‒ Avg. income for top 1%: $1.5 million (12th highest)
‒ State & local tax revenue from sales taxes: 26.5% (19th highest)
‒ State & local tax revenue from income taxes: 25.4% (22nd highest)
19. North Carolina
‒ Effective tax rate for top 1% of earners: 6.4%
‒ Effective tax rate for middle 20% of earners: 9.4% (24th lowest)
‒ Avg. income for top 1%: $1.09 million (17th lowest)
‒ State & local tax revenue from sales taxes: 25% (23rd highest)
‒ State & local tax revenue from income taxes: 30.3% (9th highest)
18. Michigan
‒ Effective tax rate for top 1% of earners: 6.2%
‒ Effective tax rate for middle 20% of earners: 9.2% (21st lowest)
‒ Avg. income for top 1%: $1.25 million (23rd highest)
‒ State & local tax revenue from sales taxes: 22.6% (24th lowest)
‒ State & local tax revenue from income taxes: 24.2% (23rd highest)
17. Missouri
‒ Effective tax rate for top 1% of earners: 6.2%
‒ Effective tax rate for middle 20% of earners: 9% (18th lowest)
‒ Avg. income for top 1%: $1.22 million (24th highest)
‒ State & local tax revenue from sales taxes: 27.3% (18th highest)
‒ State & local tax revenue from income taxes: 28.6% (13th highest)
16. Oklahoma
‒ Effective tax rate for top 1% of earners: 6.2%
‒ Effective tax rate for middle 20% of earners: 10.7% (14th highest)
‒ Avg. income for top 1%: $1.14 million (24th lowest)
‒ State & local tax revenue from sales taxes: 33.3% (12th highest)
‒ State & local tax revenue from income taxes: 22.1% (19th lowest)
15. Louisiana
‒ Effective tax rate for top 1% of earners: 6.2%
‒ Effective tax rate for middle 20% of earners: 10% (21st highest)
‒ Avg. income for top 1%: $1.06 million (15th lowest)
‒ State & local tax revenue from sales taxes: 41% (3rd highest)
‒ State & local tax revenue from income taxes: 15.7% (11th lowest)
14. New Mexico
‒ Effective tax rate for top 1% of earners: 6%
‒ Effective tax rate for middle 20% of earners: 10.2% (17th highest)
‒ Avg. income for top 1%: $845,400 (3rd lowest)
‒ State & local tax revenue from sales taxes: 37.8% (7th highest)
‒ State & local tax revenue from income taxes: 17.4% (15th lowest)
13. Pennsylvania
‒ Effective tax rate for top 1% of earners: 6%
‒ Effective tax rate for middle 20% of earners: 11.1% (7th highest)
‒ Avg. income for top 1%: $1.33 million (20th highest)
‒ State & local tax revenue from sales taxes: 17.2% (15th lowest)
‒ State & local tax revenue from income taxes: 26.2% (16th highest)
12. Arizona
‒ Effective tax rate for top 1% of earners: 5.9%
‒ Effective tax rate for middle 20% of earners: 9.4% (23rd lowest)
‒ Avg. income for top 1%: $1.12 million (21st lowest)
‒ State & local tax revenue from sales taxes: 38.7% (6th highest)
‒ State & local tax revenue from income taxes: 16% (12th lowest)
11. Alabama
‒ Effective tax rate for top 1% of earners: 5%
‒ Effective tax rate for middle 20% of earners: 9% (17th lowest)
‒ Avg. income for top 1%: $955,600 (6th lowest)
‒ State & local tax revenue from sales taxes: 30.7% (14th highest)
‒ State & local tax revenue from income taxes: 23.2% (25th lowest)
10. North Dakota
‒ Effective tax rate for top 1% of earners: 4.5%
‒ Effective tax rate for middle 20% of earners: 8.5% (13th lowest)
‒ Avg. income for top 1%: $1.33 million (19th highest)
‒ State & local tax revenue from sales taxes: 25.6% (21st highest)
‒ State & local tax revenue from income taxes: 7% (10th lowest)
9. Texas
‒ Effective tax rate for top 1% of earners: 3.1%
‒ Effective tax rate for middle 20% of earners: 9.7% (24th highest)
‒ Avg. income for top 1%: $1.64 million (10th highest)
‒ State & local tax revenue from sales taxes: 35.4% (10th highest)
‒ State & local tax revenue from income taxes: 0.0% (the lowest)
8. New Hampshire
‒ Effective tax rate for top 1% of earners: 3%
‒ Effective tax rate for middle 20% of earners: 8.1% (8th lowest)
‒ Avg. income for top 1%: $1.46 million (14th highest)
‒ State & local tax revenue from sales taxes: 0.0% (the lowest)
‒ State & local tax revenue from income taxes: 1.4% (8th lowest)
7. Washington
‒ Effective tax rate for top 1% of earners: 3%
‒ Effective tax rate for middle 20% of earners: 11% (8th highest)
‒ Avg. income for top 1%: $1.62 million (11th highest)
‒ State & local tax revenue from sales taxes: 46.4% (the highest)
‒ State & local tax revenue from income taxes: 0.0% (the lowest)
6. Tennessee
‒ Effective tax rate for top 1% of earners: 2.8%
‒ Effective tax rate for middle 20% of earners: 8.5% (12th lowest)
‒ Avg. income for top 1%: $1.34 million (18th highest)
‒ State & local tax revenue from sales taxes: 41.5% (2nd highest)
‒ State & local tax revenue from income taxes: 1.5% (9th lowest)
5. Wyoming
‒ Effective tax rate for top 1% of earners: 2.6%
‒ Effective tax rate for middle 20% of earners: 7.5% (4th lowest)
‒ Avg. income for top 1%: $2.02 million (6th highest)
‒ State & local tax revenue from sales taxes: 25.2% (22nd highest)
‒ State & local tax revenue from income taxes: 0.0% (the lowest)
4. Alaska
‒ Effective tax rate for top 1% of earners: 2.5%
‒ Effective tax rate for middle 20% of earners: 4.3% (the lowest)
‒ Avg. income for top 1%: $1.1 million (18th lowest)
‒ State & local tax revenue from sales taxes: 8.3% (5th lowest)
‒ State & local tax revenue from income taxes: 0.0% (the lowest)
3. South Dakota
‒ Effective tax rate for top 1% of earners: 2.5%
‒ Effective tax rate for middle 20% of earners: 8.9% (15th lowest)
‒ Avg. income for top 1%: $1.50 million (13th highest)
‒ State & local tax revenue from sales taxes: 39.6% (4th highest)
‒ State & local tax revenue from income taxes: 0.0% (the lowest)
2. Florida
‒ Effective tax rate for top 1% of earners: 2.3%
‒ Effective tax rate for middle 20% of earners: 8.1% (9th lowest)
‒ Avg. income for top 1%: $2.34 million (4th highest)
‒ State & local tax revenue from sales taxes: 34.1% (11th highest)
‒ State & local tax revenue from income taxes: 0.0% (the lowest)
1. Nevada
‒ Effective tax rate for top 1% of earners: 1.9%
‒ Effective tax rate for middle 20% of earners: 7.6% (5th lowest)
‒ Avg. income for top 1%: $1.7 million (9th highest)
‒ State & local tax revenue from sales taxes: 39.4% (5th highest)
‒ State & local tax revenue from income taxes: 0.0% (the lowest)
Methodology
To determine the most tax-friendly states for the rich, 24/7 Wall St. analyzed the effective tax rates for the top 1% of earners using data from the Institute on Taxation & Economic Policy’s 2018 report “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States.” Effective tax rates are the estimated amounts paid in state and local taxes as a percentage of income, and were modeled by ITEP using tax laws as they existed as of Sept. 10, 2018 and 2015 income levels.
Data on the average income of individuals in the top 1% of earners also came from ITEP.
We also considered effective income tax and sales tax rates by state from the Tax Foundation, a tax policy advocacy group. Tax Foundation data is for fiscal 2016, the most recent year available.