Taxes Vary in Every U.S. State: Its Reason and Effect

Last updated on February 5, 2022

You pay more or less in taxes depending on which U.S. state you live in. This is because every state has its own tax code and tax system. The four main taxes that determine how much individuals and businesses pay in state taxes are the corporate tax, individual income tax, sales tax, and unemployment insurance tax.

The state with the highest taxes is New York and the state with the lowest taxes is Wyoming. Factors that contribute in making a state charge more taxes than others depends on the complexity of their tax code, including whether capital income is taxed, the tax credits offered, complex sales tax, taxes on business-to-business transactions, and more.

The impact of higher taxes supposedly leads to less investment from businesses. A small or medium-sized business owner tends to operate in a state with fewer taxes. A state with higher taxes may also lose revenue when businesses migrate from high-tax states to low-tax states. Individual taxpayers may also move to states with low tax rates.

Due to the competitiveness between states, some states use aggressive tactics and charge higher taxes to increase their revenue and boost their economic growth. Although in theory it may seem plausible, studies have shown that states that charge more in taxes lose their taxpayers and businesses leading to lower net revenue. This can be interesting knowledge for states that are looking to get a competitive edge over neighboring states.