New York And New Jersey Have The Worst Tax Codes According To New Study
The Tax Foundation recently released its 2025 State Tax Competitiveness Index . This index evaluates how well states structure their tax systems according to the principles of sound tax policy—simplicity, transparency, neutrality, and stability. According to the index, New York and New Jersey have the worst tax systems while Wyoming and South Dakota have the best.
The Tax Foundation includes five major taxes in its index: corporate tax, individual income tax, sales tax, property tax, and unemployment insurance tax. Each tax is broken down into various components and these components are compared across the 50 states to determine each state's rank. The corporate tax components include the top rate, expensing rules, carryback and carryforward rules, and various tax credits. This level of detail unearths differences between states that may seem similar on the surface. For example, both Texas and Florida do not tax personal income, but Texas ranks 46th in corporate taxes while Florida ranks 16th.
Several studies and reports find that tax policy influences economic activity. One recent study finds that middle- and high-earning households move to non-income-tax states after large personal income tax hikes. Other studies also find high taxes encourage migration to low tax states.
It is not just income taxes that impact migration. The figure below shows the relationship between a state's overall tax ranking on the Tax Foundation's index (horizontal axis) and its net migration rate ranking from 2022 to 2023 (vertical axis). As shown in the figure, states with a worse overall tax rank also tend to attract fewer people (50th is worst for both rankings).
New York, California, New Jersey, Maryland, Hawaii, and Louisiana all rank in the bottom 10 on both overall tax policy and net migration (upper right of figure). Meanwhile, Florida, Montana, Texas, and Tennessee all rank in the top 10 of both overall tax policy and net migration (lower left of figure).
A good tax code has certain characteristics . It should be simple, meaning it is easy for taxpayers to comply with and for governments to administer. It should be transparent, meaning taxpayers know how much to pay and when to pay it. It should be neutral regarding economic activity, meaning people do not do things primarily for tax purposes. Finally, it should be stable, meaning governments avoid frequent and temporary tax changes e.g., tax holidays.
There were several notable moves in the 2025 ranking as states adopted policies either more or less aligned with these principles. Georgia moved from a graduated personal income tax with a top rate of 5.75% to a flat income tax with a rate of 5.39%. It also aligned its corporate income tax rate with its individual income tax rate, and both rates are scheduled to decline further to 4.99% by 2028. These changes caused Georgia to move up six places in the overall ranking.
Indiana decreased its individual income tax rate from 3.15% to 3.05% and implemented a filing and withholding threshold to protect non-Indiana workers who occasionally work in the state, making it one of the best states in the country for remote workers. These changes helped Indiana move from 12th to 10th in the overall ranking. On the flip side, Minnesota slid two places in the overall ranking as it became the only state to tax long-term capital gains at a higher rate than ordinary income. This policy change will discourage investment and reduce economic growth in the state.
Tax policy impacts the economy in a variety of ways. Good tax policy is simple and transparent and raises revenue for core government functions without unduly discouraging work and investment. Bad tax policy is opaque, confusing, and favors some industries or workers over others. State officials who want to improve their economies should avoid the tax mistakes made by New York and New Jersey, and instead follow the lead of Indiana and Georgia.
