Just like I’ve done in previous years (2024, 2023, 2022, etc, etc), it’s time share some highlights from the Tax Foundation’s annual report on state tax competitiveness.
The 2025 version has been released and this map shows states with better tax systems (light colored) and worse tax systems (darker is bad).
Wyoming, South Dakota, and Alaska win the gold, silver, and bronze medals. The booby prizes go to New York, New Jersey, and California.
Unsurprisingly, states with no income taxes tend to score highly, followed by states that belong to the Flat Tax Club.
States with class-warfare systems, by contrast, are near the bottom.
What I find fascinating is the list of states that have risen of fallen in the rankings.
Here are states that enjoyed the biggest improvements between 2020 and 2025.
- +27 Tennessee
- +24 Iowa
- +9 Arkansas
- +6 Idaho
- +6 Kansas
- +5 Oklahoma
I’m a bit surprised by Tennessee’s big increase. Yes, it cemented its no-income-tax status by getting rid of levies on interest and dividends, but I would think more than that would be necessary for such a big improvement.
Iowa’s big jump, however, makes a lot of sense given that it replaced a high-rate discriminatory income tax with a simple and fair flat tax.
And here are states that suffered the biggest declines, with the Pacific Northwest clearly in a downward spiral.
- -37 Washington
- -21 Oregon
- -10 Colorado
- -7 Massachusetts
- -7 New Mexico
- -5 Maryland
- -5 Virginia
I’m guessing that the state of Washington plummeted because it enacted a capital gains tax (contrary to the state’s constitution, but aided and abetted by a partisan judiciary).
Though that seems like a huge decline, as does Oregon’s big drop.
I’ll close with some nit-picking. The Tax Foundation’s Index is based on corporate income taxes, personal income taxes, sales taxes, property taxes, and unemployment insurance taxes.
It does not include a variable for total tax collections. If it did, Wyoming and Alaska would be ranked much lower since both of those states finance bloated public sectors with taxes on their energy sectors.
Another minor quibble is that rankings only give relative scores (i.e., Florida is better than Illinois). It would be interesting if the Tax Foundation also gave grades using some sort of absolute metric, especially since there has been a big shift toward better tax policy in many states.
Which is why I personally think South Dakota has the nation’s best tax system.
One final comment is that the Tax Foundation is looking only at the tax side of the fiscal equation. For readers interested in the spending side of the fiscal ledger, I did some rankings back in 2020 that gave high marks to Idaho (not my first guess, but also not surprising) and Connecticut (so shocking I wonder if I made a mistake).
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