Tax-friendly places 2005
Top honors go to Alaska, New Hampshire and Delaware. Most unfriendly? Maine, New York, D.C.
By Jeanne Sahadi, CNN/Money senior writer

NEW YORK (CNN/Money) When you travel from state to state, some differences are readily apparent: the landscape, people's accents, use of the word "dude," you name it.

But you can't know what it truly costs to live in a place until you get hit with the whole megillah of taxes.

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Every year, the Tax Foundation measures the total tax bill for each state, creating a list of the most and least tax-friendly states in the country.

See the full list here. And see more state rankings based on income tax, sales tax, property tax and tax breaks for retirees.

In creating its rankings, the Tax Foundation measures as a percentage of per capita income what residents pay in income, property, sales and other personal taxes levied at the state and local levels. It also factors in the portion of business taxes passed along to state residents through higher prices, lower wages or lower profits.

The Tax Foundation is a nonpartisan, nonprofit policy research group that advocates, among other things, tax simplification.

The winners are ...

This year, Alaska again takes top honors as the most tax-friendly to residents. It has no state sales tax, no income tax and the government annually sends residents a refund because of the excess revenue it collects from companies extracting oil from the state.

New Hampshire comes in second. Although it has relatively high property taxes, like Alaska it doesn't impose a sales tax and it doesn't tax wages (although it does tax investment income).

Delaware takes third place, primarily for its lack of a sales tax, its low income taxes the top rate is 5.95 percent and the relatively light burden imposed on residents resulting from the state's corporate tax.

Topping the list of least tax-friendly places is Maine. Its No. 1 ranking results from the great disparity between the fact that it is one of the lowest income states in the country yet has one of the highest rankings in terms of tax collection, said Curtis Dubay, an economist with the Tax Foundation.

Property taxes account for about 40 percent of the overall tax revenue Maine collects, and it has relatively high income tax rates a top rate of 8.5 percent for all income above $16,950.

The District of Columbia comes in second, due in part to a high individual income tax the top rate is 9.3 percent for income above $30,000.

New York, meanwhile, maintains its usual high ranking thanks to an average sales tax of about 8 percent when average state and local rates are combined, plus the option to levy a local income tax, which is one of the reasons New York City is among the least tax-friendly cities in the country.

In fact, the revenue generated by local taxes levied across New York account for about half of all tax revenue collected in the state, Dubay said.

It's not just about the averages

Of course, how tax friendly a state is to you depends on several factors. For instance:

How you make your money. Two states, Tennessee and New Hampshire, don't tax wage income but tax investment income. So if you're living off your investments, you'll pay for the privilege.

Where in a state you live. Big cities tend to have bigger tax bites than many suburban and rural areas in a state. (For a look at the rankings of the tax burden in the largest cities in the country, click here.)

Whether you own a home. A state may have modest taxes in many areas but rank high when it comes to property taxes. New Hampshire, for example, is a tax-friendly state overall, but has relatively high property taxes. Also, owning a home in a desirable neighborhood in any state is likely to increase your property tax bill.

Whether you're retired. Some states, even high-tax ones like Hawaii and New York, offer retirees income-tax breaks.

Whether you smoke or drink. Cigarette and liquor taxes can add up when you're feeding a habit. Ditto if you drive a gas guzzler in a state with high fuel taxes.

Tax lists:

State by state rankings

Big city rankings

To see when when your state's residents will have earned enough to pay off their federal, state and local taxes, click here.


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