On the Naughty List Again: California Has Third-Worst Tax Climate in the U.S.

Having one of the highest costs of living in the country, California’s tax climate is the third-worst in the country, AGAIN, ahead of only New Jersey and New York, the Tax Foundation recently reported.

This is the 13th year California is on the naughty list – formerly known as the “Business Tax Climate Index” and this year referred to as the “State Tax Competitiveness Index.”

The Tax Foundation’s State Tax Competitiveness Index enables policymakers, taxpayers, and business leaders to gauge how their states’ tax systems compare. While there are many ways to show how much state governments collect in taxes, the Index evaluates how well states structure their tax systems and provides a road map for improvement.

The 10 lowest-ranked, or worst, states in this year’s Index are:

41. Massachusetts
42. Hawaii
43. Vermont
44. Minnesota
45. Washington
46. Maryland
47. Connecticut
48. California
49. New Jersey
50. New York

What lands the 10-worst states at the bottom of the list? The Tax Foundation explains:

“The states in the bottom 10 tend to have a number of issues in common: complex, non-neutral taxes with comparatively high rates. New Jersey, for example, is hampered by some of the highest property tax burdens in the country, has the highest-rate corporate income tax in the country, and has one of the highest-rate individual income taxes. Additionally, the state has a particularly aggressive treatment of international income, levies an inheritance tax, and maintains some of the nation’s worst-structured individual income taxes.”

Which states are on the nice list?

The 10 best states in this year’s Index are:

1. Wyoming
2. South Dakota
3. Alaska
4. Florida
5. Montana
6. New Hampshire
7. Texas
8. Tennessee
9. North Dakota
10. Indiana

The Tax Foundation explains that the absence of a major tax is the common factor among many of the top 10 states. “Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate income tax, the individual income tax, or the sales tax. South Dakota and Wyoming have no corporate or individual income tax; Alaska has no individual income or state-level sales tax; Florida and Texas have no individual income tax; and New Hampshire and Montana have no sales tax, with New Hampshire also only imposing a narrow tax on interest and dividend income.”

California received the low ranking again with an “uncompetitive tax structure”:

“California is the only state to deny all net operating loss carry forwards; the state’s NOL provisions have been suspended on multiple occasions and are not currently in effect.

California has a throwback rule, exposing in-state businesses to additional corporate tax liability for certain out-of-state income that would not be taxed elsewhere.

The state is also dramatically out of conformity with the federal tax code, which adds to tax complexity, though it has certain benefits: the state does not, for instance, incorporate global intangible low-taxed income (GILTI), which does not belong in state tax codes but has been incorporated by some states.”

California has a graduated state individual income tax, with rates ranging from 1.00 percent to 13.30 percent. There is also a jurisdiction that collects local incometaxes. California has an 8.84 percent corporate income tax rate. California also has a 7.25 percent state sales tax rate and an average combined state and local sales tax rate of 8.85 percent. California has a 0.68 percent effective property tax rate on owner-occupied housing value.

California does not have an estate tax or inheritance tax. California has a 68.1 cents per gallon gas tax rate and a $2.87 cigarette excise tax rate. The State of California collects $9,229 in state and local tax collections per capita. California has $13,845 in state and local debt per capita and has a 79 percentfunded ratio of public pension plans. California’s tax system ranks 48th overall on the 2025 State Tax Competitiveness Index.

Additionally, nonresidents must file income taxes if they work even a single day in the state, and California is one of only four states to still impose an alternative minimum tax.”

Compare California to Indiana, which ranked 10th on the nice list:

“Indiana has a flat 3.05 percent individual income tax rate. There are also jurisdictions that collect local income taxes. Indiana has a 4.9 percent corporate income tax rate. Indiana also has a 7.00 percent state sales tax rate and does not have local sales taxes. Indiana has a 0.71 percent effective property tax rate on owner-occupied housing value.

Indiana does not have an estate tax or inheritance tax. Indiana has a 51.7 cents per gallon gas tax rate and a $1.32 cigarette excise tax rate. Indiana collects $5,354 in state and local tax collections per capita. Indiana has $7,548 in state and local debt per capita and has a 78 percent funded ratio of public pension plans. Indiana’s tax system ranks 10th overall on the 2025 State Tax Competitiveness Index.