On the Naughty List Again: California Ranks 48th for 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 New Jersey and New York, the Tax Foundation recently reported.

This is the 14th year California is on the naughty list – formerly known as the “Business Tax Climate Index” and this year referred to as the “2026 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 best states in this year’s Index are:

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

The absence of a major tax is a 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 and New Hampshire have no individual income or state-level sales tax; Florida, Tennessee, and Texas have no individual income tax; and Montana has no sales tax.

This does not mean, however, that a state cannot rank well while still levying all the major taxes. Idaho and Indiana, for example, levy all the major tax types, as do all the other states that rank 11^th to 16^th: North Dakota, North Carolina, Missouri, Arizona, Utah, and Michigan.

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

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

“The states in the bottom 10 tend to have a number of issues in common: complex, nonneutral taxes with comparatively high rates,” the Tax Foundation explains. “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.”

Competitiveness

The Tax Foundation notes that When a state imposes higher taxes than a neighboring state, businesses will cross the border to some extent, which certainly is the case of California. “Therefore, states with more competitive tax systems score well in the Index because they are best suited to generate economic growth.”

California received the low ranking again with an “uncompetitive tax structure.” “California combines high tax rates with an uncompetitive tax structure, yielding one of the worst rankings on the Index.”

California isn’t doing so well on competitiveness – the state remains static at 48th for 2025-2026 State Tax Competitiveness Index:

The Tax Foundation reports on California:

“The state’s top marginal individual income tax rate of 13.3 percent is compounded by a 1.1 percent uncapped payroll tax, bringing the all-in top rate to 14.4 percent. 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.

California is the only state to deny all net operating loss carryforwards; the state’s NOL provisions have been suspended on multiple occasions and are not currently in effect. It is also the only state to use the outmoded ACRS depreciation system rather than MACRS, and does not allow any accelerated first-year expensing. 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 as of the snapshot date of this Index, though legislation to bring conformity forward by a decade was on the governor’s desk at the time of publication. Even this conformity bill would be outdated from the start, however, predating changes adopted as part of 2025’s One Big Beautiful Bill Act (OBBBA). Delayed conformity adds to tax complexity, though California’s current 2015 conformity date has certain benefits: the state does not, for instance, currently incorporate global intangible low-taxed income (or net CFC-tested income under the OBBBA), which does not belong in state tax codes but has been incorporated by some states.”

Here is the full nationwide ranking of states with corporate taxes, individual income taxes, sales taxes, property taxes and unemployment insurance taxes measured:

Note that California ranks 49th for individual income taxes.

Some key takeaways from the 2025-2026 State Tax Competitiveness Index:

• Business taxes affect business decisions, job creation and
  retention, plant location, competitiveness, the transparency of the tax system, and the long-term health of a state’s economy.
• Most importantly, taxes diminish profits.
• Every tax law will in some way change a state’s competitive position relative to its immediate neighbors, its region, and even globally.
• The more riddled a tax system is with politically motivated preferences, the less likely it is that business decisions will be made in response to market forces.

The Tax Foundation explains how states compete for business using their tax systems:

“A notable example comes from Illinois, where in early 2011 lawmakers passed two major tax increases. The individual income tax rate increased from 3 percent to 5 percent, and the corporate income tax rate rose from 7.3 percent to 9.5 percent. The result was that many businesses threatened to leave the state, including some very high-profile Illinois companies such as Sears and the Chicago Mercantile Exchange. By the end of the year, lawmakers had cut deals with both firms, totaling $235 million over the next decade, to keep them from leaving the state.”

You can read the entire report below or at the Tax Foundation: