One Federal Code, Fifty State Answers

Federal tax law often receives much of the attention from tax payers and tax professionals as its rules generally apply nationwide. State tax laws are different. Rates, exemptions and even the types of taxes imposed can vary considerably from one state to another, and those rules continue to change.

For families deciding where to live, work or retire (or considering how assets may eventually pass to the next generation), state taxes can be an important part of a broader planning conversation.

State Tax Systems Are Stable, but Rates Are Not

An average of 15 states change at least one tax rate in a typical year, according to a paper from the National Bureau of Economic Research. That churn is easy to miss, because the overall architecture of state taxation looks settled. States have rarely added or eliminated entire categories of tax since roughly 1970. An aggregate state tax collections have stayed near 5% of U.S. gross domestic product since the 1980s. While the framework is relatively stable, the numbers inside it are not, which means the state tax picture a family relied on even a few years ago may no longer hold.

States Are Moving in Different Directions

To add further complexity, tax rate changes have not all moved in the same way. According to a 2026 analysis of the Institute on Taxation and Economic Policy’s historical rate database, states have reduced top personal income tax rates 210 times since 1990 and raised them 73 times. During the same period, states increased sales-tax rates 68 times and reduced them 29 times. The median top state personal incometax rate is now lower than it was in 1990, while the median sales tax rate is higher. More recently, some states have moved in the opposite direction by increasing taxes affecting higher-income households.

Washington illustrates how quickly a state’s tax landscape can change. The state has historically had no broad-based individual income tax. However, in 2022 Washington imposed a 7% tax on certain long-term capital gains. Starting with tax year 2025, an additional 2.9% surtax was added for taxable long-term gains that exceeded $1 million, for a 9.9% marginal rate, subject to certain exclusions.

In March 2026, Washington enacted a separate individual income tax scheduled to begin January 1, 2028. The law imposes a 9.9% tax on taxable Washington income and provides a $1 million standard deduction. The law faces a state constitutional challenge, creating uncertainty before its scheduled effective date.

Another Consideration: Estate and Inheritance Taxes

Estate and inheritance taxes add another layer of state-by-state variation and can affect how much wealth ultimately passes to beneficiaries. At the federal level, the basic estate tax exclusion is $15 million per individual for deaths in 2026. Sixteen states and the District of Columbia currently impose an estate tax, an inheritance tax or both, at substantially lower thresholds in many cases.

Oregon is one example. Its estate tax applies above a $1 million threshold, with marginal rates ranging from 10% to 16%. Data from the Oregon Department of Revenue shows that 3,134 estate-tax returns were filed for tax year 2023. Approximately 63% reported tax liability and the median gross estate reported was about $1.9 million.

Thresholds and rates vary considerably among the states that impose these taxes, so exposure depends on the particular state or states involved.

Planning is About More than the Lowest Tax Rate

Headline tax rates tell only part of the story. States that do not impose an individual income tax generally raise revenue through other sources, making property taxes, sales taxes and excise taxes relevant to the comparison. Housing, healthcare and other living costs matter as well.

Changing residence also does not necessarily establish domicile for tax purposes. Domicile rules vary by state and may depend on a range of facts and circumstances, making legal and tax guidance important when a move has significant tax implications.

For families with substantial income or larger estates, the planning conversation may include where they live, where they are domiciled and their potential exposure to income, capital-gains, property, estate and inheritance taxes. Those factors should be weighed alongside family, lifestyle, employment and other financial considerations rather than viewed in isolation.

State tax laws can change considerably even when the overall structure of state taxation appears relatively stable. That makes periodic review worthwhile, particularly when a family is considering a move, approaching retirement or reviewing an estate plan.

Taxes are rarely the only reason to make a major life decision. Understanding how different state rules may affect that decision, however, can help families identify issues worth discussing with their portfolio manager, tax advisor and attorney.

Disclosure

The views expressed represent the opinion of Ferguson Wellman. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Statements of future expectations, estimates, projections and other forward-looking statements are based on available information and Ferguson Wellman’s views as of the time of these statements. Past performance may not be indicative of future results. Ferguson Wellman, Octavia Group and West Bearing do not provide tax, legal, insurance or medical advice. This material has been prepared for general educational purposes only and not as a substitute for qualified counsel who can determine how this information applies to you. We believe the information provided is from reliable sources but should not be assumed accurate or complete.

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