Tax discussions often focus on the largest payouts, typically the Federal Income Tax and the FICA taxes that are taken out of your paycheck to pay for Social Security and Medicaid (among other things). State and local taxes tend to be afterthoughts, but they shouldn’t be – they can absorb significant amounts of your income.
It is not all about income tax. Think about how many tax sources there are within a state – income taxes, property taxes, excise taxes, inheritance and estate taxes, school district levies, municipal taxes… it makes for a difficult comparison. Even income taxes are difficult to compare on aggregate, because of differences in brackets and exemptions.
Another complicating factor: the Tax Foundation estimates that over 25% of state and local taxes come from non-residents through a multitude of mechanisms such as tourist taxes and sales taxes on sales to non-residents. How much tax did you contribute to the state of Florida on your last trip to Disney World?
A report from the Tax Foundation took this factor into account and calculated total tax burdens for residents by state by totaling the amount of state and local taxes paid to any state and local government and dividing that number by the average income for that state. This gives a reasonable estimate of the collective tax burden.
Using this method on 2011 data, New York came in with the highest tax burden at 12.6%, followed by New Jersey at 12.3%, Connecticut at 11.9%, and California at 11.4%. On the lower end were Wyoming (6.9%), Alaska (7.0%), South Dakota (7.1%), Texas (7.5%), and a tie between Louisiana and Tennessee at 7.6%.
Purely from a state income tax point of view, nine states are free of income tax on wages (Washington, Nevada, Wyoming, Alaska, Texas, South Dakota, Florida, New Hampshire and Tennessee). New Hampshire and Tennessee tax interest and dividend income; the others do not. The highest income tax rates (with respect to the highest tax bracket) are found in California (13.3%), Hawaii (11.0%), Oregon (9.9%), Minnesota (9.85%), and Iowa (8.98%).
However, state incomes must come from somewhere – so states without income taxes generally get their funds from sales taxes, tourism taxes, or other widely distributed tax methods. Here are a few examples of how taxes vary among the states.
- Florida (Tax-friendly): No income tax, inheritance/estate taxes, or tax on Social Security and retirement benefits. There is a 6% state sales tax with some county sales taxes raising the total as high as 9.5%. Gas taxes are 53.4 cents per gallon. Property taxes are assessed at full market value, with some exemptions.
- California (Tax-unfriendly): Ten income tax brackets varying from 1% (up to $14,910 for married couples) to 13.3% (over $1 million for married couples). State/county sales taxes are 7.5% statewide and up to 10% with local taxes added, with exemptions for food and prescription drugs. Social Security and railroad retirement benefits are not taxed, but all other pensions are. No inheritance/estate taxes. Gas taxes are 71.6 cents per gallon. Property taxes are assessed at full market value. Early distributions from retirement plans/IRAs/annuities are taxed at 2.5%.
- Ohio (Mixed): Nine tax brackets ranging from 0.587% (up to $5,200 in taxable income) to 5.925% (over $208,500). Sales tax is 5.5% statewide with up to 2.25% extra from counties, with food, prescription drugs and telephone service exempted. No tax on Social Security benefits, and tax credits for other retirement income. City and school district taxes can range from 0.25% to 3%. Property taxes are assessed at 35% of market value. Gas taxes are 46.4 cents per gallon.
Detailed tax maps, tax information, and comparison tools may be found at the Tax Foundation website (taxfoundation.org). The most updated information for the 2014 tax year is at taxfoundation.org/article/....
Not everyone will be affected the same way by taxes within a state, so if you are looking at taxes as part of a potential move, check the detailed tax policies of the candidate states using the links above and assess the tax-friendliness for your specific situation.