Low Taxes Or Just Regressive Taxes
This report identifies the most regressive state and local tax systems and the policy choices that drive that unfairness. Many of the most upside-down tax systems have another trait in common: they are frequently hailed as low-tax states, often with an emphasis on their lack of an income tax. But this raises the question: low tax for whom?
No-income-tax states like Washington, Texas, and Florida do, in fact, have average to low taxes overall. However, they are far from low-tax for poor families. In fact, these states disproportionate reliance on sales and excise taxes make their taxes among the highest in the entire nation on low-income families.
Figure 10 shows the 10 states that tax poor families the most. Washington State, which does not have an income tax, is the highest-tax state in the country for poor people. In fact, when all state and local taxes are tallied, Washingtons poor families pay 17.8 percent of their income in state and local taxes. Compare that to neighboring Idaho and Oregon, where the poor pay 9.2 percent and 10.1 percent, respectively, of their incomes in state and local taxes far less than in Washington.
Less Obvious State Revenue Sources
Income, property, and sales taxes arent the only ways state and local governments collect money from you.
Some states impose additional inheritance taxes on top of the federal tax, taking a chunk out of your estate when it passes to your children. Its one of those taxes most people dont think about until they plan their estate or receive an inheritance and then suddenly find themselves furious at how much the state takes.
Another not-so-obvious tax is gasoline tax, which is applied to suppliers and hidden from consumers. But make no mistake: That tax passes through to you in the form of higher gas prices.
States also earn a pretty penny by charging tolls on their highways. Depending on where you live and drive, these could add up to hundreds or even thousands of dollars each year.
And dont forget the DMV. They charge vehicle registration fees, drivers license fees, emissions testing fees, and other fees to collect more money from you.
Many states also impose sin taxes on tobacco, alcohol, marijuana, and gambling. For example, nearly half of the price of an average pack of cigarettes goes to taxes, according to the Tax Foundation. Its one more reason to quit smoking.
State Sales Tax Rates
California has the highest state-level sales tax rate, at 7.25 percent.;Four states tie for the second-highest statewide rate, at 7 percent: Indiana, Mississippi, Rhode Island, and Tennessee. The lowest non-zero state-level sales tax is in Colorado, which has a rate of 2.9 percent. Five states follow with 4 percent rates: Alabama, Georgia, Hawaii, New York, and Wyoming.
No state rates have changed since April 2019, when Utahs state-collected rate increased from 5.95 percent to 6.1 percent.
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States With The Lowest Property Taxes
Heres the moment youve been waiting for: the big reveal of the 10 states with the lowest property tax rates! If you own property, then youll know the pain of having had to pay property taxes every year. However, if you own property in one of the states listed below, this annual expense is less of a burden. If youre thinking about buying real estate, you might consider investing in real estate in one of the following states, even if you dont plan to live there.
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Undermining Progressivity With Tax Breaks For Wealthy Taxpayers
In contrast to states that improve tax fairness with tax credits for low-income families, more than a dozen states currently allow substantial tax breaks for the wealthy that undermine tax progressivity. Two of the most regressive state income tax loopholes are capital gains tax breaks and deductions for federal income taxes paid .
In combination with a flat rate structure, these tax breaks can create an odd and unfair situation where the highest income taxpayers devote a lower percentage of their income to income taxes than their middle-income neighbors.
For example, Alabama allows a deduction for federal income taxes. Although Alabamas income tax is essentially flat, the federal income tax is still progressive. So Alabamas deduction for federal income taxes disproportionately benefits the states wealthiest taxpayers. As a result, effective marginal income tax rates in Alabama actually decline at the states highest income levels. Despite the 5 percent top tax rate, the effective income tax rate on the very wealthiest taxpayers is actually less than 3 percent. Among the six states that allow a deduction for federal taxes, three allow a full deduction for federal taxes, including Alabama, while the other three have a partial deduction.
State And Local Sales Tax By State
State and local sales taxes play a significant role in determining the total taxes by state. Thats why in the table below, we have the state ranking by taxes imposed on sales. Tennessee, Louisiana, and Arkansas have the highest tax burden by state in this category. Their tax burdens in this category are 9.53%, 9.52%, and 9.47%, respectively.
The lowest state and local tax burdens in 2020 were seen in Alaska, Hawaii, and Wyoming. Residents in these states have a combined sales and local tax burden of 1.76%, 4.44%, and 5.34%. Oregon, New Hampshire, Montana, and Delaware meanwhile have no such taxes at all.
The difference in the sales tax burden between Tennessee and the states without such taxation is 9.53%. Yet, Tennessee is among the 10 states with the lowest tax burden thanks to its exceptionally low property and individual income taxes. Hawaii, similarly, is one of the worst states for taxes despite having a low sales tax burden.
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Should You Move To A State With No Income Tax
If youre trying to determine whether moving to a state with no income tax is financially worth it, start by taking a look at your most recent tax return. Calculate how much you paid in state income taxes and determine your individual income tax rate. Then, compare that total with what you would be paying in the state where you wish to move.
But those calculations should be the tip of the iceberg, according to Steber. Compare the property tax and sales tax rates of both locations, along with cost-of-living considerations, such as housing and food.
Familial and educational considerations might matter as well, which might not be immediately on your radar. Steber, for instance, ended up having to pay out-of-state tuition to his childrens colleges back in Alabama after the family moved across state lines to Florida.
I would tell you, if I had stayed in Alabama, I wouldnt pay out-of-state tuition, which wouldve offset the income tax that I wouldve had, he says.
How Does Your State Affect Your Income Taxes
Your income, not your state, determines the federal income tax you owe. But depending on where you live, federal income tax may not be the only type of income tax you owe.
You may also have to pay state income tax, a type of tax levied by state governments, not the federal government. Most states have a progressive tax system. The more you earn, the more you pay in state income taxes.
Forty-three states impose state income tax. 41 of these impose state income tax on wages. Another two âÃÃ® Tennessee and New Hampshire âÃÃ® impose the tax on dividends and interest. But the states with the lowest and highest taxes have very different tax rates.
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Ten States With The Lowest Sales Tax Rates In The Us
Sales tax is collected at the state level in forty-five states and in the District of Columbia. New Hampshire, Oregon, Montana, Alaska, and Delaware, otherwise known as the NOMAD states, are the only states that do not have a state-level sales tax, although some local levels in Alaska do impose a sales tax.
Sales tax rates vary significantly from state to state. Below is a list of the ten states with the lowest average combined state and local sales tax rates across the US.
Right off the bat, we have a 4-way tie for spot #10, which puts the first four states in a tie for #7:
Sales Tax Rate By State
45 US states charge sales tax. According to the 2016 report on sales tax, Oregon, Montana, Alaska, Delaware, and New Hampshire do not have a sales tax. Of the five states, Alaska and Montana allow for the collection of a local tax. However, Alaska’s local authorities have capped local taxes below 2%, meaning the highest tax that can be charged in the state is 2%. The average local tax in Alaska as of 2015 is 1.76%.
The five states with the highest local taxes are Tennessee, Arkansas, Alabama, Louisiana, and Washington. These five states charge sales taxes of 9.45, 9.26, 8.91, 8.91, and 8.89%, respectively. The prices of goods and services in these five states are generally higher compared to the prices of the five states that do not charge sales tax. The high sales tax is attributed to additional local taxes charged by various counties and municipalities within these states.
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States With No State Sales Tax
What is a sales tax? The U.S. Department of the Treasury defines a sales tax as a tax levied on the sale of goods and services. The three different types of sales tax include the vendor tax, the consumer tax and the combination vendor-consumer tax. Only five U.S. states do not have a sales tax. These five states are:
Although Alaska doesnt have a statewide sales tax, the state does allow localities to impose a local sales tax on residents. While most states do charge a statewide sales tax, not all of these tax rates are particularly high. According to data from The Tax Foundation, states with low state sales tax rates include Colorado , Georgia , Hawaii , Louisiana , Missouri , Alabama , Wyoming , New York , North Carolina , Oklahoma and South Dakota .
Of course, when considering sales tax, its important to keep in mind local sales tax rates as well. Combined with the state sales tax, these rates can quickly add up. According to data from The Tax Foundation, the five states with the highest average combined state and local sales tax rates are Tennessee and Arkansas , Louisiana , Washington , and Alabama . States with the lowest average combined rates are Alaska , Hawaii , Wyoming , Wisconsin , and Maine .
When Local Taxes Are Added In
Thirty-eight states allow local-level sales taxes. Among those that do, Hawaii, Wisconsin, Wyoming, and Maine all trail behind Alaska as having the lowest combined rates. Hawaii logs in at 4.44%, Wisconsin at 5.46%, Wyoming at 5.34%, and Maine at 5.50%.
The combined state and local rates reach a whopping 9.53% in some areas of Tennesseethe highest combined rate in the country.
Also among the five highest combined state and local taxes are Arkansas at 9.47%, Louisiana at 9.52%, Alabama at 9.22%, and Washington at 9.21%, all as of 2020.
Residents of Colorado Springs, Colorado voted to increase their city sales tax to 3.12% effective 2016 to help pay for highway and road maintenance, but Colorado still remains on the short list of low-taxed states overall.;
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Property Tax Rates By State
When calculating the overall tax burden of a destination, it is vital to analyze the taxation on property. Again, the property taxes by state vary depending on local regulations. It is interesting to note how Hawaii has the lowest taxation on median owner-occupied homes of 0.27%. This US destination is among the ones with the worst tax burden by state. New Jersey has the highest property tax rates on owner-occupied homes of 2.47%. Still, residents of D.C. pay the highest property taxes per capita of $3,500. This amount is significantly larger than the $582 paid in property taxes per capita in Alabama.
New Hampshire, Virginia, and New Jersey are the states with the highest property taxes as a percentage of the personal income. The share from the residents personal income that goes to tax on property in the states is 5.66%, 5.14%, and 5.05%, respectively. Alabama, Oklahoma, and Arkansas have the lowest property tax burden by state. In these states, taxes on properties represent 1.44%, 1.67%, and 1.78% of the individual income.
Four out of the five states with the lowest property tax burden are among the 10 best states ranked by taxes. Besides Alabama and Oklahoma, Delaware and Tennessee belong in this group, too.
What About States Without Income Taxes
Not levying a personal income tax requires tradeoffs that are often detrimental to tax fairness. It is a common misconception that states without personal income taxes are low tax. In reality, to compensate for lack of income tax revenues these state governments often rely more heavily on sales and excise taxes that disproportionately impact lower-income families. As a result, while the nine states without broad-based personal income taxes are universally low tax for households earning large incomes, these states tend to be higher tax for the poor.
Note: The nine states without broad-based personal income taxes are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Tennessee levies a limited personal income tax that only applies to interest and dividend income; it is set to expire in 2021.
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What States Have The Lowest Income Tax
Many more states have top tax rates of under five percent. Some of these use a progressive tax system. Others levy a fixed tax rate at all income levels. Here are the rates for 2019:
- North Dakota: 1.1 to 2.9 percent
- Pennsylvania: 3.07 percent
- Arizona: 2.59 to 4.54 percent
- Kansas: 3.1 to 5.7 percent
- Colorado: 4.63 percent
- New Mexico: 1.7 to 4.9 percent
- Illinois: 4.95 percent
- Ohio: 0.495 to 4.997 percent
Combined State And Local Sales Tax Rates
Five states do not have statewide sales taxes: Alaska, Delaware, Montana, New Hampshire, and Oregon. Of these, Alaska allows localities to charge local sales taxes.
The five states with the highest average combined state and local sales tax rates are Louisiana , Tennessee , Arkansas , Washington , and Alabama . The five states with the lowest average combined rates are Alaska , Hawaii , Wyoming , Wisconsin , and Maine .
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Collection Payment And Tax Returns
Sales taxes are collected by vendors in most states. Use taxes are self assessed by purchasers. Many states require individuals and businesses who regularly make sales to register with the state. All states imposing sales tax require that taxes collected be paid to the state at least quarterly. Most states have thresholds at which more frequent payment is required. Some states provide a discount to vendors upon payment of collected tax.
Sales taxes collected in some states are considered to be money owned by the state, and consider a vendor failing to remit the tax as in breach of its fiduciary duties. Sellers of taxable property must file tax returns with each jurisdiction in which they are required to collect sales tax. Most jurisdictions require that returns be filed monthly, though sellers with small amounts of tax due may be allowed to file less frequently.
Sales tax returns typically report all sales, taxable sales, sales by category of exemption, and the amount of tax due. Where multiple tax rates are imposed , these amounts are typically reported for each rate. Some states combine returns for state and local sales taxes, but many local jurisdictions require separate reporting. Some jurisdictions permit or require electronic filing of returns.
Purchasers of goods who have not paid sales tax in their own jurisdiction must file use tax returns to report taxable purchases. Many states permit such filing for individuals as part of individual income tax returns.
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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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