Posted by: John S Kiernan

Tax season can be stressful for many Americans, especially those who owe money to Uncle Sam. Every year, the average U.S. household pays more than $5,700 in federal income taxes, according to the Bureau of Labor Statistics. And while we’re all faced with that same obligation, there is significant disparity when it comes to state and local taxes. Taxpayers in the most tax-expensive states, for instance, pay three times more than those in the cheapest states to meet their civic burden.

As this year’s tax-filing deadline, April 18, looms closer, it’s fair to wonder which states have the most and least burdensome tax rates. WalletHub’s analysts searched for answers by comparing state and local tax rates in the 50 states and the District of Columbia against national medians. To illustrate, we calculated relative income-tax obligations by applying the effective income-tax rates in each state and locality to the average American’s income. Scroll down for the complete ranking, commentary from a panel of tax experts and a full description of our methodology.

1. Main Findings
2. Red States vs. Blue States
3. State & Local Tax Breakdown
4. Ask the Experts: Best Tax Advice
5. Methodology

 

Main Findings

Embed on your website<iframe src="//d2e70e9yced57e.cloudfront.net/wallethub/embed/2416/taxpayer1.html" width="556" height="347" frameBorder="0" scrolling="no"></iframe> <div style="width:556px;font-size:12px;color:#888;">Source: <a href="http://ift.tt/2mF5WzB;  

Tax Rates by State

Overall Rank	State	Effective Total State & Local Tax Rates on Median U.S. Household*	Annual State & Local Taxes on Median U.S. Household*	% Difference Between State & U.S. Avg.**	Annual State & Local Taxes on Median State Household***	Adjusted Overall Rank (based on Cost of Living Index)
1	Alaska	5.64%	$3,060	-47.41%	$4,227	5
2	Delaware	6.07%	$3,293	-43.41%	$3,852	1
3	Montana	6.89%	$3,741	-35.72%	$3,596	3
4	Wyoming	7.43%	$4,036	-30.64%	$4,355	2
5	Nevada	7.66%	$4,157	-28.56%	$4,028	7
6	Tennessee	7.97%	$4,327	-25.65%	$3,566	4
7	Idaho	8.48%	$4,604	-20.88%	$4,095	6
8	California	8.79%	$4,774	-17.97%	$6,908	34
9	South Carolina	8.84%	$4,800	-17.51%	$4,066	11
10	Florida	8.94%	$4,851	-16.65%	$4,287	10
11	Oregon	9.22%	$5,004	-14.01%	$5,481	26
12	Utah	9.25%	$5,019	-13.75%	$5,723	8
13	Colorado	9.34%	$5,071	-12.85%	$5,918	14
14	Alabama	9.43%	$5,120	-12.01%	$4,097	9
15	Arizona	9.60%	$5,211	-10.46%	$4,872	12
16	South Dakota	9.77%	$5,302	-8.89%	$4,625	21
17	District of Columbia	10.00%	$5,428	-6.72%	$8,481	45
18	North Dakota	10.03%	$5,447	-6.40%	$5,367	17
19	New Hampshire	10.09%	$5,475	-5.91%	$7,025	35
20	Louisiana	10.33%	$5,608	-3.62%	$4,652	16
21	Hawaii	10.33%	$5,610	-3.59%	$7,979	49
22	West Virginia	10.38%	$5,635	-3.17%	$4,237	18
23	Georgia	10.57%	$5,739	-1.39%	$5,106	15
24	North Carolina	10.63%	$5,773	-0.80%	$5,046	20
25	Oklahoma	10.70%	$5,809	-0.17%	$4,712	13
26	New Mexico	10.73%	$5,825	0.10%	$4,933	23
27	Virginia	10.89%	$5,913	1.61%	$7,165	29
28	Vermont	10.89%	$5,913	1.62%	$6,651	42
29	Missouri	11.02%	$5,981	2.77%	$5,169	19
30	Texas	11.12%	$6,034	3.69%	$5,196	22
31	Massachusetts	11.52%	$6,253	7.45%	$9,069	47
32	Minnesota	11.59%	$6,291	8.11%	$6,911	32
33	Maine	11.63%	$6,316	8.53%	$5,941	40
34	Washington	11.72%	$6,363	9.34%	$7,806	37
35	Indiana	11.87%	$6,444	10.74%	$5,549	24
36	Maryland	11.92%	$6,470	11.19%	$9,371	44
37	Kentucky	12.01%	$6,522	12.08%	$5,162	28
38	Mississippi	12.14%	$6,589	13.23%	$4,810	25
39	Kansas	12.28%	$6,665	14.53%	$5,897	30
40	Arkansas	12.28%	$6,665	14.54%	$5,005	27
41	Pennsylvania	12.33%	$6,691	14.98%	$6,472	39
42	New Jersey	12.63%	$6,855	17.79%	$10,969	46
43	Iowa	12.84%	$6,968	19.75%	$6,167	33
44	Michigan	13.00%	$7,058	21.28%	$5,741	31
45	Ohio	13.06%	$7,087	21.79%	$5,947	36
46	Connecticut	13.56%	$7,361	26.49%	$10,155	50
47	Rhode Island	13.57%	$7,367	26.60%	$8,531	48
48	New York	13.58%	$7,370	26.64%	$9,495	51
49	Wisconsin	13.60%	$7,384	26.89%	$7,091	41
50	Nebraska	13.80%	$7,493	28.75%	$6,589	38
51	Illinois	14.76%	$8,011	37.66%	$8,162	43

*Assumes “Median U.S. Household” has an annual income of $54,286 (mean third quintile U.S. income); owns a home valued at $178,600 (median U.S. home value); owns a car valued at $23,070 (the highest-selling car of 2016); and spends annually an amount equal to the spending of a household earning the median U.S. income. **National Average of State and Local Tax Rates = 10.72%.***Assumes “Median State Household” has an annual income equal to the mean third quintile income of the state; owns a home at a value equal to the median of the state; owns a car valued at $23,070 (the highest-selling car of 2016); and spends annually an amount equal to the spending of a household earning the median state income.

   

Red States vs. Blue States

 

State & Local Tax Breakdown

All effective tax rates shown below were calculated as a percentage of the mean third quintile U.S. income of $54,286 and based on the characteristics of the Median U.S. Household*.

State	Effective Real-Estate Tax Rate	Real-Estate Tax Rank ($)	Effective Vehicle Property Tax Rate	Vehicle Property Tax Rank ($)	Effective Income Tax Rate	Income Tax Rank ($)	Effective Sales & Excise Tax Rate	Sales & Excise Tax Rank ($)	Effective Total State & Local Tax Rates on Median U.S. Household*
Alabama	1.42%	2($773)	0.32%	29($174)	2.68%	28($1,454)	5.01%	39($2,720)	9.43%
Alaska	3.89%	33($2,112)	0.00%	1($000)	0.10%	6($054)	1.65%	4($894)	5.64%
Arizona	2.66%	18($1,446)	0.71%	37($388)	1.57%	13($850)	4.66%	35($2,527)	9.60%
Arkansas	2.05%	10($1,111)	0.44%	31($240)	2.66%	27($1,444)	7.13%	50($3,871)	12.28%
California	2.65%	17($1,438)	0.28%	28($150)	1.40%	11($760)	4.47%	30($2,426)	8.79%
Colorado	1.98%	8($1,073)	0.76%	40($412)	2.54%	25($1,377)	4.07%	24($2,210)	9.34%
Connecticut	6.48%	48($3,517)	1.02%	48($555)	2.25%	19($1,222)	3.81%	18($2,067)	13.56%
Delaware	1.77%	4($959)	0.00%	1($000)	3.03%	33($1,645)	1.27%	3($689)	6.07%
District of Columbia	1.84%	5($1,000)	0.00%	1($000)	3.72%	46($2,018)	4.44%	28($2,410)	10.00%
Florida	3.49%	27($1,894)	0.00%	1($000)	0.00%	1($000)	5.45%	44($2,957)	8.94%
Georgia	3.10%	25($1,685)	0.00%	1($000)	3.17%	35($1,721)	4.30%	26($2,333)	10.57%
Hawaii	0.90%	1($487)	0.00%	1($000)	3.85%	47($2,090)	5.59%	46($3,033)	10.33%
Idaho	2.52%	14($1,366)	0.00%	1($000)	2.13%	16($1,154)	3.84%	20($2,085)	8.48%
Illinois	7.56%	50($4,105)	0.00%	1($000)	2.82%	30($1,531)	4.37%	27($2,375)	14.76%
Indiana	2.87%	23($1,560)	0.55%	34($300)	3.71%	45($2,014)	4.73%	36($2,570)	11.87%
Iowa	4.88%	38($2,649)	0.42%	30($231)	3.03%	34($1,646)	4.50%	31($2,443)	12.84%
Kansas	4.61%	37($2,502)	0.77%	43($416)	1.78%	15($968)	5.12%	40($2,779)	12.28%
Kentucky	2.78%	19($1,511)	0.53%	32($288)	4.87%	51($2,645)	3.83%	19($2,079)	12.01%
Louisiana	1.61%	3($876)	0.04%	25($023)	2.17%	18($1,181)	6.50%	49($3,529)	10.33%
Maine	4.28%	35($2,321)	1.02%	47($554)	2.54%	26($1,379)	3.80%	17($2,062)	11.63%
Maryland	3.60%	30($1,956)	0.00%	1($000)	4.30%	49($2,332)	4.02%	23($2,182)	11.92%
Massachusetts	3.94%	34($2,139)	0.96%	45($519)	3.67%	44($1,992)	2.95%	6($1,603)	11.52%
Michigan	5.84%	44($3,172)	0.26%	27($142)	3.32%	37($1,801)	3.58%	11($1,942)	13.00%
Minnesota	3.89%	32($2,110)	0.55%	33($299)	2.94%	32($1,597)	4.21%	25($2,285)	11.59%
Mississippi	2.59%	15($1,408)	1.42%	49($773)	2.34%	21($1,269)	5.78%	47($3,139)	12.14%
Missouri	3.30%	26($1,790)	0.82%	44($443)	2.91%	31($1,582)	3.99%	22($2,166)	11.02%
Montana	2.81%	22($1,525)	0.16%	26($086)	2.76%	29($1,501)	1.16%	2($629)	6.89%
Nebraska	6.09%	45($3,308)	0.61%	36($331)	2.53%	24($1,373)	4.57%	32($2,481)	13.80%
Nevada	2.81%	20($1,523)	0.73%	39($398)	0.53%	8($288)	3.59%	12($1,949)	7.66%
New Hampshire	7.07%	49($3,838)	0.76%	41($415)	0.60%	9($326)	1.65%	5($896)	10.09%
New Jersey	7.72%	51($4,189)	0.00%	1($000)	1.40%	11($760)	3.51%	9($1,905)	12.63%
New Mexico	2.44%	12($1,324)	0.00%	1($000)	2.16%	17($1,173)	6.13%	48($3,329)	10.73%
New York	5.34%	41($2,899)	0.00%	1($000)	3.49%	40($1,893)	4.75%	37($2,577)	13.58%
North Carolina	2.81%	21($1,524)	0.56%	35($302)	3.62%	43($1,965)	3.65%	15($1,981)	10.63%
North Dakota	3.68%	31($2,000)	0.00%	1($000)	0.78%	10($421)	5.58%	45($3,026)	10.03%
Ohio	5.15%	40($2,794)	0.00%	1($000)	3.34%	38($1,813)	4.57%	33($2,481)	13.06%
Oklahoma	2.89%	24($1,569)	0.00%	1($000)	2.44%	23($1,325)	5.37%	42($2,915)	10.70%
Oregon	3.55%	28($1,929)	0.00%	1($000)	4.74%	50($2,570)	0.93%	1($505)	9.22%
Pennsylvania	5.02%	39($2,725)	0.00%	1($000)	3.90%	48($2,117)	3.40%	8($1,848)	12.33%
Rhode Island	5.37%	42($2,915)	2.03%	51($1,100)	2.30%	20($1,249)	3.88%	21($2,105)	13.57%
South Carolina	1.88%	6($1,019)	1.01%	46($546)	2.35%	22($1,276)	3.61%	14($1,960)	8.84%
South Dakota	4.40%	36($2,389)	0.00%	1($000)	0.00%	1($000)	5.37%	41($2,914)	9.77%
Tennessee	2.46%	13($1,335)	0.00%	1($000)	0.10%	6($054)	5.41%	43($2,937)	7.97%
Texas	6.24%	46($3,386)	0.00%	1($000)	0.00%	1($000)	4.88%	38($2,649)	11.12%
Utah	2.24%	11($1,218)	0.00%	1($000)	3.35%	39($1,820)	3.65%	15($1,981)	9.25%
Vermont	5.74%	43($3,116)	0.00%	1($000)	1.61%	14($872)	3.55%	10($1,925)	10.89%
Virginia	2.62%	16($1,420)	1.78%	50($966)	3.49%	41($1,896)	3.00%	7($1,631)	10.89%
Washington	3.56%	29($1,931)	0.00%	1($000)	0.00%	1($000)	8.16%	51($4,432)	11.72%
West Virginia	1.92%	7($1,044)	0.72%	38($392)	3.29%	36($1,785)	4.44%	29($2,413)	10.38%
Wisconsin	6.45%	47($3,499)	0.00%	1($000)	3.56%	42($1,933)	3.60%	13($1,953)	13.60%
Wyoming	2.02%	9($1,097)	0.76%	41($415)	0.00%	1($000)	4.65%	34($2,524)	7.43%

*Assumes “Median U.S. Household” has an income equal to $54,286 (mean third quintile U.S. income); owns a home valued at $178,600 (median U.S. home value); owns a car valued at $23,070 (the highest-selling car of 2016); and spends annually an amount equal to the spending of a household earning the median U.S. income.

 

Ask the Experts: Best Tax Advice

For more insight into the impact state and local taxes have on migration and public policy, we turned to a panel of leading tax and policy experts from colleges and universities across the U.S. You can check out their bios and responses below.

1. Do people consider taxes when deciding where to live? Should they?
2. How can state/local tax policy be used to attract new residents and stimulate growth?
3. Which states have particularly complicated tax rules for families?
4. How has the total amount families pay in state and local taxes changed as a result of the Great Recession?
5. Which states have the best mix of taxes and government services?
6. Should people pay taxes based on where they live or where they work?

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• Stephanie Hunter McMahon Professor of Law at the University of Cincinnati College of Law
• Jared A. Moore Mary Ellen Phillips Associate Professor of Accounting and Mervyn L. Brenner Distinguished Teaching Fellow at Oregon State University, College of Business
• Craig Svoboda Maher Professor of Public Administration in the College of Public Affairs and Community Service at University of Nebraska at Omaha
• Roberta F. Mann Mr. & Mrs. L.L. Stewart Professor of Business Law at the University of Oregon School of Law
• William F. Fox Ergen Professor of Business and Professor of Economics, and Director of the Center for Business & Economic Research in the Haslam College of Business at University of Tennessee
• Paul Trogen Associate Professor of Public Finance at East Tennessee State University
• Kathryn M. Jaques Lecturer in Taxation at the San Diego State University, College of Business Administration

Stephanie Hunter McMahon Professor of Law at the University of Cincinnati College of Law Do people consider taxes when deciding where to live? Should they? Economic theory expects people to consider taxes when deciding where to live, but most studies show taxes only tangentially influence these decisions. For example, schools drive the decision for many people as among localities and local property taxes are the primary source of local school funding. Taxes are, therefore, more influential for what they do or do not provide rather than the rate itself. This is to be expected because state and local taxes vary greatly, and these taxes are really payments for the goods and services state and local governments provide to the taxpayer and other members of the community. Truly economically rational people should make decisions about where they live after considering the level of goods and services that are provided and their cost, even though people often discount the cost because it is framed as a tax. How can state/local tax policy be used to attract new residents and stimulate growth? Studies show that state and local tax policies do not attract new residents or stimulate growth, no matter how much politicians may want it to. Factors other than taxes are much larger influences to business growth and relocation. Because the consideration is not the absolute amount of taxes but only the difference relative to other jurisdictions, the differential is just not that large of a cost as compared to infrastructure, an educated workforce, suppliers, etc. It would be best to focus on how to invest the revenue that is raised to making the state or locality the most attractive to business, rather than cutting the taxes that could fund these true difference makers. Which states have particularly complicated tax rules for families? The complication for family taxation usually results in the choice of married couples filing jointly or separately or head of household status, so states that have different filing status than at the federal level, such as Montana that permits couples to choose, could be considered more complicated. Otherwise, most complication in taxation results from tax planning in the attempt to avoid higher progressive tax rates. Those states and localities with the highest progressive tax rates, such as California, New Jersey, and Iowa, are more likely to be considered complicated because of the planning families will engage in to avoid taxation. How has the total amount families pay in state and local taxes changed as a result of the financial crisis? The financial crisis has put tremendous pressure on state and local budgets, in part because the federal government has reduced its funding to these lower levels of government in response to its own budgetary pressure. Coupled with the reduced revenue are increased demands for state and local spending. Nevertheless, most states have responded by continuing the decline of the property, income, and sales taxes as sources of revenue. People are paying less in tax but demanding more in services. For example, starting in 2017, states will have a growing share of the expanded Medicaid costs as a result of the Patient Care and Affordable Care Act. This is creating an untenable situation, which will result in either fewer goods and services being provided or increased taxes. Jared A. Moore Mary Ellen Phillips Associate Professor of Accounting and Mervyn L. Brenner Distinguished Teaching Fellow at Oregon State University, College of Business Do people consider taxes when deciding where to live? Should they? Research suggests that individuals consider taxes when deciding where to live. This is especially true for retirees, partially because concerns about estate and inheritance taxes likely enter the picture at that point. That said, the “tax effect” in this decision is modest, reflecting (in my view) an appropriate recognition of the fact that state and local taxes are but one variable in a whole list of variables relevant to the decision about where to live. Taxes are an important consideration, but their potential impact needs to be assessed within the context of the bigger picture, which also includes non-tax factors such as work opportunities, desirability of location, proximity to family, etc. How can state/local tax policy be used to attract new residents and stimulate growth? The conventional wisdom is that states that are able to generate sufficient revenues to cover their budget through tax policies that involve low rates and/or omitting at least one major type of tax (e.g., income, sales, or wealth-based) are in a better position to attract individuals and businesses to the state. As examples, Alaska, Florida, and Washington have no personal income tax, while Alaska, Montana, New Hampshire, and Oregon have no sales tax. One thing that is not clear, however, is the extent to which such tax policies actually stimulate economic growth (e.g., investment, employment, etc.). Research on this is mixed, with some studies finding significant effects and others finding marginal or no effects. Further, alongside tax policy itself, another side of this coin is how the state and local governments spend their tax revenues. Specifically, a state with relatively high taxes might still be attractive to individuals if the result is good infrastructure and well-functioning basic services. Along this line, it is often that case that many of the cities that place highly in “most livable” rankings are in relatively high-tax jurisdictions. Which states have particularly complicated tax rules for families? This is a tough question to answer because complexity can take any of several forms. For example, a state might have complicated income tax rules that include provisions such as a personal alternative minimum tax (e.g., California, Connecticut, and Wisconsin). But, other states might have relatively straightforward income tax rules but impose several different types of taxes in addition (e.g., sales, property, estate, inheritance, etc.), all of which taxpayers must consider in assessing overall tax burden. Further, a number of states have municipalities that impose income and/or sales taxes in addition to state-level taxes (e.g., Ohio, New York), again making assessment of the overall state and local tax burden complex. On balance, New York and California commonly rank among the “least friendly” tax environments, partially because their tax systems contain multiple of the sources of complexity described here. All of that said, while a number of states certainly have complicated tax systems, the effects of this complexity are mitigated to some extent these days with the widespread use of tax software. How has the total amount families pay in state and local taxes changed as a result of the financial crisis? Speaking broadly (i.e., beyond the financial industry and those working therein), one area in which the financial crisis and the recession that followed have had a widespread effect on personal state and local taxes is home ownership-related taxes and deductions. Specifically, since the financial crisis, home mortgages have become harder for many people to get, and interest rates have generally fallen. Accordingly, IRS data reveal a decline in the home mortgage interest deduction as a percentage of income since 2009. This translates into higher income taxes in states that allow this deduction. This effect is partially offset by the concurrent decline in real estate values in the United States, which results in lower property taxes. Lower property taxes also translates into a smaller property tax deduction for income tax purposes (in states that allow this deduction), but the net is still a reduction in taxes paid. Craig Svoboda Maher Professor of Public Administration in the College of Public Affairs and Community Service at University of Nebraska at Omaha Do people consider taxes when deciding where to live? Should they? Part of the answer depends on what you mean by “where to live” and the other part of my answer is that it often depends on where people are in their lives. In general, young adults tend to base their decision on opportunity and quality of life issues. For example, some of my best friends moved to and still live in Seattle, which is not the cheapest place to live, however, career opportunities and the quality of live afforded by Seattle trumped taxes. People with families also tend to choose where to live based on a host of factors, including career opportunities, family, quality of life and further down the list, taxes. Elderly people, again, tend to look at quality of life, but with many on fixed incomes, taxes tend to become more important which helps explain tax structures in states like Florida and Arizona. It may also be that housing prices and taxes, particularly property taxes, will affect where families choose to live within a given community. I, for instance, moved from Wisconsin to Illinois to Nebraska within a span of five years. I didn’t make those decisions based on taxes, rather it was the result of career choices and quality of life for my family. Once, however, the decision was made to relocate, property taxes did play a role in deciding where to move within those cities. Should taxes play a role as a normative question? As I stated above, I think it matters within the context of a host of other important determinants. How can state/local tax policy be used to attract new residents and stimulate growth? A number of economists have researched the role of taxes in business attraction and found that the role of taxes plays a smaller role in location matters than were thought. Business attraction is more often based on the ability to attract the required workforce. This then means that quality of life issues often trumps tax comparisons. It could be argued that tax policies aimed at enhancing quality of life and attracting skilled workforces have a greater effect on stimulating growth than tax rates and policies aimed at offering a competitive advantage relative to contiguous states or communities. There is also a negative side to tax competition at both the state and local level. I saw this in tax competition between Wisconsin and Illinois and I see that here in Nebraska vs. Iowa. The aim of these policies is to entice a business relocation rather than business expansion, resulting in an aggregate zero-sum economic gain. What often happens is that businesses complain about taxes and threaten to leave, which can result in tax breaks to prevent those businesses from leaving. Few would argue this is bad policy, but it does set a precedent. If company A can get a tax break, why not companies B, C D, etc.? In northern Illinois, where local governments have sales taxes, there were battles between cities for big-revenue generators such as car dealerships. Is that effective policy? I am not convinced. Which states have particularly complicated tax rules for families? It depends on what you mean by complicated. One of the challenges in some states is the number and taxing authority of special purpose districts. In Nebraska, for instance, we have more special-purpose districts per capita than most other states and they include fire districts, cemetery districts, natural resource districts, etc. and each of these has property tax levy authority. Other states such as Florida have unique property tax requirements/exemptions depending on residence, age (retired), military service, disabilities, etc. At the state-level, income taxes can get a bit complicated, depending on the number of exemptions and deductions. Hawaii probably has the most income tax brackets. Other states such as Alaska, Florida, South Dakota, Texas, Washington and Wyoming have no income tax, making the rules rather easy. Illinois can be rather complicated because of state taxes, as well as the array of local taxes available to home-rule communities, including utility taxes, telecommunications taxes, liquor taxes, hotel/motel taxes, etc. How has the total amount families pay in state and local taxes changed as a result of the financial crisis? In short, not much at all. According to the Tax Foundation, state and local tax burdens relative to income have changed little since the recession. As a percentage of income, the state-local tax burden was 10% in 2006, 10.1% in 2007, 10.3% in 2008, 10.3% in 2009, 10.4% in 2010, 10.1% in 2011 and 9.9% in 2012. Roberta F. Mann Mr. & Mrs. L.L. Stewart Professor of Business Law at the University of Oregon School of Law Do people consider taxes when deciding where to live? Should they? Yes, people do consider taxes when deciding where to live, particularly in places that are close to state borders, like Wilmington, Delaware (close to Pennsylvania) and Portland, Oregon (close to Washington). Oregon is a state without sales taxes, next door to a state without income taxes. One could live in Vancouver, Washington, and drive across the bridge to shop in Portland. Property taxes are another major burden for households. On the one hand, excellent public schools may be associated with high property taxes. On the other hand, families without children or who intend to send their children to private schools may prefer a lower tax jurisdiction. How can state/local tax policy be used to attract new residents and stimulate growth? Tax policy has long been considered a way to attract new residents and businesses. Taxes can be tailored to the type of residents and businesses the state hopes to attract. Tax abatements for certain types of development attract that development. In Eugene, Oregon, many student housing projects have received local property tax abatements. This attracts such projects, but has caused controversy among residents who have differing opinions about how tax revenue should be used. Corporations may be attracted not only by a low tax rate but also by the way corporate taxes are calculated. Historically, states have assessed corporate taxes applicable to multistate corporations using a three factor test: property, employees, and sales. Using a different combination of those factors or eliminating one or more of the factors can significantly change a corporation’s tax burden in the state. How has the total amount families pay in state and local taxes changed as a result of the financial crisis? Of course, the answer to this question depends upon the state, as well as on the particular circumstances of the family in question! Some states, like Kansas, have reduced the individual income tax rate (lowest rate 3.5 percent in 2008, down to 2.7 percent in 2014). Other states, like California, have increased the individual tax rate (top rate 10.3 percent in 2008, up to 13.3 percent in 2014). Notably, California’s economy is doing well and the economy of Kansas is suffering. William F. Fox Ergen Professor of Business and Professor of Economics, and Director of the Center for Business & Economic Research in the Haslam College of Business at University of Tennessee Do people consider taxes when deciding where to live? Should they? Quality of life and access to jobs are key factors in where people decide to live. Low taxes are an element in the decision, but people also want good schools, good roads, and parks. Thus, taxes are a positive factor if people receive a good return for their money but discourage location otherwise. Of course, public service demands likely differ across groups such as young families and retirees. How can state/local tax policy be used to attract new residents and stimulate growth? State and local governments need to ensure that they are providing the services that businesses and people value. Good schools that improve the labor force and good infrastructure are most important to strong economic growth. Transfer programs will be less likely to help the economy. Growth will be discouraged if taxes are out-of-line as these services are provided. Which states have particularly complicated tax rules for families? Compliance costs must be kept low because they are a real, though necessary, imposition on people. But compliance costs are even greater for business. Many poorly structured taxes could be identified but the local sales taxes in Colorado and Louisiana are certainly high on the list. How has the total amount families pay in state and local taxes changed as a result of the financial crisis? State and local taxes have fallen relative to the economy over the past decade. Policy has reduced taxes to some extent, but changes in consumption habits, difficulties in enforcing some taxes and other factors have also affected tax levels. Paul Trogen Associate Professor of Public Finance at East Tennessee State University Do people consider taxes when deciding where to live? Should they? Sometimes government feels like a monopoly, forcing us to pay for things whether we want them or not. We may still have some a choice. Economist Charles Tiebout (1) suggests that mobile taxpayers create a quasi-market for local government by voting with their feet for services they desire at the most reasonable tax rate. If a local government has bad schools and high taxes, we can move to a place with better schools and lower taxes. A 2002 study (2) found that mobile taxpayers do create a quasi-market for state governments and move in response to taxes and expenditures. State and local tax burdens deter in-migration. The existence of a state income tax also reduced in-migration and population growth. The study also confirmed the hypothesis that taxpayers were attracted or desired services. For example, mobile taxpayers were attracted by higher education expenditures. Mobile individuals were also repelled by some other categories, like high welfare expenditures. The national government can fit poorly, like “one size fits most.” Sometimes, we feel stuck with poor decisions beyond our control. When we do have a say, it often feels like a choice between the lesser of two evils. In a federal system, however, states and local governments serve as the laboratories of democracy, offering citizens 50 choices of states and thousands of choices local governments. This is a way that citizens can make their preferences known by voting with their feet. And their tax dollars give state and local governments an incentive to listen. How can state/local tax policy be used to attract new residents and stimulate growth? The first assumption is that for any level of services, people would prefer to pay less in taxes. Therefore, efficiency would be rewarded with an influx of additional taxpayers. Second, two types of expenditures influence growth: developmental and redistributive expenditures. Paul Peterson, in a 1981 book, City Limits (3), suggested that taxpayers would be attracted by a developmental expenditure, which is any expenditure that would build the tax base. Building the tax base allows the same level of revenue (and services) at a lower tax rate. Education is popular as a developmental expenditure, as it adds to the future tax base. On the opposite hand, redistributive expenditures would repel taxpayers. Redistribution does not build the tax base, but takes resources from one taxpayer and gives it to another. For example, higher welfare expenditures do not add to the tax base. The taxpayer who would have to pay would have a disincentive to come. Sometimes it is hard to differentiate between developmental expenditures and consumption. Some policies that are called economic development may just redistribute advantages from existing employers to new ones. If there is no net gain on tax base, the policy is not really developmental. Another thing that taxpayers like is stable policies not subject to change. No one wants to move, only to have the rules changed afterward. The 2002 study found mobile taxpayers liked tax breaks for all manufacturing, but were repelled by tax breaks for new investment. Most economic development policies did not draw mobile individuals. Interestingly, a 2003 study (4) of what attracted state manufacturing investment, found no positive effect on manufacturing investment for many so-called economic development policies. They are too variable. They can be given, and taken away. What attracted manufacturers was a low overall tax burden, low changes in the tax burden, and low reliance on the property tax. These characteristics are unlikely to drastically change. How has the total amount families pay in state and local taxes changed as a result of the financial crisis? It may feel like taxes are getting harder to pay. Many people are hurting. A recent survey found 72 percent of Americans believe we are still in the Great Recession that began in 2007. According to the Economic Policy Institute, real wages have been stagnant since 2007. The good news is that state and local governments are responsive quasi-market forces. According to Tax Foundation, real per capita state and local taxes have decreased in 36 of the 50 states. The quasi-market for state and local government appears to work. Furthermore, most states operate under balanced budget requirements, and still trim costs. During the same period, the Federal government has doubled the national debt from 8 to 19 trillion dollars or about $159,000 per taxpayer. Now that is a burden that would make one want to move away! 1. Tiebout, Charles M. (1956) “A Pure Theory of Local Expenditures” Journal of Political Economy 64 65-94. 2. Trogen, Paul, (2002) “Determinants of Interstate Migration,” Journal of Financial and Economic Practice Vol 1, No 1. 3. Peterson, Paul (1981) City Limits. Chicago: University of Chicago Press. 4. Trogen, Paul, (2003) “Attracting Capital: Determinants of State Manufacturing Investment” Journal of Financial and Economic Practice Vol 2, No 1. Kathryn M. Jaques Lecturer in Taxation at the San Diego State University, College of Business Administration Do people consider taxes when deciding where to live? Should they? People certainly do consider state taxes when deciding where to live, especially when they have high income and wealth, and when deciding where to retire. As a state tax consultant I counseled entrepreneurs who had founded successful businesses in California and were considering moving to a lower-tax state to retire, or before selling the business at a substantial gain. However, changing one's residence for state income tax purposes is not as simple as people sometimes think. It's fairly easy to become a tax resident of another state, but not so easy to become a nonresident of the state where a person has been domiciled for many years and raised a family. Sometimes one spouse is eager to move to Nevada or Florida, but the other is not so ready to leave home, adult children, grandchildren, community, and friends. Over the years I have had a few clients decide to stay in California, despite higher taxes, when they understood that to become nonresidents of California they would have to actually move to another state and live there. Buying a condo in Nevada, registering to vote, getting a driver's license and opening a bank account won't do it if you keep a home in California and spend significant time in the state. For some individuals, state taxes can be a very important element to consider when planning a change of residence. However, many other factors need to be taken into consideration, including the cost and availability of housing, the job market, the quality of schools and colleges, climate, distance from family and friends, etc. Taxes aren't everything. How can state/local tax policy be used to attract new residents and stimulate growth? There does not seem to be a direct relationship between state tax burden and economic growth. In a 2014 study by Business Insider, Colorado ranked first in economic growth from 2013 to 2014, and ranked 18th in the Tax Foundation's index of business tax climate in 2016. California ranked second in the economic growth study, but 48th in business tax climate. Factors other than tax policy seem to be more important in creating economic growth. Which states have particularly complicated tax rules for families? All states that impose individual income taxes start the calculation of the tax base with federal adjusted gross income. Various state adjustments are added or subtracted, some required by federal constitutional or statutory law, some as the result of delayed conformity to federal law changes, and some as a result of policy decisions by the state legislature. The simplest systems start with federal AGI as calculated under the rules applicable to the particular tax year, incorporating federal law changes without action by the state legislature. Illinois and New York are examples of states that use a "moving" federal base. Complications sometimes arise in states like California and Arizona, where state legislative action is required to conform to federal law changes. This has been a particular problem in California because of the legislature's inability to enact conformity legislation for several years at a stretch. California's delayed conformity to the federal Mortgage Debt Forgiveness Act is an example.

 

Methodology

In order to identify the states with the highest and lowest tax rates, WalletHub’s analysts compared the 50 states and the District of Columbia across four types of taxation:

1. Real-Estate Tax: We first divided the “Median Real-Estate Tax Amount Paid” by the “Median Home Price” in each state. We then applied the resulting rates to a house worth $178,600, the median value for a home in the U.S., in order to obtain the dollar amount paid as real-estate tax per household.
2. Vehicle Property Tax: We examined data for cities and counties collectively accounting for at least 50 percent of the state’s population and extrapolated this to the state level using weighted averages based on population size. For each state, we assumed all residents own the same car: a Toyota Camry LE four-door sedan, 2016’s highest-selling car, valued at $23,070, as of March 2017.
3. Income Tax: We used the percentage of income (middle income rate) spent on income tax from WalletHub’s Best States to Be Rich or Poor from a Tax Perspective report. “Income” refers to the mean third quintile U.S. income amount of $54,286.
4. Sales & Excise Tax: We used the percentage of income (middle income rate) spent on sales and excise taxes from WalletHub’s Best States to Be Rich or Poor from a Tax Perspective report. “Income” refers to the mean third quintile U.S. income amount of $54,286.

 

Sources: Data used to create this ranking were collected from the U.S. Census Bureau, Tax Foundation, Federation of Tax Administrators, American Petroleum Institute, National Automobile Dealers Association, each state’s Department of Motor Vehicles and WalletHub research.

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