2018’s Tax Burden by State
3:32 AMPosted by: Adam McCann
On April 17, Uncle Sam will once again take his cut of the past year’s earnings. And many taxpayers are already wondering how that will affect their finances. However, since the tax code is so complicated and has rules based on individual household characteristics, it’s hard for the average person to tell. And with a new tax code recently signed into law, next year’s taxes will be quite different.
One simple ratio known as the “tax burden” helps cut through the confusion. Unlike tax rates, which vary widely based on an individual’s circumstances, tax burden measures the proportion of total personal income that residents pay toward state and local taxes. And it isn’t uniform across the U.S., either.
To determine the residents with the biggest tax burdens, WalletHub compared the 50 states across the three tax types of state tax burdens — property taxes, individual income taxes and sales and excise taxes — as a share of total personal income in the state. Read on for our findings, commentary from a panel of tax experts and a full description of our methodology.
For more fun (or not so fun) facts about 2018’s tax landscape, check out WalletHub’s Tax Day Facts infographic.
Main FindingsEmbed on your website<iframe src="//d2e70e9yced57e.cloudfront.net/wallethub/embed/20494/geochart-tax-burden.html" width="556" height="347" frameBorder="0" scrolling="no"></iframe> <div style="width:556px;font-size:12px;color:#888;">Source: <a href="https://ift.tt/2Hck3J4>
Overall Tax Burden by State
|
Overall Rank (1=Highest) |
State |
Total Tax Burden (%) |
Property Tax Burden (%) |
Individual Income Tax Burden (%) |
Total Sales & Excise Tax Burden (%) |
|---|---|---|---|---|---|
| 1 | New York | 13.04% | 4.62% | 4.78% | 3.64% |
| 2 | Hawaii | 11.57% | 2.20% | 2.85% | 6.52% |
| 3 | Maine | 11.02% | 4.80% | 2.69% | 3.53% |
| 4 | Vermont | 10.94% | 5.20% | 2.32% | 3.42% |
| 5 | Minnesota | 10.37% | 3.00% | 3.70% | 3.67% |
| 6 | Connecticut | 10.19% | 4.17% | 3.34% | 2.68% |
| 7 | Rhode Island | 10.14% | 4.70% | 2.31% | 3.13% |
| 8 | Illinois | 10.08% | 4.11% | 2.44% | 3.53% |
| 9 | New Jersey | 10.02% | 5.12% | 2.46% | 2.44% |
| 10 | California | 9.57% | 2.66% | 3.65% | 3.26% |
| 11 | Ohio | 9.48% | 2.90% | 2.71% | 3.87% |
| 12 | Maryland | 9.45% | 2.77% | 3.92% | 2.76% |
| 13 | West Virginia | 9.40% | 2.43% | 2.87% | 4.10% |
| 14 | Iowa | 9.32% | 3.43% | 2.50% | 3.39% |
| 14 | Mississippi | 9.32% | 2.80% | 1.72% | 4.80% |
| 16 | Wisconsin | 9.26% | 3.52% | 2.67% | 3.07% |
| 17 | Nebraska | 9.17% | 3.83% | 2.39% | 2.95% |
| 18 | Massachusetts | 9.03% | 3.60% | 3.40% | 2.03% |
| 19 | Arkansas | 8.99% | 1.79% | 2.29% | 4.91% |
| 20 | New Mexico | 8.94% | 2.03% | 1.75% | 5.16% |
| 21 | Kentucky | 8.79% | 2.03% | 3.16% | 3.60% |
| 22 | North Dakota | 8.69% | 2.20% | 1.28% | 5.21% |
| 23 | Pennsylvania | 8.66% | 2.98% | 2.56% | 3.12% |
| 24 | Indiana | 8.56% | 2.33% | 2.33% | 3.90% |
| 25 | Kansas | 8.54% | 3.07% | 1.66% | 3.81% |
| 26 | Michigan | 8.53% | 3.21% | 2.18% | 3.14% |
| 27 | Louisiana | 8.43% | 2.03% | 1.49% | 4.91% |
| 28 | Oregon | 8.38% | 3.17% | 4.10% | 1.11% |
| 29 | Utah | 8.36% | 2.46% | 2.66% | 3.24% |
| 30 | North Carolina | 8.32% | 2.30% | 2.70% | 3.32% |
| 31 | Arizona | 8.21% | 2.62% | 1.39% | 4.20% |
| 31 | Nevada | 8.21% | 2.23% | 0.00% | 5.98% |
| 33 | Texas | 8.15% | 3.70% | 0.00% | 4.45% |
| 33 | Washington | 8.15% | 2.66% | 0.00% | 5.49% |
| 35 | Colorado | 8.10% | 2.67% | 2.26% | 3.17% |
| 36 | Georgia | 8.09% | 2.75% | 2.31% | 3.03% |
| 37 | Wyoming | 8.03% | 4.17% | 0.00% | 3.86% |
| 38 | Missouri | 7.95% | 2.34% | 2.42% | 3.19% |
| 39 | South Carolina | 7.88% | 2.91% | 1.97% | 3.00% |
| 40 | Idaho | 7.87% | 2.48% | 2.30% | 3.09% |
| 41 | Virginia | 7.77% | 2.92% | 2.73% | 2.12% |
| 42 | Montana | 7.64% | 3.55% | 2.69% | 1.40% |
| 43 | Alabama | 7.24% | 1.41% | 1.86% | 3.97% |
| 44 | South Dakota | 7.22% | 2.90% | 0.00% | 4.32% |
| 45 | Oklahoma | 7.17% | 1.54% | 1.89% | 3.74% |
| 46 | New Hampshire | 7.07% | 5.60% | 0.13% | 1.34% |
| 47 | Florida | 6.64% | 2.72% | 0.00% | 3.92% |
| 48 | Tennessee | 6.47% | 2.05% | 0.11% | 4.31% |
| 49 | Delaware | 5.68% | 1.82% | 2.70% | 1.16% |
| 50 | Alaska | 4.94% | 3.54% | 0.00% | 1.40% |
Ask the Experts
For more insight on the differences in state tax policies, we asked a panel of taxation experts to weigh in with their thoughts on the following key questions:
- What state and local tax instruments are most fair? Least fair?
- What’s the relationship between state tax burden and economic growth?
- Should states and localities tax property at different marginal rates like income?
- What makes some state and local tax systems better able to weather economic downturns?
Susan Pace Hamill Professor of Law and Honors Professor in the School of Law at the University of Alabama
Tracy J. Noga Tax Consultant and Associate Professor of Accountancy at Bentley University
Gary L. Rose Professor and Chair in the Department of Government, Politics and Global Studies at Sacred Heart University
Andrew Reschovsky Research Fellow at the Lincoln Institute of Land Policy and Professor Emeritus of Public Affairs and Applied Economics at the University of Wisconsin-Madison
Oskar Harmon Associate Professor of Economics at the University of Connecticut
Andrew Downs Associate Professor in the Department of Political Science at Indiana University-Purdue University Fort Wayne
Lonce Bailey Assistant Professor of Political Science at Shippensburg University
What state and local tax instruments are most fair? Least fair?
Well-designed income tax structures that have a moderately progressive tax burden, which cannot be determined by merely looking at the marginal rates, adequate exemptions to shield small incomes from tax, and no deductions and other breaks for special interests are the most fair.
Sales tax structures are the least fair and inherently regressive. Sales tax structures that impose high rates and fail to exempt necessities are especially unfair. For example, Alabama imposes the full sales tax on all food at the grocery store. In Tuscaloosa, state and local sales tax rates are 9%. That means $100 of groceries cost $109. That is terrible for struggling, low-wage workers trying to feed children. There are places in Alabama with sales tax rates in the double digits.
What’s the relationship between state tax burden and economic growth?
Contrary to erroneous assumptions, low state tax burdens do not promote long-term, stable economic growth. Excessively high state tax burdens, especially if imposed unfairly, will retard economic growth. Creating a state tax structure that helps economic growth can be compared to Goldilocks’ “just right” porridge. Adequate revenues must be raised to fund state services, including high-quality education (both K-12 and higher education -- there is a direct relationship between high-quality research universities and economic growth) in a fair manner. A fair manner requires those enjoying higher levels of income and wealth to bear a moderately progressive, higher, proportionate tax burden. Steeply progressive tax burdens and regressive, especially grossly regressive, tax burdens both harm economic growth. Reasonable minds will disagree as to exactly what a “just right” tax structure looks like, but as long as the debate sticks to the above standards, the end result will foster economic growth.
Should states and localities tax property at different marginal rates like income?
Creating a well-designed property tax is very complicated beyond setting the rates. If the base (the portion of the property’s value subject to the rates) is too small, the rates mean very little. For example, in Alabama, the base of timber property owned by large corporations engaged in agribusiness is so small, their property tax averages less than one dollar an acre. In New Jersey, the property tax on homes squeezes their middle class, an indication that the base and rates are too high. A property tax is not an income tax, it is a wealth tax, and the challenge is to require sufficient value in the base subject to the rates without going overboard. Only focusing on the rates misses the point. In Alabama, raising the rates would only mean that big timber pays a tiny bit more than practically nothing.
What makes some state and local taxes systems better able to weather economic downturns?
States that depend less on sales taxes are better able to weather economic downturns. States that depend heavily on sales tax (e.g., Alabama relies on sales tax for almost half of its revenues) have a volatile situation, because sales tax revenues are the most sensitive to the ups and downs of the economy. Income tax revenues are also sensitive to downturns, but not as much as sales taxes. Property taxes are the least sensitive to downturns.
I tell my students that a well-designed state and local tax structure should keep sales taxes as minimal as possible, accounting for no more than a quarter of total revenues, less would be better. Rates should be low and exemptions for necessities should be generous. Property taxes should account for at least a quarter of revenues, but no more than a third. The rest should be raised from a moderately progressive income tax and any other special taxes the state can uniquely raise (e.g., Delaware gets more revenues from corporate filings and certain states extract significant minerals).
No state meets my standards, but some states are much worse than others. In 2008, I published an article called “The Vast Injustice Perpetuated by State and Local Tax Policy.” This article evaluates data providing a “helicopter view” of the state and local tax structures and K-12 funding of all fifty states, in a book I published called “As Certain as Death.” That was a massive, three-year research project.
Tracy J. Noga Tax Consultant and Associate Professor of Accountancy at Bentley University
What state and local tax instruments are most fair? Least fair?
By the conventional definition of “fair,” an income tax is most fair if it is progressive (e.g., the rates increase as income increase). However, most states do not have progressive tax rates for individual income taxes.
Most states (all but five) utilize a sales tax due to its relative ease of implementation and collectability. Many people would argue that a sales tax is unfair, since lower-income individuals end up with a larger portion of their income paying sales tax than higher-income individuals. But fairness is often a matter of perception. You will often hear Warren Buffet argue a consumption tax is the fairest tax of all because you are only taxing people on what they choose to consume.
An ad valorem tax, such as a real estate tax, appears to be quite fair since it is assessed on the value of property, and you are required to pay according to what you own. However, if you are a long-time homeowner, particularly in an area of the country that has been gentrified, you could find yourself owning a property that has significantly increased in value, and your income has not increased at the same rate. These individuals, particularly senior citizens on a fixed income, are forced out of their homes because they simply cannot afford the taxes.
There is no perfect tax. Out of all of these, a progressive income tax is most fair. Of course, there will still be a debate about what should be included in the income tax base to be taxed.
What’s the relationship between state tax burden and economic growth?
They are absolutely directly correlated on both the business side and individual side. There are studies out there, as well as several anecdotal examples. On the anecdotal side, you can look at Connecticut as a case study. Businesses are leaving in droves as a result of the increases in taxes. To make up for that, the individual tax burdens need to be increased for the workers that have remained, for those that have managed to keep jobs. Just since last year, Connecticut removed a valuable property tax credit that had been available to most individuals on their income tax return. I have not seen the migration numbers for individuals leaving Connecticut, but I am guessing it is quite high. On the flip side, there are multiple examples of states offering all kinds of incentives to businesses to relocate to their states (e.g., General Electric coming to Boston, the multiple packages Amazon is being offered).
Should states and localities tax property at different marginal rates like income?
This ties very closely to the first question. It would make it much more “fair.” However, as you try to make it more fair, it becomes much more complicated and difficult to administer and, possibly, inefficient. When policymakers implement a tax, they need to balance equity and efficiency. If the property tax was the only tax being administered as their main revenue raiser, you might want to make it more “fair.” However, if it was in place to supplement the income tax, then the time and effort would be better spent to make the income tax fair and the purpose of the property tax and/or sales tax would be a simple, efficient, and easy to administer tax that would complement the income tax. The whole package needs to be balanced.
What makes some state and local taxes systems better able to weather economic downturns?
There is not a magic formula for a tax system to make the economy resilient to economic downturns. That is true at the state and local, federal and global levels. I think fairness plays a role, but it probably has a little more to do with the nature of the state’s economy. Being from Massachusetts, particularly the Boston area, our economy is focused on education and health care. That is a very stable economy. It is certainly affected by economic downturns, but not to the extent other economies in other areas of the countries are.
Gary L. Rose Professor and Chair in the Department of Government, Politics and Global Studies at Sacred Heart University
What state and local tax instruments are most fair? Least fair?
It's beyond dispute that the income tax is regarded as the most fair and progressive form of taxation, while the sales tax is regarded as a very regressive tax, in that the fixed percentage on goods draws a higher percentage of money from the middle class and the poor.
The corporate tax is another form of fair taxation, as despite the fixed percentage (in most cases), how much a corporation pays is a reflection of profits. Connecticut looks as if we are going to reintroduce tolls. Although the rates are expected to vary depending on congestion, to my mind, the tolls, which are yet another form of taxation, are regressive and punitive on lower-income earners.
What’s the relationship between state tax burden and economic growth?
I don't think there can be any doubt that the tax policies and tax structure of a state have direct bearing on the state's economy and economic growth. And this is one of the prime reasons why the state of Connecticut is not deemed a desirable state for corporate and small business relocation, along with entrepreneurial innovation. Connecticut was once regarded as a very desirable state for economic development and job opportunities, but unfortunately, the tax burden has changed that in a most dramatic way. College graduates from Connecticut colleges and universities, many of whom have excellent high-tech and data-based skill sets, do not see their future in Connecticut due to fewer job opportunities resulting from tax policies. The interests of the public sector are now outweighing the interests of the private sector. And in a geographically small and densely populated state, that does not lend itself to a favorable economic climate.
Should states and localities tax property at different marginal rates like income?
Property taxes on homes and vehicles seem to be taxed in a fair manner. I wouldn't want to see the calculations on mill rates altered. My initial thoughts are opposed to imposing a property tax structure similar to the progressive income tax on personal property. That could have some serious consequences on the housing market.
What makes some state and local taxes systems better able to weather economic downturns?
The income tax, despite being the most progressive and fair form of taxation, is also the most variable. A good portion of our state's revenue depends on income tax dollars from the residents of Fairfield County, where there is of course extreme wealth and much investment in the stock market, not to mention that a good number of people in lower Fairfield County work on Wall Street. So, when there is a downturn, then yes, the state's revenue declines. To weather a downturn, it seems as if the steady and less variable forms of revenue will at least allow basic services to be provided. The less variable taxes include the sales tax, the property tax, the gas tax, which the governor wants to increase by 7 cents, a $3.00 new tire tax, which Malloy is also proposing, and the dreaded tolls.
Andrew Reschovsky Research Fellow at the Lincoln Institute of Land Policy and Professor Emeritus of Public Affairs and Applied Economics at the University of Wisconsin-Madison
What state and local tax instruments are most fair? Least fair?
Fairness is obviously a subjective matter. Economists often discuss fairness in terms of vertical equity. The starting point is calculating for each individual the amount of tax paid relative to his or her income. This ratio is often called a tax burden. A tax instrument that imposes higher burdens on individuals with low incomes relative to those with higher incomes is called a regressive tax and is considered by many people to be an unfair tax. In the U.S., state and local governments rely on several taxes: the individual income tax, a corporation income tax, a general sales tax, taxes on specific items, such alcohol or tobacco, and the property tax. Exactly how regressive (or progressive -- higher burdens on high-income taxpayers) a tax is depends on characteristics of the tax. Do different people pay different rates? Are certain people treated favorably? Are certain goods or services exempt from taxation?
The detailed characteristics of each tax instrument vary quite substantially across states. However, one can make a few broad statements. Individual and corporation income taxes are generally the most progressive taxes state and local governments use. General and selective sales taxes tend to be the most regressive form of taxation, especially if the purchase of necessities, e.g., food, are not exempt from taxation. Determining the progressivity of the property tax is complicated, and the experts do not all agree. One difficult issue is the extent to which landlords can pass on property tax increases to their tenants.
Another question that is subject to debate is who actually feels the burden of property taxes paid by businesses. Is it the business owners, or is it workers who end up with lower wages, or households who end up facing higher prices? Finally, it is likely that the property tax burden on homeowners may be somewhat regressive. However, some states provide low-income homeowners, and especially the elderly, with tax credits or exemptions. The result of these provisions is to increase the fairness of the property tax. For an analysis of state and local tax fairness in the 50 states, see the Institute of Taxation and Economic Policy’s “Who Pays? A Distributional Analysis of the Tax Systems in all 50 States.”
What’s the relationship between state tax burden and economic growth?
This is obviously a complex and controversial topic. The weight of the evidence is that there is no simple or direct relationship between the level of state taxes and the rate of economic growth. In the period since the Great Recession, some of the states that have had the strongest economies also have quite high tax burdens. It is important to remember that rates of taxation are only one of many factors that influence economic growth, and simple correlations between tax burdens and state growth rates don’t tell us anything about whether lower taxes cause states to grow faster.
One interesting example comes from Kansas, where Governor Brownback convinced the state legislature that cutting income taxes would spur so much economic growth that state revenues would not fall. History proved him wrong. In the period following the tax cuts, the Kansas economy grew at a rate below the national average and below the rates of growth in neighboring states. State revenues fell dramatically, and recently, the legislature voted to increase state taxes in order to prevent continued sharp cuts in state services, especially public education.
Should states and localities tax property at different marginal rates like income?
The short answer is that to operate an efficient property tax system, local governments should tax all property owners within their jurisdiction at the same tax (millage) rate. In some states, however, local governments are allowed to tax business (commercial and industrial) properties at a higher rate than residential properties. If the rate on business property is too high, businesses may choose to move to other lower-tax locations. States that would like to provide property tax relief to low-income households who face high property tax burdens often create “circuit breaker” systems. These systems provide taxpayers facing high burdens with a tax credit that lowers the effective tax rate that these taxpayers face. Other states exempt a fixed amount of property value from taxation. These exemptions obviously reduce tax burdens by a larger percentage amount for those taxpayers with low-value houses as compared to those owning high-value houses.
What makes some state and local taxes systems better able to weather economic downturns?
In general, revenue from each type of tax will grow when its tax base grows and fall when its tax base shrinks. Thus, revenue from corporate income (profit) taxes tend to grow during periods of economic prosperity, but to fall dramatically during recessions. Individual income taxes also follow this type of cyclical pattern, with revenue growing when the local economy is strong and revenues falling when the economy is weak. Sales tax revenue also fluctuates with the economy, although the revenue swings tend to be more muted because households tend to increase their rate of savings during boom periods and then use some of their savings to finance purchases during economic slumps. Of all the major state and local government taxes, revenue from the property tax is the most stable over the business cycle.
Although house prices and the value of business property tends to grow during periods of economic growth and decline or remain stable during economic downturns, the property tax differs from all the other taxes because its rate is set each year by local governments. This contrasts with state and local income and sales tax rates, which are adjusted only infrequently. The evidence shows that local property tax revenues grow at a much lower rate than the growth of the property tax base during boom periods. The same pattern holds during economic downturns -- when property tax value declines, property tax revenues also decline, but at a much lower rate than the decline in property values. This relative stability of property tax revenues occurs because property tax rates come down in periods of economic growth and rates are increased during economic downturns.
These changing patterns of tax revenue do not mean that state and local governments should turn away from the use of pro-cyclical tax revenue instruments, such as the corporate or individual income tax. Rather, the lesson state and local governments should take is that it is important that they use some portion of their revenue growth during boom periods to finance fund balances and rainy-day funds. If they have adequate fiscal reserves when the next recession occurs, they will be able to prevent or at least reduce the sharp cuts in public services that occurred in many state and local governments after the Great Recession.
Oskar Harmon Associate Professor of Economics at the University of Connecticut
What state and local tax instruments are most fair? Least fair?
Most fair is the income tax and least fair are sales and property taxes.
The income tax is based on ability to pay and is closely related to adjusted gross income on the federal personal income tax form. It is less prone to measurement error due to vigilant enforcement, and uniform reporting standards. Whereas the sales and property taxes are based on spending and wealth, respectively, which are not as directly related to ability to pay and are prone to measurement error. Sales taxes are regressive, but that is mitigated to the extent that there are exemptions for items that are a disproportionately high share of lower-income household’s budgets. Property taxes that can be regressive for selected groups like veterans, seniors, disabled, but can be mitigated by exemptions.
What’s the relationship between state tax burden and economic growth?
Not so clear-cut. If economic activity is high, tax collections are rising and tax burden does not receive the same attention as it does when economic activity is low. Most important is how the state’s tax burden compares to neighboring states and to states with comparable economic structures.
Should states and localities tax property at different marginal rates like income?
Yes. The role of different marginal rates is to influence the location of economic activity and encourage economic development.
What makes some state and local taxes systems better able to weather economic downturns?
States with greater reliance on taxes and fees are less sensitive to fluctuations in personal income and have revenue systems that are more stable over the course of the business cycle.
Andrew Downs Associate Professor in the Department of Political Science at Indiana University-Purdue University Fort Wayne
Should states and localities tax property at different marginal rates like income?
The easy answers to this question are “yes” and “no.” Having different marginal rates is appealing for several reasons, not the least of which is the belief that people are paying according to their ability to pay. A flat tax structure also is appealing for several reasons, not the least of which is the simplicity of it. Of course, the real answer is not this simple.
State and local governments have a number of tools at their disposal that can lower property tax burdens without having different marginal rates. They can allow for deductions and exemptions and they can grant tax abatements. These tools can be targeted. That allows states and local governments to achieve at least two things. They can use property tax relief in their economic development strategy and they can allow for relief for those who have less ability to pay.
When state and local governments are making decisions about what rate, or rates, to levy, and what deductions, exemptions, and abatements to allow, they should include an analysis of how much it will cost to administer the tax system. The more complicated the system, the more resources it will consume to administer.
In the end, what state and local governments should want is for property values in general to be growing. When they are growing, it may be possible to reduce property tax rates for everyone regardless of the marginal rates.
What makes some state and local tax systems better able to weather economic downturns?
Three important components of a tax system that can weather economic downturns are diversification of revenue, stability of the revenue streams, and keeping a watchful eye on indicators.
Governments that become overly reliant on one or two taxes run the risk of having revenue problems when those sources face a downturn. In the case of local governments, over-reliance may be due to state laws that limit the ability of local governments to levy a variety of taxes.
One of the taxes that state and local governments rely on heavily is property tax. They do this because it can be very stable when compared to other taxes. For example, if a person’s income declines, that person may choose to spend less money, which means less sales tax revenue. At the same time, unless the decline in income is severe, that person is likely to continue to make property tax payments because housing is essential.
State and local governments create annual or biannual budgets. The revenue estimates that are used can change dramatically over the lifetime of the budget. It is imperative that governments monitor indicators so that they can adjust spending sooner rather than later as a way to weather economic downturns.
Diversification, stability of revenue streams, and monitoring indicators are important for weathering downturns in the economy, but just as important is having an economic base that is not overly reliant on one industry and having a quality of life that attracts people.
Lonce Bailey Assistant Professor of Political Science at Shippensburg University
What state and local tax instruments are most fair? Least fair?
It depends a bit on what you mean by "fairness." When we talk about tax fairness, we typically talk about two types: horizontal fairness and vertical fairness. Horizontal fairness is the idea that people in similar circumstances pay the same. If you live in a housing development and your house is essentially the same as your neighbor’s, then you should pay the same property tax. That would be horizontally fair. Vertical fairness is that people with different circumstances pay differently. If one person makes a million dollars a year and one 50 thousand a year, they should pay a different income tax rate. That is why in terms of income, the federal government has a "progressive" tax. Wealthier people pay a higher rate.
And these two ideas of fairness can compete. You might have the same house as your neighbor and horizontal fairness says you should pay the same tax on that house. But if one person is a retired person living on a small pension and the other is the owner of the local bank, that tax might be horizontally fair but it is vertically unfair in that the tax burden is heavier on the retiree. Sales tax is horizontally fair -- the sales tax I pay on a new TV from Target is the same for Warren Buffet buying the same TV, but it is vertically unfair (or regressive) in that the burden of that tax is greater on me than on Mr. Buffet.
So, it depends on which kind of fairness you prefer. Progressive income taxes are perceived by many as being more fair, but are more complicated and messy. Americans in general are attracted to horizontal fairness like a flat tax sales tax because it seems simpler and more understandable and there is an attachment to American individualism that says that we should all pay the same and not penalize wealthier people. "They worked hard for their money so why should they pay more. And, besides, maybe I will be rich one day too and I wouldn't want to pay that."
Property tax is perhaps the most hated tax. This partially has to do with the fact that the government has to assess your property and that creates conflict and tension. But it also has to do with the fact that the tax is very direct and typically large. You pay it every month or quarter and you pay it directly by writing a check (as opposed to income tax or sales tax). But also, people's economic circumstances can change very quickly (we call that elasticity) but the value of the property rarely changes quickly. You might get fired, become disabled, retire, have a spouse die and that significantly changes your income but you still pay the same property tax on the property (the value of it does not change very much, it is not elastic). In this way, we have circumstances where people get taxed out of their house. They bought their house 30 years ago for 75K but now the house is worth 500K and they have now retired. They probably can't afford the tax on it any longer.
What’s the relationship between state tax burden and economic growth?
The main idea is, does a tax burden on a person or business affect their interaction with economy either positively or negatively. While it is true that tax burden on a person has an impact, it is typically exaggerated. Stability of tax systems, many would argue, is more important to a business. Knowing the tax conditions so businesses can make confident decisions is important. If you look at ten of the biggest federal tax increases in the U.S. in the 20th century, they were quickly followed by a long-time surge in the stock market. It doesn't necessarily argue for causation, but the idea that there is a strong correlation and that increased burden always leads to economic downturn is suspect. There are tax limits you could hit if the burden is enough. If the burden gets too big, individuals sometimes increase the energy they take to avoid those taxes either through financial manipulation (i.e., hire an account or lawyer to help lower your taxes) or try to do your transactions on the black market.
Should states and localities tax property at different marginal rates like income?
There have been some proposals for this and other types of property tax reform. This type of reform would essentially focus on vertical fairness over horizontal fairness. That is, we would tax people's property based on income, not on the value of the house. This would be a relatively radical reform but assessing people's income is probably easier and perceived as more fair than assessing their house. At the end of the day, the government needs a certain amount of money to deliver services, so either way, they would need to get similar amounts of revenue. Marginal rates would simply distribute the burden based on earnings under that model.
What makes some state and local taxes systems better able to weather economic downturns?
For the most part, this has to do with the nature of the tax. There are different ways to look at this, but elasticity is one main way. Elasticity refers to whether or not the tax varies much based on economic conditions. Property tax does not change much and, if it does, it typically is slow. Income tax is elastic, so it can change based on changes in unemployment rate, retirements, closing of businesses, etc. Sales tax is sort of in the middle. It can change -- however, people need to buy things regardless of the economy but they might not buy expensive things, and then necessities like food are usually exempt from taxation. Also, how you tax it can matter. If you tax gas at 5 cents a gallon, the tax you get from it won't really change based on the economy (maybe some because people drive less), but if you charge a 5 percent tax on gas, that can go up and down wildly based on gas prices.
States that have less elastic systems or that have more diverse systems would, theoretically, weather economic downturns better. It is perhaps better to ask which types of state and local budgets or finances weather economic downturn better, rather than which taxes.
MethodologyIn order to determine the states that tax their residents the most and least aggressively, WalletHub compared the 50 states across the following three tax burdens and added the results to obtain the overall tax burden for each state:
- Property Tax as a Share of Personal Income
- Individual Income Tax as a Share of Personal Income
- Total Sales & Excise Tax as a Share of Personal Income
Sources: Data used to create this ranking were collected from the Tax Policy Center.
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