Best & Worst States to be a Taxpayer
Economic mobility – that is, our ability to climb the proverbial ladder – has a strong correlation to where we live. Children from Seattle whose families are in the 25th percentile in terms of income, for example, end up at roughly the same economic stature as kids from the median family in Atlanta.
Why? State and local taxes. At least that’s what a group of Harvard and Berkeley researchers collaborating on The Equality of Opportunity Project have to say. They “found a significant correlation between both measures of mobility and local tax rates.”
Want to know which states have the most and least burdensome tax rates?
WalletHub analyzed how state and local tax rates compare to the national median in the 50 states as well as the District of Columbia. We compared eight different types of taxation in order to determine: 1) Which states have the highest and lowest tax rates; 2) how those rates compare to the national median; 3) which states offer the best tax rates when adjusted by the cost-of-living index.
Our findings as well as information about the methodology we used to conduct this report can be found below.
|Rank||State||Avg. Annual State & Local Taxes||% Difference from National Avg.||Adj. Rank (based on Cost of Living Index)|
|37||District of Columbia||$8034||15%||46|
Red States vs. Blue States
Ask the Experts: Best Tax Advice
Mistakes are common come tax season. They’re expensive too. So, in order to help people avoid costly tax prep errors, we asked tax experts from around the country what the most common mistakes are as well as how we can correct them. You can check out their responses below.
“One mistake is not paying attention to all that is on your tax return and related documents. Many people just look at the line that says amount owed or refund, thinking that is their federal tax liability. They should look at the total tax line of their Form 1040 (line 61) to see their total tax. They should also look at their W-2 wage forms to see what additional taxes they paid for FICA and Medicare (boxes 4 and 6). The FICA and Medicare tax was matched by the employer, but in effect paid by the worker in the form of lower wages.
Take all of these federal income and payroll taxes and divide it by your taxable income to find your average tax rate. We often hear news stories about people with less than $50,000 of income not paying any tax, that usually is not true. Many of these individuals are wage earners and have at least paid payroll taxes of 15.3% (employee and employer share). Also, individuals pay federal excise taxes when they buy gasoline, alcohol, tobacco, airline tickets and a few other items. And, don't forget to look at what your state income and other state and local taxes are to get the full picture of what you contribute to funding government operations.”
- Annette Nellen, San Jose State University
“One of the biggest mistakes a taxpayer makes when having their return prepared by a paid return preparer is not look over and understand what has been reported on their returns. By signing the return, they are declaring under penalties of perjury that the return is true and correct.”
- Caroline Tso Chen, Santa Clara University School of Law
“One of the most common reasons why people overpay on their investment-related taxes is by failing to maximize the use of any capital losses they may have. Generally, if you have sold an investment at a loss, you should try to sell an appreciated investment at a gain so you can benefit from the loss this year. However, be sure to anticipate your tax rate in the following year because in some circumstances it might be better to defer taking your losses.
People also overpay on their investment-related taxes by unintentionally purchasing stock, selling it, and then re-purchasing it 30 days after the sale. This causes the ‘wash sale’ rules to apply which generally denies the taxpayer from claiming the loss. (This issue also arises if the taxpayer purchases substantially identical stock 30 days before the date of the sale of the stock that it holds).”
- Orly Mazur, SMU Dedman School of Law
“There are several common mistakes that result in the overpayment of investment related tax that come up with some regularity. The first is that money is not invested in a tax-deferred investment like an IRA or a 401k account, so it doesn't grow tax free. Related to these types of investments is another common mistake and that is the situation where even though money is initially invested in these types of accounts, that money is withdrawn prior to age 59 1/2. When that happens, not only is ordinary income tax due on the withdrawal, but taxpayers end up paying a 10% penalty tax for the early withdrawal.
A third common reason for overpayment of tax is that investors often buy taxable investments when tax-free investments, like municipal bonds, might result in a better rate of return once taxes are factored into the calculations.
A final common mistake that is often made is that capital assets are sold prior to the one-year holding period that entitles investors to reduced rates of tax.”
- David J Kautter, American University
“Individuals should understand the differences between ‘above the line’ and ‘below the line’ deductions. Above the line deductions are more advantageous because they reduce taxable income – the tax calculation base – while below the line deductions allow taxpayers to realize a savings based on their marginal tax rate.
In addition, many individuals do not realize that certain items touted as deductions (charitable contributions) are in fact only deductible if the taxpayer is eligible to itemize on their return.”
The purpose of this report was to determine which states pay the highest and lowest tax rates, as well as to see how each state compares to the national median. We based this comparison on eight types of taxation (see below), using the composition of the median national tax burden to construct a weighting system. That is, we analyzed national spending patterns and tax return data to determine a baseline national tax profile to which we could compare each state.
You can find a breakdown of the types of taxes that we compared as well as the baseline national tax payment profile that we used below.
- Real Estate Tax (this metric reflects the median real estate tax payment divided by the median house price – both at the state level)
- Income Tax – State (single filer, no deductions)
- Income Tax – Local (weighted average, by population, of all local tax rates within a state)
- Vehicle Property Tax (this metric only applies to VA & Conn.; data for those states is at the county level)
- Vehicle Sales Tax (this metric includes vehicle sales tax and registration fee; we used the Toyota Camry L 4D Sedan – the country’s top selling car – as a proxy)
- Sales & Use Tax (this metric includes state & local data for 2012)
- Fuel Tax
- Alcohol Tax (this metric includes state-level data for beer, which accounts for more than 80% of all nationwide alcohol sales)
- Food Tax
- Telecom Tax
Average American's Tax Profile Used for this Report:
|Median house price||
|Mean income before taxes||
|Median car price/value||
|Most sold car in the US 2013||
Toyota Camry L 4D Sedan
|Amount spent on item subject to sale tax*||
|Amount spent on gas||
$3,091 / 835.6 gallons
|Amount spent on alcohol beverages**||
$420 / 30.05 gallons beer
|Amount spent on food||
|Amount spent on telephone services||
*Food away from home, Housekeeping supplies, Household furnishings and equipment, Apparel and services, Vehicle maintenance and repairs, Medical supplies, Entertainment, Personal care products and services, Reading
**per capita 21 years and older
Sources: The data used in this report is courtesy of the U.S. Census Bureau, the Internal Revenue Service, The Tax Foundation, the Federation of Tax Administrators, the U.S. Bureau of Labor Statistics, the U.S. Energy Information Administration, the National Institute on Alcohol Abuse and Alcoholism, the American Petroleum Institute, the National Automobile Dealers Association, and local Revenue Departments from Virginia and Connecticut.