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 about the most common mistakes and the best ways to correct them. We also asked state representatives to comment on our rankings. You can click on their pictures to see their responses below.
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.
The tax dispute resolution system in California is abysmal. The only pre-payment option if to appeal to the State Board of Equalization which is an elected body with little tax expertise. The Board’s lack of published decisions results in the absence of any public guidance with respect to the interpretation of California’s tax provisions.
The system evolved out of a patchwork tax legislation and has been criticized by every commission and legislative panel to examine the California system going back to the 1920’s. The political influence of the Board’s elected politicians and lobbying efforts by connected law and accounting firms who benefit from practice before the Board has stymied efforts to reform the system by the creation of a California Board of Tax Appeals.
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).
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.
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.