Best & Worst States to be a Taxpayer

by John S Kiernan

WH-2014-Best-States-to-be-a-TaxpayerEconomic 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.

Complete Rankings

 

Rank State Avg. Annual State & Local Taxes % Difference from National Avg. Adj. Rank (based on Cost of Living Index)
1 Wyoming $2365 -66% 1
2 Alaska $2791 -66% 4
3 Nevada $3370 -52% 2
4 Florida $3648 -48% 3
5 South Dakota $3766 -46% 5
6 Washington $3823 -45% 6
7 Texas $5193 -25% 7
8 Delaware $5195 -25% 12
9 North Dakota $5588 -20% 13
10 Colorado $5674 -19% 14
11 New Mexico $5822 -16% 8
12 Alabama $5846 -16% 9
13 Arizona $6057 -13% 17
14 Utah $6098 -13% 11
15 Mississippi $6210 -11% 10
16 Indiana $6358 -9% 15
17 Louisiana $6564 -6% 18
18 West Virginia $6598 -5% 19
19 Montana $6641 -5% 20
20 Oklahoma $6795 -2% 16
21 Massachusetts $6884 -1% 35
22 Rhode Island $6905 -1% 40
23 South Carolina $7070 1% 24
24 Missouri $7220 4% 22
25 Tennessee $7252 4% 21
26 Georgia $7319 5% 25
27 Virginia $7333 5% 29
28 New Hampshire $7419 6% 41
29 Hawaii $7427 7% 48
30 Kentucky $7472 7% 23
31 Arkansas $7557 8% 26
32 Ohio $7604 9% 28
33 Kansas $7695 10% 30
34 Idaho $7776 12% 27
35 North Carolina $7789 12% 32
36 Michigan $7867 13% 31
37 District of Columbia $8034 15% 46
38 Minnesota $8261 19% 36
39 Pennsylvania $8344 20% 34
40 Oregon $8416 21% 42
41 Maryland $8571 23% 44
42 Maine $8622 24% 43
43 Iowa $8788 26% 33
44 New Jersey $8830 27% 47
45 Vermont $8838 27% 45
46 Wisconsin $8975 29% 39
47 Illinois $9006 29% 38
48 Connecticut $9099 31% 49
49 Nebraska $9450 36% 37
50 California $9509 36% 50
51 New York $9718 39% 51

WalletHub Best Taxpayer States

Red States vs. Blue States

Red State Taxes vs Blue State Taxes

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.  Click on their picture to see their responses.

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Annette Nellen

San Jose State University
Annette Nellen
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.

Caroline Tso Chen

Santa Clara University School of Law
Caroline Tso Chen
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.

Orly Mazur

SMU Dedman School of Law
Orly Mazur
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).

David J Kautter

American University
David J Kautter
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.

Maureen J. Bruns

Carl H. Lindner College of Business, University of Cincinnati
Maureen J. Bruns
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.

Methodology

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:

Category Taxable Amount
Median house price

$174,600

Mean income before taxes

$65,596

Median car price/value

$17,547

Most sold car in the US 2013

Toyota Camry L 4D Sedan

Amount spent on item subject to sale tax*

$ 10,327

Amount spent on gas

$3,091 / 835.6 gallons

Amount spent on alcohol beverages**

$420 / 30.05 gallons beer

Amount spent on food

$3,910

Amount spent on telephone services

$1,383

 

*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.

Author
User
John Kiernan is Senior Writer & Editor at Evolution Finance. He graduated from the University of Maryland with a BA in Journalism, a minor in Sport Commerce & Culture,…
1301 Wallet Points
This cries out for a spreadsheet, particularly for those of us who are or soon will be retired.
Apr 30, 2014  •  Reply  •  Flag
Non-right-to-work states
Alaska
California
Colorado
Connecticut
Delaware
Hawaii
Illinois
Indiana
Kentucky
Maine
Maryland
Massachusetts
Michigan
Minnesota
Missouri
Montana
New Hampshire
New Jersey
New Mexico
New York
Ohio
Oregon
Pennsylvania
Rhode Island
Vermont
Washington
West Virginia
Wisconsin
Apr 21, 2014  •  Reply  •  Flag
@patrick_hughes_739: your analogy with the "plumber making prevailing wages" is shoddy. You are not including the Plumbers benefit package which is actually part of his compensation. I researched the plumbers and pipe fitters local 777 in Connecticut. This is $115,550.16 a year if (s)he works 2024 work hours. This doesn't include additional expenses by the employer (liability insurance, workman's compensation, vehicle costs and insurance (if the plumber has a company vehicle, and the employers portion read more
Apr 21, 2014  •  Reply  •  Flag
Thanks too Douglas47 this will go viral and take on a life of its own.
Apr 19, 2014  •  Reply  •  Flag
Definitely do another study and include unions. I suspect you will see a pattern of fiscally unhealthy economies, abject poverty, corruption, insane taxes and unions.
Apr 19, 2014  •  Reply  •  Flag
Douglas,

Do you have any thoughts of your own or are they the intellectual properties of your "Professor"? I noticed you mentioned unions (really they are a "business" and are there as "for profit". As such you enter into an agreement with them and they negotiate your wages, benefits, etc as part of the collective bargaining agreement with the employer(s) and now you the member pay dues for this service to the union or i.e. read more
Apr 19, 2014  •  Reply  •  Flag
My economics professor says the numbers in the column labeled " Avg. Annual State & Local Taxes" are not true averages. The "national average" is not a true average. Therefore all the calculations in the " % Difference from National Avg." Have no legitimate basis.

And since all these numbers are incorrect, there is no way to logically weight them on a cost of living index.

Strike three.
Mar 30, 2014  •  Reply  •  Flag
While the actual cost of living plays a major role in quality of life, I think I know what they are trying to accomplish in this report.
Where I live, we have a taxable "value", taxable "rate" and also a tax "multiplier" on real estate. These are put in place by local government to confuse the tax payer and keep things as difficult to understand as much as possible.
We have a two bedroom home with a read more
Mar 28, 2014  •  Reply  •  Flag
Washington is #6 with an average total state tax of $3800? On what planet?

I live in WA state and my property tax alone is $6800 for a house valued in the $500K range. And as anyone who lives in Seattle knows, $500K is nothing extravagant.

This data is 100% meaningless.
Mar 26, 2014  •  Reply (4)  •  Flag
@Jack_white_9638718 - Did you read the study?? They are comparing TAX RATES across states. Do you understand that in order to calculate a state's effective tax rate you need to make some assumptions of how much gets allocated to sales taxes, real estate taxes, etc.
Mar 26, 2014  •  Reply  •  Flag
David,

Do you realize your study "ranks" Nebraska as the third highest taxed state, while most legitimate studies rank them twentyfifth?

According to your study, as my right wing wack job web site is thrilled to point out:
" CA taxes 150% higher than Washington state’s — to what benefit?"

Technically, what your study says is that the "average taxpayer" in California, as defined by your profile, pays about 150% more (or 2 1\2 TIMES) what that "average read more
Mar 26, 2014  •  Reply  •  Flag
@Douglas47 - Buddy you do even realize that I have nothing to do with this study so no wonder why it is so hard for you to understand the results of the study. Different methodologies produce different results and I find this one as sound as any of the others. At the end of the day no methodology will be perfect. For example, how much did TaxFoundation and ITEP assume that people spend toward items read more
Mar 26, 2014  •  Reply  •  Flag
David,

No, I did not realize you had nothing to do with this study.

I received an email from Wallethub saying David responded to my comment. It closed with "regards, the Wallethub team"

So, yes, I assumed you were with Wallethub.

I clearly understand that different methodologies produce different results.

I thought I had answered the ITEP question. Their methodology is on page 129 of their latest report. I doubt you can access their raw numbers. It read more
Mar 26, 2014  •  Reply  •  Flag
Wallethub,

Please don't do another study like this next year.

You created way more heat than light.

Right wing wackos (mis)used your data to attack Democrats and unions.

And you can't, or won't, back up your methodology or correct the erroneous use of the results.

On the bright side, you did get tons of free publicity. Live with it.
Mar 25, 2014  •  Reply  •  Flag
From the actual Equality of Opportunity Report:
"In summary, we find that areas that provide more local public goods and larger tax credits for low income families tend to have higher levels of upward mobility. However, segregation and inequality are much stronger and more robust predictors of the variation in intergenerational mobility than differences in local tax and expenditure policies."
Mar 24, 2014  •  Reply  •  Flag
OK, this is even more dishonest than I thought.

The first paragraph of this article refers to an executive summary of a report by the Equality of Opportunity Project (you might even say it plagiarizes it).

http://obs.rc.fas.harvard.edu/chetty/website/v2/Geography%20Executive%20Summary%20and%20Memo%20January%202014.pdf

This article makes it sound like the Equality of Opportunity Project touted local taxes as some sort of major economic barrier.

Here is their tax findings: "We find modest correlations between upward mobility and local tax and government expenditure policies" read more
Mar 24, 2014  •  Reply  •  Flag
That methodology is terrible because you take the median nationwide income and then apply state specific statistics to it. The median household income in Mississippi is somewhere around $40,000/yr. The median income in somewhere like Maryland is $70,000/yr. Someone making $65000/yr in Mississippi is probably 85th percentile (upper middle class). If you aren't comparing state to state (apples to apples), the analysis is simply shoddy. If someone who works as say a plumber and makes read more
Mar 24, 2014  •  Reply (5)  •  Flag
@patrick_hughes_739:
Stay on their case. The misinformation is unbelievable, and going viral on the web. Once on the web it develops a life of its own. It will never die.
Mar 24, 2014  •  Reply  •  Flag
<a href='/profile/patrick_hughes_739/' rel="nofollow">@patrick_hughes_739</a> - They are comparing tax rates buddy!! Tax rates!! If you get paid less in another state it does NOT mean that tax rates are better!! Wow!
Mar 24, 2014  •  Reply  •  Flag
I don't know who you're responding to, David. But the media is NOT comparing tax rates. They are comparing tax BURDENS, and they are improperly describing them as "median" or "average" .

Which is NOT what this study measures. From FoxBusiness:

"The Big Apple is home to the most burdensome taxes. The average state and local taxes were $9,718 for New Yorkers, 39% higher than the national median.

$9,718 is Wallethub figure. 39% is Wallethub figure. but read more
Mar 25, 2014  •  Reply  •  Flag
Douglas47,

Are you a layed of union worker, or do you work for a union? Do you have any political affiliation with the Democratic Party?
Apr 21, 2014  •  Reply  •  Flag
@patrick_hughes_739: your analogy with the "plumber making prevailing wages" is shoddy. You are not including the Plumbers benefit package which is actually part of his compensation. I researched the plumbers and pipe fitters local 777 in Connecticut. This is $115,550.16 a year if (s)he works 2024 work hours. This doesn't include additional expenses by the employer (liability insurance, workman's compensation, vehicle costs and insurance (if the plumber has a company vehicle, and the employers portion read more
Apr 21, 2014  •  Reply  •  Flag
This statement is wrong - "Vehicle Property Tax (this metric only applies to VA & Conn.; data for those states is at the county level)" - Wyoming also has a significant property tax on cars, trucks, RVs (both powered and not).
Mar 23, 2014  •  Reply  •  Flag
http://www.yourerie.com/news/news-article/d/story/wallethub-report-best-worst-states-to-be-a-taxpaye/25413/KldaiCCLHkalopSaYwhc6Q

" The average family pays almost $7,000 in state and local taxes per year."

Oh dear lord in heaven, PLEASE read the methodology for this study.

The average family does NOT pay $7,000 in state and local taxes.

Those are the taxes allegedly paid by a SPECIFIC hand picked representative taxpayer.

One who makes about $66,000 a year

Has a house worth $174,000

A car worth about $17,000

And several other criteria listed on wallethub website.

....................
The TaxFoundation released read more
Mar 23, 2014  •  Reply  •  Flag
Detractors - check out the methodology before you gripe!
Mar 22, 2014  •  Reply (1)  •  Flag
@michael_ernest_798:

Yes, please. This report has been misinterpreted worldwide web wide.

It's like copy and paste without reading....or thinking.
Mar 23, 2014  •  Reply  •  Flag
Why is the Dallas Morning News highlighting the false claims made by your story?

http://bizbeatblog.dallasnews.com/2014/03/wallethub-state-by-state-tax-ranking-has-faulty-premise.html/
Mar 22, 2014  •  Reply (2)  •  Flag
The Dallas Morning News reporter did not do her homework. The quote that we used on the second paragraph of this report that they claim as false can be found at: http://obs.rc.fas.harvard.edu/chetty/website/IGE/Executive%20Summary.pdf
We will be contacting them to issue a correction. Thanks for bringing this to our attention.
Mar 22, 2014  •  Reply  •  Flag
Kate Rogers, Fox Business..

Didn't do her homework either.
Will you be contacting her for a correction, also?

I can give you a substantial list of websites that mangled your data.

It's like an internet boil. It won't go away. It will just keep growing until you lance it.
Mar 24, 2014  •  Reply  •  Flag
Douglas47 is correct. Why are the claims you posted so far out of alignment with groups like the Tax Foundation, etc.? The original data don't support your claims when they are evaluated based on total tax load, etc.

Will you be publishing a retraction?
Mar 22, 2014  •  Reply  •  Flag
PLEASE clarify your information. A local website headlined your story with the comment that the "average" Californian pays 150% more in state and local taxes than the average Washington state resident.

TaxFoundation, ITEP, and others show California about 10 to 12% higher in PER CAPITA tax

Please explain the huge discrepancy.
Mar 21, 2014  •  Reply (3)  •  Flag
@Douglas47: Please read the methodology and point us to a study that includes all of the same components and has come up with a significantly different conclusion. The Tax Foundation was actually one of the many sources we used.
Mar 22, 2014  •  Reply  •  Flag
First, your methodology is, I think, either misunderstood or ignored by MOST articles I have read. Usually "average" tax burden is virtually synonymous with "per capita" tax burden. Take the total amount of state and local taxes collected and divide by the states total population.

Your methodology, as I understand it, develops a profile of an "average" taxpayer nationwide, then determines what that person would pay in each state. This distinction seems lost in almost read more
Mar 22, 2014  •  Reply  •  Flag
@Douglas47: You are bringing up some excellent points but frankly your comments about certain articles having misunderstood the methodology of this study belong on those publications and not here. BTW, do you where can I see the raw numbers that ITEP used for each quantile (in terms of how much people spend on gas, food, etc.)?
Mar 23, 2014  •  Reply  •  Flag
Another reason too move too Indiana. Low taxes, good government, fiscal responsibility, great businesd climate, unmatched affordability and record job creation with personal happiness await you. Indianapolis is the largest US city with a Republican Mayor too.
Mar 21, 2014  •  Reply (1)  •  Flag
Actually, San Diego, #8 in population, is the largest US city w/ a Republican mayor
Mar 21, 2014  •  Reply  •  Flag
I wonder how these line up when it comes to the state’s financial stability
Mar 21, 2014  •  Reply  •  Flag
Ok, after a cursory glance I notice an error that makes one question the accuracy of this information. As someone who is from NJ but is currently living in VA, I specifically point to the section "35 States with No Tax on Food". Both NJ and VA are highlighted as not having food tax - well, this is quite inaccurate. While NJ doesn't have tax on unprepared food (or clothing items and things like paper read more
Mar 21, 2014  •  Reply (1)  •  Flag
@Thulani: Good catch! Our underlying data included a Food Tax for VA but when our graphic designer was working with this tiny map he highlighted the wrong state. The map is now updated.
Mar 22, 2014  •  Reply  •  Flag
Good analysis but you need to include taxes by businesses that are hidden as part of the price to consumer. For example in NYS the gas station pays property tax, etc. the gasoline distributor pays property tax, etc all part of cost but hidden in the price consumer pays. Utility companies pay property tax, etc. all part of their cost but hidden in price to consumers before they visibly show sales tax, gross rec. tax read more
Mar 21, 2014  •  Reply  •  Flag
"The Equality of Opportunity . . . found a significant correlation between both measures of mobility and local tax rates.” They found that local tax rates were positively related to mobility!
http://obs.rc.fas.harvard.edu/chetty/mobility_geo.pd
maybe because a lot of taxes go to schools.
So if you have high taxes, grin and bear it--it's good for the kids!
Mar 21, 2014  •  Reply  •  Flag
A quick note - MO should be lower ranked as the study omitted Missouri vehicle property tax (only includes vehicle property tax in CT and VA).
Mar 20, 2014  •  Reply  •  Flag
This is fine analysis for a base-line study. However, it should be noted that states like NY and CA will be much for the upper middle class and wealthy because these states are more progressive. For instance, a person making $65,596 (the income level used in the study) will face CA personal income tax of 9.3% but the top marginal tax bracket is 12.3%. It's hard to believe that NYS beat out CA. CA seems read more
Mar 19, 2014  •  Reply  •  Flag
I dislike having to defend my home state of Connecticut, where my state/local tax burden is about 20 percent. On balance, I believe that the red states are more dependent on Federal funds, as compared to the blue states. Last year, Governor Perry, of Texas, came to Connecticut to poach jobs. Mr. Perry was not bashful about his intentions. Mr. Perry bragged about his low taxes, but he forgot to mention that Connecticut only receives read more
Mar 18, 2014  •  Reply (2)  •  Flag
Now let me get this straight, Maryland being a dark blue state is not dependent on Federal funds. You better check your research as this state's economy is highly dependent on the Federal government for everything owing to it's proximity to DC. Perry came to MD too, and he wooed Beretta that is starting a new facility outside of MD. MD is a very business unfriendly state because of high taxes and out of control read more
Mar 23, 2014  •  Reply  •  Flag
@michael_ernest_798: Liberals always conveniently forget that the govt buys trillions of dollars worth of good/services from blue states as well. The millions of govt vehicles bought from Detroit doesn't technically count as federal funds since it's not a direct payment from the feds to the state. But it still works the same way. The federal govt provides billions of dollars to Michigan every year by buying cars, trucks and parts to service those cars and read more
Mar 26, 2014  •  Reply  •  Flag
Attributing the Seattle/Atlanta difference to different state and local tax rates is strange. From http://www.equality-of-opportunity.org/, 8 out of the 10 cities with the best chance to climb up the ladder have higher tax rates than Georgia. New York and California, the two states with the highest state and local taxes have 4 of the 8 cities where you're most likely to be able to move up the ladder. It's not clear if there is a read more
Mar 18, 2014  •  Reply  •  Flag