2015’s Best & Worst States to be a Taxpayer

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by John S Kiernan

The average American household pays roughly $17,000 in federal income taxes each year. And while we’re all faced with the same burden in that regard, there is significant disparity when it comes to state and local taxes. For example, taxpayers in the most expensive states spend three-times more to meet their civic burden than those in the cheapest states.

As you might expect, differences in state tax obligations – as well as the services for which funds are used – can have an impact on populous migration and thus the strength of local economies. Such trends are clearly evidenced at the top of the socioeconomic totem pole, with professional athletes, for example, often taking up residence in Florida or Texas for the tax break. And while academic research shows state and local taxes to have a negligible impact on overall population movement, one has to conclude that it makes a distinct difference on the individual household level.

It’s therefore fair to wonder: Which states have the most and least burdensome taxes?

In search of answers, WalletHub analyzed how state and local tax rates compare to the national average in the 50 states as well as the District of Columbia. For example, we calculated relative income tax obligations by applying the average American’s income to the effective income taxes rate in each state and locality. This approach differs from our report on the Best States to Be Rich & Poor from a Tax Perspective, which considers tax obligations relative to the average income in each state.

More information about our findings and the methodology we used to conduct this report can be found below. Make sure to also check out our Ask the Experts section for state and local tax insights from a panel of leading minds in the field.

Main Findings

Red States vs. Blue States

Detailed Findings

Ask the Experts:  Best Tax Advice

For more insights into the impact state and local taxes have on populous migration as well as public policy, we turned to a panel of leading taxation and policy experts from colleges and universities across the country. 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 financial crisis?

• Cathy Duffy Assistant Professor of Accounting and Finance at Carthage College
• Heidi Hylton Meier Professor of Accounting at Cleveland State University
• Hughlene Burton Associate Professor of Accounting at University of North Carolina at Charlotte, Belk College of Business
• Casey Martin Schwab Assistant Professor of Accounting at University of Georgia, Terry College of Business
• Haim Mozes Professor of Accounting at Fordham University Gabelli School of Business
• Tim Gagnon Professor of Taxation and Faculty Director of the Online MST Program at Northeastern University
• Arnold L. Berman Professor of Accounting at Pace University
• Ge Bai Assistant Professor of Accounting at Washington and Lee University, Williams School of Commerce, Economics, and Politics
• Linda McKissack Beale Professor of Law at Wayne State University
• Vada Lindsey Associate Professor of Law and Associate Dean for Enrollment, Marquette University Law School

Cathy Duffy

Assistant Professor of Accounting and Finance at Carthage College

Do people consider taxes when deciding where to live? Should they?

I think most homeowners consider property taxes in deciding where to live, but beyond that, probably not so much. Yes, people should consider all of the taxes when deciding where to move - local income and sales taxes can really increase the cost of living.

How can state/local tax policy be used to attract new residents and stimulate growth?

Of course it would be great to say reduce taxes, but with reduced taxes come reduced public services. In terms of attracting new residents, perhaps special financing opportunities could be available to home owners and even renters.

Which states have particularly complicated tax rules for families?

I am not familiar with most states, but I do know that Wisconsin is relatively complicated (thank goodness for TurboTax) compared to Illinois.

How has the total amount families pay in state and local taxes changed as a result of the financial crisis?

I think states are cutting income tax rates but then add more sale and use taxes. The sales and use taxes tend to hit the low and middle income tax payers harder and therefore make the income gap wider. There is a lot of talk at the state level of cutting income tax rates, but as Kansas has proven, this doesn't help anyone in the long run.

Heidi Hylton Meier

Professor of Accounting at Cleveland State University

Do people consider taxes when deciding where to live? Should they?

I would say that for the most part, the answer is no. In my dealings with college graduates (almost all accounting and business students), when they receive job offers, that is rarely a consideration for them in accepting new employment, and many are attracted to areas with the highest taxes. However, on the other end of the spectrum, as many of my acquaintances are starting to retire, I would say that many of them do consider taxes as one determinant of where to live.

Should it be a consideration? Absolutely. However, what I also find is that even those people who do consider taxes, they do not look at the whole picture. In other words, income taxes are important, but that is only one tax and in many states/local areas that do not have income taxes, the property taxes make up for the revenue to the government and must be considered. So, in other words, people need to analyze their whole tax obligation, and that includes sales taxes, too. For example, currently in Pennsylvania, there is no sales tax on clothing or shoes, which can be a substantial savings.

How can state/local tax policy be used to attract new residents and stimulate growth?

Tax policy has long been used to attract businesses into targeted areas and to successfully stimulate economic growth. These models utilizing tax abatements and credits for businesses could be adapted for individuals -- it just seems that governments are more focused on attracting and retaining businesses rather than residents.

Hughlene Burton

Associate Professor of Accounting at University of North Carolina at Charlotte, Belk College of Business

Do people consider taxes when deciding where to live? Should they?

Most people do not consider taxes when they are deciding where to live. They usually are looking at neighborhoods, schools and other activities that are nearby. They should consider taxes. However, they need to consider income taxes, property taxes and sales taxes and most people don’t understand all of the taxes they have to pay. If they consider all of these taxes, they may be able to either afford a larger house or just have more spendable money.

For example, if you are moving to Charlotte to work, if you live in Union county you will pay considerably less in property taxes than if you live in Mecklenburg County and you are not that far away from the center of the city.

How can state/local tax policy be used to attract new residents and stimulate growth?

It is really hard to use tax policy to attract new residents because it is not good policy to give some individuals a break while not giving the current residents the same break, and if you reduce the tax rate for everyone then services will go down and new residents will not want to come. That is why you usually see state and local governments using tax policy to attract new corporations which hopefully will bring new jobs and residents to the area.

Which states have particularly complicated tax rules for families?

California has the most complicated tax system for everyone. New York is also very complicated.

How has the total amount families pay in state and local taxes changed as a result of the financial crisis?

The amount has gone down as family income has decreased. Because taxable income has gone down, the amount of income tax collected by the state went down. In addition, because families had less to spend, the amount of sales tax collected went down since the families just didn’t buy as much. That is why you see many areas increasing what they charge sales tax on and the rate of tax they assess.

Casey Martin Schwab

Assistant Professor of Accounting at University of Georgia, Terry College of Business

Do people consider taxes when deciding where to live? Should they?

Taxes are generally not the primary determinant of where a taxpayer chooses to live. However, ignoring state and local taxes can substantially reduce an individual’s after-tax income. For example, taxpayers living in Texas do not pay state income taxes while taxpayers living in New York City are subject to substantial state and city income taxes. Taxpayers also need to consider property, sales and various other forms of taxes.

Individuals are most likely to take taxes into account when there is substantial variation in taxes within a close geographic proximity. Living on a state border often creates such variation. For example, although the linked document is not current, it displays variation in taxes across state lines. There is often substantial variation in income taxes, sales taxes, property taxes and even excise taxes (e.g., alcohol, cigarettes, etc.) across county and state borders.

How can state/local tax policy be used to attract new residents and stimulate growth?

In general, lower corporate state taxes make it less expensive for a company to operate within the state, which entices corporations to shift operations to that state. Similarly, lower individual state taxes make it less expensive for sole proprietorships and partnerships to operate. Lower individual taxes also make it less expensive for an individual to live in that state because the individual is left with higher levels of after-tax income and, presumably, greater after-tax purchasing power.

Note this discussion focuses exclusively on explicit taxes (e.g., taxes paid directly to a taxing authority). As more businesses move to a state to take advantage of the tax savings, implicit taxes can occur. From a business standpoint, if lower explicit taxes stimulate growth, the increased demand for productive inputs (e.g., labor, raw materials, etc.) can increase the cost of those inputs and lower firms’ pre-tax profits (or rates of return). Implicit taxes equal the reduction in the pre-tax return and, in the long run, often offset many of the benefits of lower explicit taxes. As a basic example to illustrate this point, if businesses move to a state in response to lower explicit taxes, there will be increased demand for the current labor force which will drive up labor costs (i.e., people get paid more as more companies compete for their services). Those increased labor costs can reduce a firm’s pre-tax profits (which is the definition of an implicit tax).

How has the total amount families pay in state and local taxes changed as a result of the financial crisis?

My response is a conjecture and not based on hard data. Given the financial crisis resulted in lower real property values, many families have lower property tax bills (assuming tax rates have stayed the same). Due to many states’ tax revenue shortfalls, I know some states have increased state income tax rates which will increase a family’s tax bill. I do not know if there have been many changes to state and local property tax rates, sales tax rates, excise tax rates, etc.

Haim Mozes

Professor of Accounting at Fordham University Gabelli School of Business

Do people consider taxes when deciding where to live? Should they?

People do not particularly like paying state income taxes. One of the reasons that Florida is so popular with retirees (besides the great weather 9 out of 12 months) is that there is no state income tax. Basically, if you have $250,000 taxable income, living in Florida gives you about $10,000 more after tax-dollars than living in New York. That savings is basically enough to pay the mortgage on a modest Florida retirement home! Financial-type high net worth individuals are also increasingly looking to establish their legal residence in Florida and Texas. A growing number of hedge funds list Florida as their place of business.

How can state/local tax policy be used to attract new residents and stimulate growth?

Here is a simple example: If I were governor of Michigan, I would suggest a bill that whoever moves into Detroit is exempt from Michigan state tax for 20 years. Likewise, Puerto Rico is providing strong tax incentives for investors to consider moving there. Among the wealthy investors attracted is John Paulson.

Which states have particularly complicated tax rules for families?

A recent report ranks states by tax complexity. Not surprisingly, New York State ranks near the top of this list (most complex).

How has the total amount families pay in state and local taxes changed as a result of the financial crisis?

States can raise money by raising taxes, by charging higher fees for services, or by providing less services. For example, public colleges can raise tuition, public transportation fares can increase, bridge and highway tolls can rise, public school funding can be reduced thereby leaving more costs for parents to pick up, parking ticket fines can double, etc. While tax rates have not increased too much, various revenue grabs have gotten more aggressive, and services and aid have been reduced. In sum, families are paying more and getting less in return.

Tim Gagnon

Professor of Taxation and Faculty Director of the Online MST Program at Northeastern University

Do people consider taxes when deciding where to live? Should they?

Most people do not use tax as the major decision for where they live for the large moves. But within a general area, the property taxes and state income taxes can be an issue. For example the MA vs. NH house location for people working in the Boston area and north of Boston is a consideration; since the commute is doable but the state income tax is extremely different (remembering that any income earned in MA still has MA income tax). Or the choice of a house in one town or another could be dependent on local property taxes — I can be close to the town border but pay less. I am not sure that taxes should be the biggest part of the decision — schools, location or commute may be bigger issues.

How can state/local tax policy be used to attract new residents and stimulate growth?

Policy can be used to make a "tax friendly" environment in the local property tax rates, income tax rates or even death taxes for residents. Reducing or capping increases can make the location attractive to residents and ultimately businesses, since employee satisfaction can affect work satisfaction and ultimately employee turnover.

Also, happy residents mean more local businesses to support the residents and "friendly" tax environments mean more willingness to open businesses which may attract business from other locations and willingness to relocate to the area.

Which states have particularly complicated tax rules for families?

Every taxpayer tells me their locality's tax rules are confusing and complicated so I am not sure which states are worst.

How has the total amount families pay in state and local taxes changed as a result of the financial crisis?

The property taxes have not reduced and may have been raised (by overrides) to accommodate the reduction in values. Income taxes receipts go up and down based on the economy but the needs for additional revenues appear to change as basic needs are met by the state and local governments.

Arnold L. Berman

Professor of Accounting at Pace University

Do people consider taxes when deciding where to live? Should they?

Your perception that people make state choices based, in part, on tax issues is accurate. This accounts for a lot of individuals moving to Washington, Florida and Nevada and New Hampshire. In reality however, there is a lot of misinformation which tends to confuse a number of individuals.

For example, someone who’s income consists primarily of NYS Pensions will find that (except for the non-taxing states mentioned above), New York is the most favorable income tax state for them.

We are asked all the time to compare the NYS Tax with that of the surrounding states, as well as how much would be “saved” by moving to, say Florida. The bottom line for me is that unless people have a lot of income subject to tax, quality of life is far more important than a few dollars saved. And for individuals that have lots of money and lots of income, then state taxes are really a non-economic issue.

Your article can consider those states such as NY and CA that allow itemized deductions to reduce taxable income from those states, NJ, CT that for the most part are gross income states. There is also the issue that for taxpayers in the AMT, state taxes when paid are not deductible. And there are issues as to being in several states and avoiding residency status in one of them (the Derek Jeter situation.) I would also venture to say that it is not so much the state income tax that scares people from our area, it is the overall cost of living, real estate taxes etc.

Ge Bai

Assistant Professor of Accounting at Washington and Lee University, Williams School of Commerce, Economics, and Politics

Do people consider taxes when deciding where to live? Should they?

I believe they do and they should. Taxes determine the amount of disposal income for individual taxpayers. Just as people should consider income and intangible benefits to be received (e.g., quality of the school district etc.) when deciding where to live, they should also consider the cost of living there, one important factor of which is the amount of tax they will have to pay.

How can state/local tax policy be used to attract new residents and stimulate growth?

I am a believer of fiscal conservatism and supply-side economics. One good thing state/local governments can do to attract talented residents and simulate growth is to cut taxes, which will reduce the barrier and enhance the incentive for people to produce, innovate, and invest.

It is more beneficiary to leave wealth to individuals who have earned them than to the government, because individuals, in totality, process more skill and knowledge than governments, to determine how to best use their wealth. They will not let their wealth sit there doing nothing, instead, they will invest, expand, and innovate, which brings more jobs, wealth, and talented residents to the community. This virtuous circle will bring more tax revenues to the state/local government, not less.

Linda McKissack Beale

Professor of Law at Wayne State University

Do people consider taxes when deciding where to live? Should they?

For most Americans, the major factors determining where they live are where they get a job; how well the job pays; and what the schools and communities where they have job offers are like. Additional factors include what others say about quality of life in that city and state, and whether they have family and friends in that area.

Most people don’t decide where to live based on taxes, in part because they usually don’t have full information about complex state and local tax regimes or about the kinds of services paid for by those living in that state and local taxes. It is mainly the most affluent Americans in the top quintile of the income distribution, who have great flexibility in where they live and work, who can cherry-pick their state of residence for tax policies (and politicians) that are favorable to them.

Should they?

Probably not. Taxes do vary from state to state and locality to locality, but there are a wide range of types of taxes (state sales and excise taxes, business taxes, state and local income taxes, and property taxes, to name a few) that make any definitive comparison of one locale to another quite difficult. Reports about “average” taxes paid by a resident of a particular state are meaningless and less than useful in this regard, since averages include the extraordinarily high-income and those in poverty. Most can’t use those averages to understand how their particular situations might be affected.

How can state/local tax policy be used to attract new residents and stimulate growth?

The attempts to use state and local tax policy to “attract new residents and stimulate growth” — which lately seems to mean cutting taxes or offering tax breaks to particular industries - are likely to be unproductive. States like Kansas that tout large tax cuts frequently end up in dire budget situations where they do not have enough revenue coming in to pay for important infrastructure and education. People do notice when a state’s roads are full of potholes (just look at Michigan as an example) or when a state revenue gap results in prison overcrowding, cuts to schools and universities, and drastic reductions in the many other services on which citizens depend.

Which states have particularly complicated tax rules for families?

States that have refused to allow same-sex marriages create a complex tangle of tax and other rules that comprise a hurdle for same-sex couples living in the state. States that don’t even recognize same-sex marriages from other states make it even harder, especially if a married couple has adopted children: those families who were able to file joint state and federal tax returns in their prior residence now have to prepare separate state returns, among other burdens.

How has the total amount families pay in state and local taxes changed as a result of the financial crisis?

Workers in many families slipped out of employment for long periods of time or into much lower paying jobs than they had before the Great Recession. As a result, many states took in less tax revenue and had fewer resources to provide the broader safety net that was needed. This caused a spiral of less demand and further job losses.

In some states, such as Kansas, political groups successfully lobbied for tax cuts anyway -- even claiming that tax cuts would bring in more revenue and make the tax-cutting state better off. The benefit of those state tax cuts likely went to bigger businesses and individuals in the higher-income brackets, while most ordinary Americans suffered the loss of needed services and support during especially difficult times for families.

Vada Lindsey

Associate Professor of Law and Associate Dean for Enrollment, Marquette University Law School

Do people consider taxes when deciding where to live? Should they?

Undoubtedly, the level of state taxation is an important factor in determining where people choose to reside. If all things are equal, many people will choose to avoid paying high taxes. In making this determination, they must consider all types of taxes, including income, sales, property and estate taxes.

States with the highest state/local taxes have below average income from other sources. Conversely, many states with low levels of taxation derive a very large percentage of revenue from sources other than sales, income and property taxes. People must also understand that the level of taxation varies within a state. For example, property tax levels in states vary based on which city or county property is located. However, people must consider factors other than the level of taxation. For example, many retirees decide to move to warmer climates. Other people choose to live near relatives or they relocate based on job opportunities. People also consider the overall cost of living in a city or state, especially the cost of housing, and they must consider fees other than taxes, such as the cost of registering vehicles.

Should people consider the level of taxation in deciding where to live? While people should consider the level of taxation, there are other factors that are equally as important as taxes. These factors include the school system, distance to nearby cities, climate, jobs, proximity to an airport, cost of housing, access to good medical services, etc.

How can state/local tax policy be used to attract new residents and stimulate growth?

States need to be cautious in using tax policy to attract new residents and stimulate growth. Many states have attempted to spur economic development by using tax credits and property tax exemptions. There are limitations on the use of these types of incentives. For example, the businesses receiving these tax incentives may relocate prior to the state recouping the lost tax revenue. Indeed, there is plenty of empirical data establishing that states lose revenue when they use tax incentives to encourage businesses to relocate to the state because the businesses frequently relocate before the states can recoup a return on their investment.

Which states have particularly complicated tax rules for families?

The Supreme Court’s determination that the Defense to Marriage Act (DOMA) is unconstitutional complicates the tax rules for families in states that do not recognize same-sex marriages. While the case means that same-sex couples can file joint returns at the federal level, the couple won’t be able to file a joint return at the state level in the states that don’t recognize same-sex marriages. Other types of taxes are also impacted by the inconsistent treatment. For example, in the estate tax area, an unlimited marital deduction is allowed. Therefore, states that have an estate tax but don’t recognize same-sex marriages add complexity to families because there will be inconsistent treatment at the federal and state levels.

Methodology

The purpose of this report was to determine which states pay the highest and lowest tax amounts, as well as to see how each state compares to the national average. We based this comparison on four types of taxation.

1. Real Estate Tax: Median Real Estate Tax Amount Paid / Median Home Price for each state. We than used the rates in order to obtain the dollar amount paid as real estate tax for a house worth $173,200 – the median value for a home in U.S. (State Level)
2. Vehicle Property Tax: Based on an examination of data pertaining to cities and counties comprising 50%+ of the state’s population and extrapolated this to the state level using weighted averages based on population size. Calculations assume ownership of 2014’s highest-selling car: the 2015 Toyota Camry L four-door sedan ($22,970)
3. Income Tax:
   • Calculated using the percentage of income spent on income tax from WalletHub’s Best States to Be Rich or Poor from a Tax Perspective report (middle income rate).
   • Income Amount Used: $52,551 (Mean Third Quintile Household Income)
4. Sales & Excise Tax:
   • Calculated using the percentage of income spent on sales & excise taxes from WalletHub’s Best States to Be Rich or Poor from a Tax Perspective report (middle income rate).
   • Income Amount Used: $52,551 (Mean Third Quintile Household Income)

Sources: The data used in this report is courtesy of the U.S. Census Bureau, the Tax Foundation, the Federation of Tax Administrators, the American Petroleum Institute, the National Automobile Dealers Association, each state’s Department of Motor Vehicles and WalletHub research.