States with the Highest and Lowest Taxes
"Location, location, location" applies to more than housing. Where you live can help or hinder your ability to make ends meet.
"It depends on demographics and individual circumstances," says Walter Molony of the National Association of Realtors. "For those relocating for a job, the job is the deciding factor. However, taxes would possibly have some influence on your choice when you're retiring."
A myriad of taxes -- property, license, state and local sales, property, inheritance, estate and excise taxes on gasoline -- eat away at your disposable income. Weighing the tax landscape against your financial picture lets you stretch your dollars.
The biggest tax ticket citizens face after paying the Internal Revenue Service is the one their state presents. Forty-one states and the District of Columbia levy a personal income tax.
A comparison of 2012 tax rates compiled by the Federation of Tax Administrators ranks Hawaii as the top taxer with an 11 percent maximum state income tax rate. Second-place California's top rate hits 9.3 percent, unless you make more than $1 million and have to pay 10.3 percent.
Each of these states has a personal income tax floor, deductions, exemptions, credits and varying definitions of taxable income that determine what a citizen actually pays. The 10 highest income tax states on the FTA's 2012 list were:
- California 13.3%
- Hawaii 11.0%
- New Jersey 8.97%
- Vermont 8.95%
- Iowa 8.98%
- New York 8.82%
- Minnesota 7.85%
- North Carolina 7.75%
- Wisconsin 7.75%
- South Carolina 7.0%
Only seven states have no personal income tax:
- South Dakota
Tennessee and New Hampshire limit their tax to interest and dividend income, not income from wages.
Among the states that tax income, Pennsylvania's 3.07 percent flat tax ranks the Keystone State as the tenth lowest in the nation, according to the FTA's 2012 list.
Low personal income tax rates can be misleading; a lack of exemptions and deductions can raise the effective rate you pay. The Retirement Living Information Center says figuring your total tax burden, including sales and property taxes, gives you a more accurate reading on affordability.
"If you're on a fixed income, property taxes become a factor," says the NAR's Molony.
Property tax falls under local, not state, jurisdiction. The most expensive property tax counties in terms of percent of income, according to the Tax Foundation's analysis of the U.S. Census Bureau's 2009 American Community Survey were:
- Passaic County, New Jersey 8.79%
- Essex County, New Jersey 8.27%
- Union County, New Jersey 8.13%
These Louisiana parishes hold the least expensive spots for property tax as a percent of income:
- Grant Parish 0.26%
- Assumption Parish 0.26%
- Vernon Parish 0.25%
If you're a consumer, you'll want to consider that all but five states -- Oregon, New Hampshire, Montana, Delaware and Alaska -- rely on sales tax for revenue. Of these, Alaska also has no income tax, thanks to the severance tax it levies on oil and natural gas production. However, 37 states, including sales-tax-free Alaska and Montana, allow local municipalities to impose a sales tax, which can add up.
Tuba City, Arizona has the distinction of most expensive sales tax city in the country, a 13.725 percent combined state, county and To'Nanees'Dizi tribal rate, according to a Tax Foundation 2012 analysis.
The top five highest total sales tax states as ranked by the Tax Foundation for 2012 were (combination of state and average local sales tax):
- Tennessee 9.44%
- Arkansas 9.18%
- Louisiana 8.89%
- Washington 8.87%
- Oklahoma 8.72%
Residents of these states pay the least in sales taxes overall:
- Hawaii 4.35%
- Alaska 1.69%
- Oregon 0%
- Delaware 0%
- Montana 0%
The Tax Foundation interprets individual tax burden by what taxpayers actually spend in local and state taxes, rather than report these expenses from the state revenue perspective used by the Census Bureau. Its State and Local Tax Burden Rankings study reported that Americans paid an average rate of 9.9 percent in state and local taxes in 2010. According to the foundation, the five highest state-local tax states were:
- New York 12.8 %
- New Jersey 12.4%
- Connecticut 12.3%
- California 11.2%
- Wisconsin 11.1%
The same states have ranked as the top three consistently since 2005, according to the foundation. "Lots of people want to relocate for lifestyle issues," says Molony. "Some seek a nicer climate. If all things are equal between climate choices, the tax situation becomes an area worth exploring."