Death and taxes are the only two things that are certain in life, but when it comes to state taxes, it can get a little more complicated. Tax burdens vary widely by state, and tax burdens as a whole break down into many individual components.
Some consumers cross borders in search of the lowest taxes on big-ticket items, but taxation isn’t uniform on all goods. So where should you move (or shop) to pay the least in taxes?
Taxed to the Limit
There are two methods of evaluating state taxes. The United States Census Bureau calculates the amount of taxes collected, while the non-profit Tax Foundation in Washington, D.C. finds the tax burden on residents by calculating the total amount residents pay in taxes and dividing that number by the total per capita income in each state.
There is, of course, some overlap here. For example, Connecticut residents that work in New York City pay income tax to New York. The Census Bureau counts those taxes as New York state collections, but the Tax Foundation considers them part of the tax burden of Connecticut’s residents. Obviously, residents can easily cross state lines to avoid a sales tax, for example, so the following comparisons consider both tax burdens and collections.
Who Pays More?
According to the Tax Foundation, Americans paid on average 9.7 percent of their incomes in state and local taxes in 2008. But some Americans pay much more than others. Alaskans (6.4 percent) and Nevadans (6.6 percent), for example, are on the low end of the tax scale, whereas residents of New Jersey (11.8 percent), New York (11.7 percent), and Connecticut (11.1 percent) pay the highest taxes proportional to their income. In general, these numbers seem to be directly related to the amount of infrastructure in a given state, but how exactly do the numbers break down?
The Many Kinds of State Taxes
You have your sales tax, your fuel tax, your cigarette tax, your property tax, your income tax, your … need I go on?
States tax everything, and all these little deductions really add up. It’s a paycheck hemorrhage by a thousand cuts.
Alaska, Delaware, Montana, New Hampshire, and Oregon are the only states that don’t collect sales taxes on purchased items. Growing up in New York, a lot of my friends’ families would drive to New Hampshire for back-to-school shopping so they could avoid our state’s then 8 percent tax. Connecticut, Hawaii, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, Rhode Island, Vermont, Virginia, and West Virginia all have a single tax rate throughout the state, though most permit localities to add their own taxes to the base rate.
Most states will not tax prescription drugs. A few also exempt food and clothing, while still fewer won’t tax over-the-counter medicines.
The highest sales taxes in the country are in Tennessee (9.4 percent), Louisiana (8.7 percent), Washington (8.5 percent), and New York (8.25 percent). Colorado (2.9 percent) has the lowest sales tax of the states that do tax, although most Colorado cities and counties add to this rate.
All states tax gasoline, diesel fuel, and ethanol, in addition to the federal excise tax of 18.4 cents for gasoline and 24.4 cents for diesel. These taxes are meant to cover oil inspection fees, underground storage tank fees, and other miscellaneous environmental fees. Washington (36 percent), Wisconsin (30.9 percent), and North Carolina (29.9 percent) have the highest gasoline taxes, whereas Florida (4 percent), Georgia (7.5 percent), and Alaska (8 percent) have the lowest. There’s no real pattern to these numbers, since the fuel tax is determined by several variables, including maintenance costs, sales volume, the cost of fuel to state governments, and inflation. Localities can also add to the state fuel tax.
In addition to the federal tax of $1.01 a pack as of April 2009, state governments have used higher cigarette taxes to deter smoking and protect their citizens’ health, as well as to collect revenue. New York State taxes its residents $2.75 per pack, though New York City raises that number to $4.25 per pack. New Jersey ($2.56), Massachusetts ($2.51), and Rhode Island ($2.46) are also among the highest cigarette tax collectors. Taxes on cigarettes are now so high that they constitute about 82 percent of the cost of a pack of smokes.
Forty-one out of the fifty states—excluding Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming—tax income, although New Hampshire and Tennessee only tax income from interest and dividends. Most of the states that do tax income base their tax rates on federal returns, typically by taking a portion of what each resident pays the IRS, or by using his or her federal adjusted gross income or taxable income as the starting point.
Although states themselves do not impose property taxes, they do specify the maximum rate on the market value of the property as the legal standard for local assessors, who then determine the value to be taxed. Property taxes are the biggest source of revenue for local governments, and they are also the most variable aspect of all taxation. New Jersey (6.75 percent), New Hampshire (5.86 percent), and Vermont (5.07 percent) are the three highest states for property taxes proportional to income, while Louisiana (0.37 percent), Alabama (0.66 percent), and West Virginia (0.97 percent) are the lowest. Again, these taxes are based on the market value of the homes in the state, or how many people would want to live there.
Inheritance and Estate
The estate tax, called the “death tax” by its opponents, is the tax imposed by the federal government on the bulk of a deceased person’s estate before it is divided among the heirs. The inheritance tax, however, falls solely within the purview of state governments, and is the tax placed on the portion of the estate received by an individual resident in the state.
Only eleven states—Connecticut, Indiana, Iowa, Kansas, Kentucky, Maryland, Nebraska, New Jersey, Oregon, Pennsylvania, and Tennessee—currently collect an inheritance tax. All states exempt the transfer of assets to the deceased’s spouse from taxation, and some states also exempt those assets transferred to children and close relatives.
The future of the estate tax, and how individual states will be involved in its collection, depends upon action by the Obama administration, since the President is opposed to his predecessor’s promise of a total repeal on the tax.
You Get What You Pay For
Many factors affect the rates at which state residents are taxed, and there is no single state tax, but rather several small taxes that add up to a gross tax burden on residents. In general, you get what you pay for, since the states with the highest sales and property taxes also generally have the most sound infrastructure.
Keep in mind, too, that states have to make money somehow to provide services like roads, hospitals, waste management, and schools, to name just a few. Chances are, if you’re not being taxed in one area, you’re paying for it in another. Nevada, for example, has very low taxes for its residents only because it taxes its casinos for sales, live entertainment, and liquor. When it comes to state taxes, nothing is free.