With tax day drawing near, it's the time of year to gripe about why taxes are so darn high in your state. If you live in New York, New Jersey or Connecticut, that gut feeling you have is dead on. Resident of the Golden State? At least you're better off than in New York. And Texas, we’re completely jealous.
Tax rates can be tricky to compare across state lines because there are so many variables. When it comes to income taxes, nine states in the U.S. charge residents a flat percentage regardless of the size of their salary. Most states take a graduated approach with multiple income brackets (Missouri and California lead the pack with 10). And seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) charge no state income tax at all.
To come up with the cleanest comparison of taxes by state, we calculated the effective tax rate for single taxpayers earning a taxable $50,000 in each state. Why use $50,000 for our comparison? Since the median household income for 2014 (the latest year for which Census data is available) was $53,657, it’s reasonable that after taking each state’s standard deduction (from $0 in Indiana to $10,250 in Wisconsin), a single-earner household making the median income might land around a taxable $50,000. In most states, this taxable $50,000 spans multiple tax brackets, with each ascending bracket assessed at a higher rate. To come up with the effective rate at this taxable income level, we crunched the numbers using 2016 tax data from the Tax Foundation, a nonpartisan think tank in Washington, D.C., that tracks tax policy.
Of course, there are more kinds of taxes than income, with property and sales taxes the next biggest considerations. The Tax Foundation tallies total tax revenue collected by each state from both individuals and businesses. This total figure includes not only income, property and sales tax, but also special taxes like real estate transfer, personal property taxes on some vehicles, and special tax district fees. The Tax Foundation divides this total by the number of residents in each state, and calls this figure the total tax burden per capita in that state. Unfortunately, because of the way property tax data is collected, it’s very difficult to tease out the portion that is paid by people as opposed to businesses. Still, it’s the best state-by-state account of tax burden that we’ve encountered, and so it is the metric we've used to rank the states. We used the most recent data available, which is for the fiscal year that ended in 2012.
On our list of the Best And Worst States For Taxes, New York comes in dead last. The lowest tax burden is found in Alaska. For each state, we also provide the effective tax rate at $50,000 taxable income. And although this bit of data wasn’t used to rank the states, we also looked at the top income bracket for each state. It’s interesting to note that only nine states have special tax brackets for people earning more than $200,000 in taxable income annually: California, Connecticut, Maryland, New Jersey, New York, North Dakota, Ohio, Vermont, and Wisconsin–plus the District of Columbia.
Scroll through our full list of Best and Worst States For Taxes to see where your state stacks up. As part of your strategy to minimize your taxes, maybe it's time to think about a move.
Full List: The Best And Worst States For Taxes
This year, five states made changes to income tax policy, said Jared Walczak, policy analyst at the Tax Foundation. Hawaii bid adieu to its top three brackets for the upper incomes, which were temporary brackets anyway; now its top marginal rate is 8.25%, down from 11%. Arkansas adopted a new tax schedule for incomes between $21,000 and $75,000 and now has three different tax schedules. Maine lowered its tax rates and added a third bracket. Massachusetts hit a level of state revenue that triggered a drop of the flat tax rate by 0.05% to 5.1%. And Ohio’s top marginal rate fell from 5.333% to 4.997%. “They’ve been shifting away from individual income taxes but imposing higher taxes on corporations,” Walczak explains, of the Midwestern state.
For many married couples, it's advantageous at the federal level to file jointly. Unfortunately, nearly half of the states—24—impose a marriage penalty, meaning that in those states married couples filing jointly pay more income tax than they would if they each filed on their own. Twenty-six of the states either have no marriage penalty or do not have an individual income tax at all. However, it's tough to get around this marriage penalty, since states won't let you file jointly at the federal level and separately for the state.
Finally, residents of several states this year may notice that though their taxable income hasn’t changed, their tax bracket has—to their advantage. That’s because many states index their brackets to inflation by tying them to the Consumer Price Index, Walczak says, and as the brackets rise the effective tax rate drops just a tad.
