News & Politics

No Surprises in Tax Rankings by State

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A numerical ranking of states based on their tax rates shows that Alaskans pay the least and New Yorkers pay the most.

As USA Today explains, the ranks are not always an accurate reflection of the tax burden on individual residents.

24/7 Wall Street reviewed the tax burden of residents in each state — the portion of income that goes to state and local governments’ taxes — from the report, “Facts & Figures 2017: How Does Your State Compare?” provided by tax policy research organization Tax Foundation. These tax burdens do not include the federal taxes paid by all Americans, regardless of state.

According to the report, tax burdens in the 2012 tax season were as low as 6.5% in Alaska and as high as 12.7% in New York.

In addition to federal, state, and local taxes, Americans pay taxes to other states. Out-of-state visitors pay sales taxes as tourists, investors pay capital gains taxes on investments in other states, and drivers filling up at gas stations in other states pay those states’ excise taxes. For this reason, the tax burden is not always a perfect reflection of taxes collected.

It’s no surprise that the states with the lowest tax rates are solid red states while the most expensive tax states are blue.

The highest ranking state that voted for Hillary Clinton in 2016 is Nevada, which comes in at #8.  The lowest ranked state that voted for Donald Trump is Wisconsin at #45.

But generally speaking, the red state/blue state paradigm remains pretty constant.

The top 5 states with the lowest tax rate are Alaska, Wyoming, South Dakota, Tennessee, and Louisiana. It’s no accident that all of those states produce massive amounts of oil and coal. Taxes on natural resources fill the coffers of those states.

The bottom five states with the highest tax rate are New York, Connecticut, New Jersey, California, and Illinois. What those five states have in common is — you guessed it — mostly Democratic governance.

But high taxes in many states may be a matter of choice:

A myriad of cultural, historical, and economic factors help explain the differences in state tax structures. At the root of a state’s tax system is what Tax Foundation experts characterize as a deal between residents and their governments.

“The level of services that citizens of a certain state want is a very personal decision to that state,” said Tax Foundation policy analyst Morgan Scarboro in an interview.

Scott Drenkard, director of state projects at the Tax Foundation, added, “There are some states that offer really high taxes and really great public services.”

Generally, states with lower-income residents tend to have lower tax burdens. Per capita income in all but three of the 15 states with the lowest tax burdens is lower than the average income nationwide. In contrast, the per-capita income in 12 of the 15 states with the highest tax burdens is greater than the national average of $49,246 a year. The three states with the highest tax burdens — Connecticut, New Jersey, and New York — have the highest, third highest, and fourth highest incomes per capita in the country.

I would argue with the term “really great public services.” City transit? Public hospitals? Safe streets? Good government?

The downside is those “public services” are largely manned by public unions Most of the highest tax states have troubled public pension systems — a pension time bomb that could explode during the next severe economic downturn.

So those “really good public services” — an arguable point — come at a really high price that is driving the middle class farther and farther from the cities until only the very poor and the very rich can live there.

And I dispute the notion that people want many of these public services and vote for politicians who constantly raise taxes to pay for them. People are not moving into New York, Connecticut, or Illinois — they are moving away. They are voting with their feet and rebelling against states that take more and more of their income while residents see less and less of a return.