According to the Tax Foundation, on average, Americans paid 9.7% of their income to state and local taxes in 2008. On top of that number, add the amount paid in Federal taxes and you can see that the average American works a good part of the year to fund the government - approximately 28.2% of the year, according to the Tax Foundation. Where you live, however, can have a significant effect on your tax bill, so we thought you might want to know the effect state taxes have on your pocketbook.
First, it is important to define what taxes are and what they are not. In its annual study, the Tax Foundation included the following in its definition of “taxes”:
- Sales Taxes
- Income Taxes
- Property Taxes
- Occupational and business licenses
- Motor Vehicle Licenses
- Special Assessments
Of interest in the Tax Foundation’s study, it assumes all taxes paid by businesses are ultimately paid by consumers (a/k/a you). For this reason, tax burdens imposed on manufacturers are allocated differently than taxes paid by retail stores. Also, the Tax Foundation’s study attempts to account for the effect of a state exporting its tax burden. Nevada is a good example: while the taxes visitors pay when they go to a hotel or pay sales tax in Las Vegas do support Nevada government, a tourist is not a resident of that state. In effect, Nevada shifts the burden of providing its services to individuals outside the state by charging sales and other taxes, rather than placing the burden on its residents.
From the standpoint of income, the Tax Foundation basically defines it on a cash basis to include wages, interest, capital gains and other items normally included in income.
With these basic parameters in mind, let’s take a look at who shoulders the highest state tax burden. If you live in New York, New Jersey or Connecticut, you carry a high burden indeed. New Jersey taxpayers pay the most - at 11.8% of income - followed closely by New York at 11.7%, and Connecticut is third with 11.1%.
Why do taxpayers in these states pay so much? First, the average income for many of their taxpayers is higher than most of the rest of the country. Since income tax rates tend to be progressive, higher income earners are pushed into higher brackets. Sales taxes are generally levied on the retail prices of taxable items, hence higher costs for products in these states equal a higher percentage of tax paid. Finally, these states just need to charge higher taxes to meet the cost of the services they provide.
If you live in Alaska, Nevada, Wyoming or Florida, congratulations, you are the real winner. The tax rates for citizens of these states are 6.4%, 6.6%, 7.0% and 7.4% respectively. Taking a look at the numbers, the single largest factor pushing the rates down in these states is the concept of “tax exporting”. For example, state and local tax collections in Alaska are projected to be around $7,864 per capita. Of this amount, $6,431 is paid by out-of-state residents. Of tax collections in Wyoming, approximately 72% are paid by out-of-state residents. Florida and Nevada export approximately 50% of the tax burden to other states’ residents.
So what is the take away from a review of the Tax Foundation’s study? Is it necessarily a negative to live in a state with relatively higher tax burdens? Well, maybe, but don’t be too quick to judge. State governments collect taxes to provide services. If the overall value of those services makes your state a better place to live, maybe the extra costs are worth it. Now, in our view, the less tax you pay, the better, but that is our view only. There are many people who think the opposite, especially if they feel that their dollars are spent wisely. Accordingly, this article does not make any judgments regarding the appropriateness of tax rates for any particular state.
If, however, one of your goals in life is to minimize the taxes you pay, give us a call. We are more than happy to help you pay only what you must and not a penny more.
Happy Memorial Day.