The Least Regressive State And Local Tax Systems
Ten jurisdictions with more equitable state and local tax systems can be found in Figure 5. Six of the ten California, the District of Columbia, Delaware, Minnesota, New Jersey, and Vermont had positive scores on ITEPs Tax Inequality Index, meaning that their state and local tax systems do not worsen income inequality. Thoughtful, progressive tax policy decisions permitted these six jurisdictions to make their tax systems somewhat more equitable for those with the least ability to pay taxes.
But none of these six tax systems are robustly progressive in a traditional sense. Rather than seeing effective tax rates steadily rise throughout the entire income distribution, some of these jurisdictions see peaks, where taxes on middle-income families are somewhat higher than at the top, or valleys, where low-income families face higher rates than the middle-class.
Several important factors define states with more equitable tax systems. Here is what they have in common:
What Is Tax Incidence
The incidence of a tax is a measure of which entity pays the tax. But there are two very different types of tax incidence: legal incidence and economic incidence.
The legal incidence of taxes is borne by those with the legal obligation to remit tax payments to state and local governments. Legal incidence is established by law, and tells us which individuals or companies must physically send tax payments to state and local treasuries.
The legal incidence of taxes is generally very different from the final economic burden. Because taxes influence the relative prices facing individuals, they lead to changes in individual behavior. These tax-induced changes in behavior cause some portion of the economic burden of taxes to be shifted from those bearing the legal incidence onto others in society. For example, the legal incidence of corporate income taxes typically falls on companies. But economists agree that some portion of these taxes is shifted forward to others, in the form of higher prices for consumers, lower wages for workers, reduced returns to shareholders, or some combination of the three.
Once these tax-induced changes in behavior throughout the economy are accounted for, the final distribution of the economic burden of taxes is called the economic incidence. This measure is also referred to as the tax burden faced by individuals in their roles as consumers, workers, and investors.
Utah State Income Tax
The same flat 4.9% tax rate applies to all income-earning residents in Utah.
Standard deduction per filer: $744
Personal exemptions per filer: N/A
Exemptions per dependent: $579
Federal taxes are not deducted on state returns and no other local income taxes are added.
A single filer making Utahs median income of $71,621 can expect to pay $3,508 in state income taxes, or 4.9% of yearly income.
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The Kind Of Tax Matters
State and local governments seeking to fund public services have historically relied on three broad types of taxes: personal income, property, and consumption . States also rely on a range of other tax and non-tax revenue sources such as corporate income taxes, estate and inheritance taxes, user fees, charges, and gambling revenues. A few states rely heavily on non-traditional tax sources, such as severance taxes on the extraction of natural resources, which are not included in this analysis.
As ITEPs analysis of the most and least regressive tax states shows, the relative fairness of state tax systems depends primarily on how heavily states rely on these different tax types. Each of these taxes has a distinct distributional impact, as the table on this page illustrates:
Undermining Progressivity With Tax Breaks For Wealthy Taxpayers
In contrast to states that improve tax fairness with tax credits for low-income families, more than a dozen states currently allow substantial tax breaks for the wealthy that undermine tax progressivity. Two of the most regressive state income tax loopholes are capital gains tax breaks and deductions for federal income taxes paid .
In combination with a flat rate structure, these tax breaks can create an odd and unfair situation where the highest income taxpayers devote a lower percentage of their income to income taxes than their middle-income neighbors.
For example, Alabama allows a deduction for federal income taxes. Although Alabamas income tax is essentially flat, the federal income tax is still progressive. So Alabamas deduction for federal income taxes disproportionately benefits the states wealthiest taxpayers. As a result, effective marginal income tax rates in Alabama actually decline at the states highest income levels. Despite the 5 percent top tax rate, the effective income tax rate on the very wealthiest taxpayers is actually less than 3 percent. Among the six states that allow a deduction for federal taxes, three allow a full deduction for federal taxes, including Alabama, while the other three have a partial deduction.
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Illinois State Income Tax
Both single and joint filers pay 4.95% of their federal adjusted gross income, with modification, in state income taxes.
Standard deduction: N/A
Personal exemptions per filer and per dependent: $2,275
Federal tax payments are not deducted before assessing local tax burdens in Illinois. No other local income taxes apply.
A single filer making Illinoiss median income of $65,886 can expect to pay $3,261 in state income taxes, or 4.95% of yearly income.
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States With The Lowest Taxes And The Highest Taxes
Where you live can help or hinder your ability to make ends meet. A myriad of taxesproperty, license, state and local sales, property, inheritance, estate and excise taxes on gasolineeat away at your disposable income. Weighing the tax landscape against your financial picture lets you stretch your dollars. Here’s a roundup of the highest and lowest taxes by state.
“Location, location, location” is a focus that applies to more than just housing. Where you live can help or hinder your ability to make ends meet.
A myriad of taxes such as property, license, state and local sales, inheritance, estate, and excise taxes can eat away at your income. Often, the biggest tax ticket citizens face after paying the Internal Revenue Service is the one their state presents. As a result, identifying the states with the lowest taxes might be a smart financial move to make.
Currently, 41 states and the District of Columbia levy a personal income tax. Weighing the tax landscape against your financial picture could help you stretch your dollars further.
Total Tax Burden: 823%
Nevada relies heavily on revenue from high sales taxes on everything from groceries to clothes, sin taxes on alcohol and gambling, and taxes on casinos and hotels. This results in a state-imposed total tax burden of 8.23% of personal income for Nevadans, the second-highest on this list. However, it still ranks a very respectable 22 out of 50 when compared with all states.
That said, the high costs of living and housing put Nevada near the bottom when it comes to affordability. The state ranks 37th on the U.S. News & World Report Best States to Live In list.
Nevadas spending on education in 2019 was $9,344 per pupil, the fourth-lowest in the western region of the U.S. One year earlier, in 2018, the ASCE gave Nevada a grade of C for its infrastructure.
In addition to receiving an F grade from the Education Law Center in 2015, Nevada was also the worst state overall in terms of the fairness of its state school funding distribution. Nevadas healthcare spending in 2014 was $6,714 per capita, the lowest on this list and the fourth-lowest nationally.
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Key Facts About Taxes
For a typical middle-class family, the difference between living in the highest-tax state in our rankings Illinois and the lowest Wyoming is nearly $10,000 a year. A breakdown of the state-by-state tax picture reveals:
- Illinois imposes the highest tax burden. A hypothetical middle-income family would pay $13,894 a year in state and local income, sales and property taxes.
- Wyoming collects the least. The same family with the same financial picture would spend just $3,279.
- Mississippi is in the middle of the pack. A typical family would pay $8,025 a year in state and local taxes.
Youre probably not going to pick up and move simply to avoid state and local taxes. There are simpler ways to cut your tax bill, like saving for retirement, calculating business expenses and taking advantage of education credits and deductions. But if youre pondering a relocation for professional or personal reasons, taking tax implications into consideration could help you choose your next move.
States With The Lowest Personal Income Tax Rates
Only eight states have no personal income tax:
In addition, New Hampshire limits its tax to interest and dividend income, not income from wages.
Among the states that tax income, Pennsylvania’s 3.07% flat tax ranks the Keystone State as the 10th lowest in the nation for 2021.
Low personal income tax rates can be misleading a lack of available tax deductions, for example, can raise the effective rate you pay. The Retirement Living Information Center states that figuring your total tax burden, including sales and property taxes, can give you a more accurate reading on affordability, especially if you’re on a fixed income. However, these states with the lowest taxes on income can be a good place to start looking for a more affordable location.
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State Taxation And Fee Burden Rankings
- Oklahomans pay the 41st lowest state and local taxes and fees per capita among the 50 states
- Oklahomans pay $2,359 per capita annually in state and local taxes and fees or $457 less than the 50 state average and $353 less than the 50 state median
- The 50 state average tax and fee burden is $2,816. The 50 state median tax and fee burden is $2,712
- The states surrounding Oklahoma pay an average of $2,489 annually in per capita taxes and fees
- Oklahoma ranks 46th in the nation in property tax burden per capita. Per capita property tax burden in Oklahoma is $291 while the 50 state median is $682
- Oklahoma ranks 43rd in the nation in corporate income tax burden per capita. Per capita corporate income tax burden is $43.94 in Oklahoma compared to a 50 state median of $65.99
- Oklahoma ranks 33rd in the nation in personal income tax burden per capita at $402
States Without Income Tax
On the flip side, Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington state, and Wyoming dont impose an income tax at all. New Hampshire falls into a gray area. It doesn’t levy a tax on earned income, but it does tax interest and dividends at a flat 5%.
Since they don’t collect income tax, some states generate revenue in other ways. Tennessee has one of the highest combined state and local sales tax rates in the country. Your paycheck might be safe, but you’ll be dinged at the cash register. New Hampshire and Texas have high property taxes in relation to home values. And Pennsylvania charged the highest tax on gasoline in 2021.
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Kentucky State Income Tax
Both single and joint filers pay 5% of their federal adjusted gross income in state income taxes.
Standard deduction per filer: $2,650 for single filers, $5,300 for joint filers.
Personal exemptions per filer and per dependent: N/A
In Kentucky, federal tax payments are not deducted when assessing state taxes. Some other local income taxes might apply.
Single filers earning Kentuckys median income of $50,589 can expect to pay $2,397 in state income taxes, or 4.74% of their incomes.
In Most States State And Local Tax Systems Worsen Inequality
Forty-five states have regressive tax systems that exacerbate income inequality. When tax systems rely on the lowest-income earners to pay the greatest proportion of their income in state and local taxes, gaps between the most affluent and the rest of us continue to grow.
The ITEP Tax Inequality Index measures the effects of each states tax system on income inequality by assessing the comparative impact a states tax system has on the post-tax incomes of taxpayers at different income levels. Essentially, it answers the following question: Are incomes more equal, or less equal, after state taxes than before taxes?
For example, consider this scenario: if taxpayers in the top 1 percent are left with a higher percentage of their pre-tax income to spend on their day-to-day living and to save for the future than low- and middle-income taxpayers, the tax system is regressive and receives a negative tax inequality index score. This indicates that the income inequality that existed before the levying of state and local taxes has been made worse by those taxes. On the other hand, states with slightly progressive tax structures have positive tax inequality indexes. This means that after taking state and local taxes into account incomes are no less equal than they were before taxes and tax systems in those states, at the very least, did not worsen income inequality.
NOTE: See Appendix B for detailed ITEP Tax Inequality Index and Methodology for more information.
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Total Tax Burden: 737%
Like many states with no income tax, South Dakota rakes in revenue through other forms of taxation, including taxes on cigarettes and alcohol. The home of the Lakota Sioux and the Black Hills has one of the highest sales tax rates in the country and above-average property tax rates. South Dakotas position as home to several major companies in the credit card industry, in addition to higher property and sales tax rates, helps to keep the states residents free from income tax, according to reporting by The Atlantic.
South Dakotans pay just 7.37% of their personal income in taxes, according to WalletHub, ranking the state eighth in terms of the total tax burden. The state ranks 14th in affordability and 15th on the U.S. News& World Report Best States lists.
South Dakota spent $8,933 per capita on healthcare in 2014, the 14th highest in the nation. Although it spent more money on education, at $10,139 per pupil in 2019, it spent less than any other neighboring Midwestern state. Additionally, it received a grade of F for its school funding distribution.
South Dakota hasnt received an official letter grade from the ASCE, though much of its infrastructure is notably deteriorated, with 17% of bridges rated structurally deficient and 90 dams considered to have high hazard potential.
State & Local Tax Breakdown
All effective tax rates shown below were calculated as a percentage of the mean third quintile U.S. income of $63,218 and based on the characteristics of the Median U.S. Household*.
*Assumes Median U.S. Household has an income equal to $63,218 owns a home valued at $217,500 owns a car valued at $25,295 and spends annually an amount equal to the spending of a household earning the median U.S. income.
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Total Tax Burden: 510%
Alaska has no state income or sales tax. The total state and local tax burden on Alaskans, including income, property, sales, and excise taxes, is just 5.10% of personal income, the lowest of all 50 states.
All residents of Alaska receive an annual payment from the Alaska Permanent Fund Corp. made up of revenue and investment earnings from mineral lease rentals and royalties. The per citizen dividend payment for 2021 was $1,114.
The cost of living in Alaska is high, though, mostly due to the states remote location. Alaska also levies the second-highest beer tax of any state in the union at $1.07 per gallon, bested only by Tennessee. The state ranks 47 out of 50 in affordability and 45 out of 50 on the U.S. News & World Report list of Best States to Live In.
Alaska has one of the highest and fastest-rising healthcare costs of any state in the U.S. That said, at $11,064 per capita in 2014the most recent year the Centers for Medicare and Medicaid Services Office of the Actuary reported statisticsit also spent the most on healthcare, excluding the District of Columbia.
At $18,394 per pupil, it also spent the most on education of any state in the Western U.S. in 2019. In 2017, Alaskas infrastructure received a grade of C- from the American Society of Civil Engineers .
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