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.
Expert Insights: Moving And Taxes
Making the move to a different state is a big step, and from a tax perspective, it can get complicated. MoneyGeek interviewed several experts to elaborate on the unique tax issues that moving presents and what you may need to take into account if you’re thinking about making a move across state lines. The views expressed are the opinions and insights of the individual contributors.
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.
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What Is Income Tax
Income tax is a tax imposed by a government on income generated by individuals and businesses. This tax is within the governments authority to generate revenue in order to pay for public services like schools, police and fire departments, programs like Social Security, and infrastructure such as roads and highways. Generally, taxpayers must file a state income tax return annually to determine their tax obligations. Individuals that do not earn income in states that are subject to state income tax may be paying other taxes to generate revenue for the state.
There are currently nine states in the U.S. that do not have a state income tax:
State And Local Income Taxes
Most states, and a number of municipal authorities, impose income taxes on individuals working or residing within their jurisdictions. Most of the 50 states impose some personal income tax, with the exception of Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, which have no state income tax. New Hampshire and Tennessee tax only dividend and interest income. Few states impose an income tax at rates that exceed 10%.
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States With The Highest And Lowest Property Taxes
Property tax falls under local, not state, jurisdiction. Median household property tax payments from analysis performed by the Tax Foundation as a percentage of median household income from the Census Bureau’s 2018 American Community Survey cites these as the counties with the most expensive property tax:
- Essex County, New Jersey 16.86%
- Passaic County, New Jersey 14.62%
- Union County, New Jersey 12.70%
These Louisiana parishes hold the least expensive spots for property tax as a percent of income:
- Assumption Parish 0%
- Vernon Parish 0.45%
- Grant Parish 0.68%
Louisiana carries some of the lowest property tax rates as a percentage of earned income because it offers a homestead exemption. This law allows the first $7,500 of assessed property values to forego having property taxes levied against them.
For reference, assessed home values represent 1/10 of the home’s actual value. For example, a $100,000 home would have a $10,000 assessed value. Therefore, Louisiana’s homestead exemption allows the first $75,000 of home value not to count toward calculating your property tax bill, which goes a long way toward lowering the percentage of income that goes toward these taxes.
Analysis Shows Population Growth In Lower Tax States
For many, the pandemic has altered their perceptions about where they want to live and where they can live. Millions of city-weary residents aching for more space have moved since the start of the pandemic.
Analysis of state tax burden rates and the change in population from 2020 to 2021, as estimated by the U.S. Census Bureau shows a negative correlation. The lower the state and local tax burden, the higher the population growth in 2021.
Four of the five states with an A grade in tax friendliness had population growth at or above the national average.
Of the states with an E grade, two out of three had population declines in 2021. Of the nine states with a D grade, only two New Hampshire and Vermont had population growth higher than the national average.
The included expert insights section on this page has advice on how to manage moving and taxes.
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States With No Individual Income Tax
Nine U.S. states do not level a broad-based individual income tax. Some of these do tax certain forms of personal income:
What Is A State Income Tax
US state income tax rates on a per-state basis are collected to primarily fund state budgets rather than the federal government. It is a similar tax to federal income tax, but different in the sense that it is designed to benefit the state you earned your income in , rather than fund the federal government as a whole.
While it is an attractive proposition for you and your family to move to a state with no income, such as the nine states mentioned above, the question then becomes, whether you have to make up the difference in other types of taxes, and ultimately pay more than those who live in states that impose a state income tax.
The most common way for states with no income tax to generate tax revenue that subsidizes the lack of income tax they are charging you is through sales tax.
Most of the nine states that charge no income tax have plenty of people spending money within the state and sales tax rates are in the 4-11% range with many specific areas of each state imposing a supplemental tax to fund infrastructure and transportation, etc.
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What Are Tax Burdens
In this study, we define a states tax burden as state and local taxes paid by a states residents divided by that states share of net national product. This studys contribution to our understanding of true tax burdens is its focus on the fact that each of us not only pays state and local taxes to our own places of residence, but also to the governments of states and localities in which we do not live.
This tax shifting across state borders arises from several factors, including our movement across state lines during work and leisure time and the interconnectedness of the national economy. The largest driver of this phenomenon, however, is the reality that the ultimate incidence of a tax frequently falls on entities other than those that write the check to the government.
Us Income Tax Rates By State
We have summarized the US income tax rates for all 50 states showing what the respective rate is in each state. In addition to this, you can discover more details on the specific income tax you are required to pay in the state you live in. See the table at the bottom of this page.
The US income tax rates by state for 2021 vary depending on where you live.
Here is a list of nine states in the US that have no income tax:
In addition to the above, New Hampshire taxes interest and dividends at a rate of 5%. To see more information on how many states have no income tax, we have created a page specifically on this.
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Ways To Boost State Revenues From Capital Gains
The remaining 41 states and the District of Columbia, which currently tax capital gains at the same rate as ordinary income, should resist cutting these taxes and instead raise them to generate revenue they can invest in broadly shared prosperity. They have several options:
Raise the capital gains income tax rate. States could simply levy a higher rate on capital gains income than on income from wages, salaries, and other sources, or raise the rate just on short-term capital gains.
Eliminate stepped-up basis. Under current state and federal law, people who inherit assets such as stocks, bonds, or real estate pay no taxes on any appreciation of those assets that occurred before they inherited them. As a result, a large share of capital gains is never taxed.
For example, consider a taxpayer who bought 100 shares of stock for $10 each and held them until their death, when the value had risen to $50 per share. They left them to their daughter, who sold them a number of years later, after the value had risen to $55 per share. Under current law, the daughters taxable capital gains would reflect the $5-per-share increase that occurred while she owned the stock, not the $45-per-share increase that occurred since their mother bought it.
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Massachusetts General Laws Chapter 29, Section 5G, .
Institute on Taxation and Economic Policy estimate, November 2018.
Other State Taxes Fill The Revenue Void
States have various ways to raise revenue, and those without state income taxes find different means to pay for roads, schools and other infrastructure. One typical source is sales taxes. Florida, for example, levies a 6 percent sales tax, and the average locality tacks on 1.08 percent, according to the Tax Foundation, for a combined average of 7.08 percent. Tennessee, at 9.55 percent, has the highest combined sales tax of any state in the U.S. Washington state levies a tax of 49.4 cents per gallon on gasoline, one of the highest rates in the nation.
Alaska has no statewide sales tax, although some localities have one. New Hampshire has no sales taxes at all.
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Other states use property taxes as a revenue stream. How much you pay in property taxes depends on the state tax rate and the value of your home. Homes tend to cost more in urban areas, so people living in cities tend to have the highest property tax bills. The six counties with the highest median property tax payments half higher, half lower all have bills exceeding $10,000 and all are near New York City: Bergen, Essex and Union counties in New Jersey, and Nassau, Rockland and Westchester counties in New York. These counties all have high median home values.
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Personal Income Tax Rates
For individuals, the top income tax rate for 2022 is 37%, except for long-term capital gains and qualified dividends .
P.L. 115-97 reduced both the individual tax rates and the number of tax brackets. P.L. 115-97 sunsets after 2025 many individual tax provisions, including the lower rates and revised brackets, in order to comply with US Senate budget rules.
Capital Gains Go Overwhelmingly To Wealthy White Households
Capital gains are generated by wealth. Because wealth is highly concentrated, so is capital gains income. About 85 percent of capital gains go to the wealthiest 5 percent of taxpayers 75 percent go to the top 1 percent of taxpayers. Wealthy households are disproportionately white: white families are three times likelier than families of color to be in the top 1 percent.
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The Bottom Line On State Income Tax
Having a percentage of your wages taken to pay state income tax may seem like a pain, but its important to remember that this money is used to fund important state programs and services. Paying your state income tax is the law, and failing to do so on time can lead to hefty fines and penalties.
Dont be caught off-guard come tax time. Merchant Maverick offers a variety of tax resources to help you through tax season and beyond. If youre a small business owner, dont miss out on our tax guide for small businesses. And if youre new to filing taxes, check out our guide to filing your small business taxes. Finally, dont forget to check out our state tax guides to learn about specific tax rates and laws in your state and leave a comment for the state you want to see next. Good luck!
States With No State Income Tax
In the nine states with no income tax , all residents avoid paying tax on their earnings. We include New Hampshire in this list as it has no tax on earned wages, but note that it does charge a flat income tax on investment earnings.
Currently, the states with no individual income tax include:
An analysis of 2020 moving data by United Van Lines found that the Covid-19 pandemic accelerated decisions to move from high-tax states like New Jersey, New York and California to no-income-tax states like South Dakota, Tennessee and Florida .
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What To Consider Before Moving To A No
While moving to a state with no income tax may sound appealing, it comes with trade offs. States with no income tax often make up for the loss of revenue to the state by charging residents a higher sales, property or excise tax .
For instance, Tennessee has the highest combined sales tax rate in the nation at 9.53%, according to the Tax Foundation, a D.C.-based think tank. Washington state has one of the highest tax rates on gasoline in the nation, at 49.4 cents per gallon. Of all states, New Hampshire and Alaska rely the most on property taxes, with tax collections accounting for 67.6% and 51.8%, respectively, of their revenue.
Taxes are also a big source of income that the state uses to finance public services such as infrastructure, healthcare and education. Lower taxpayer dollars likely translates into lower funding for these initiatives.
South Dakota, for example, spends the lowest on education of all states in the Midwest, at $10,073 per pupil per year. Nationwide, the average school spending per pupil is $12,612, and Florida, Nevada, Tennessee, Texas all spend less than the average.
To weigh another state’s affordability, consider these above factors as well as the overall cost of living and job opportunities in your field. Leaving a big city, for example, you may have to accept certain trade-offs, such as a lower paying job for more affordable real estate.