During the 2012 tax season, Americans paid an average of roughly $1 for every $10 they earned in state and local taxes — on top of taxes paid to the federal government. This is part of Americans’ total tax burden, according to a report by the Tax Foundation. The state and local tax burden was as low as 6.5% in Alaska and as high as 12.7% in New York.
Generally, tax burdens were highest on the East Coast, while residents of Midwestern and Southern states faced relatively low tax burdens. Residents of New York, Connecticut, and New Jersey paid more than 12% of their income in state and local taxes alone, the most in the nation. Alaska residents, on the other hand, paid less than 7% of their income, the only state where this was the case.
Nicole Kaeding, economist at the Tax Foundation and co-author of the State-Local Tax Burden Rankings report, noted in an email that state and local tax burdens tend to change very little year to year. However, “as the nation continues to rebound from the Great Recession, state personal income [has] increased at a faster rate than state tax collections,” Kaeding said.
For Connecticut, New Jersey, and New York the high tax burden is due almost entirely to high tax rates, particularly on income earned and in the form of business taxes. Individual income tax collections in these three states were in the top 10 nationwide. The average annual collection from income tax in Connecticut and New York was $2,174 and $2,051 per capita, the two highest in the country and the only states where per capita income tax collections exceeded $2,000.
Residents of states with the highest tax burdens also tend to pay large amounts of taxes to other high-tax states. For example, a relatively large share of Connecticut and New Jersey workers are employed in New York City, where residents pay some of the nation’s highest state and city income taxes. In the Tax Foundation’s model, taxes paid in this way are counted as tax burden of the state’s residents, not where they are employed.
In addition, “these states have residents with high levels of capital gains, compared to other states,” Kaeding said. “This results in their residents paying a higher share of other states’ business taxes.”
On the other end of the spectrum, a similar exchange occurs. States with low tax burdens benefit from collecting taxes from out-of-state residents. Kaeding gave Alaska as an example, where roughly 80% of taxes collected come from severance taxes on oil and natural gas levied on residents of other states.
In the Tax Foundation’s report, co-written by Kaeding, “The burden of Alaskan oil taxes does not fall predominantly on Alaska residents. Ignoring this fact and comparing Alaskan tax collections directly to Alaskan income makes the tax burden of Alaska residents look much higher than it actually is.”
Many of the states with low tax burdens benefit from having taxable resources such as oil in addition to taxes on incomes, property, and residents’ spending. In the case of Nevada, gaming is a major source of revenue. In the case of states such as Wyoming and Alaska, severance taxes — charged on businesses producing oil and natural gas — have historically been a large source of revenue.
Such revenue sources also tend to reflect the types of taxes levied in each state, which for Kaeding reflects the amount of taxes the state is able to collect from out of state residents. For example, “Florida collects a large amount of revenue via taxes on tourists, such as sales taxes on hotels, food, and rental cars.”
Generally, states with wealthier residents tend to collect more in taxes. Eight out of the 10 states with the highest tax burdens had a per capita income greater than the national average of $44,481. The three states with the highest tax burdens — Connecticut, New Jersey, and New York — had among the five highest per capita incomes.
To identify the states with the highest and lowest tax burdens, 24/7 Wall St. reviewed state and local tax burdens as a share of state residents’ income in fiscal 2012 provided by the Tax Foundation. Property, income, general sales, and excise tax rates and collections per capita also came from the Tax Foundation. Taxes paid by a given state’s residents to other state governments was computed by the Tax Foundation as part of its State-Local Tax Burden Rankings FY 2012 report. Combined state and local sales tax rate, average effective property tax rates, and collections from income tax per capita also came from the Tax Foundation but are for fiscal 2013. Federal taxes are not included in any of the estimates.
These are the states paying the highest (and lowest) taxes.