To paraphrase Benjamin Franklin, taxes are one of only two certainties in the world. Americans know this all too well. Taxpayers in the United States pay over $11,000 a year on average in federal, state, and local taxes, or 20% of their gross annual pay.
While all Americans are subject to the same federal income tax code, state and local tax policies vary considerably by region — and therefore the average take-home pay after taxes differs as well.
Using the IRS’s Statistics of Income program, 24/7 Wall St. calculated the average annual income after taxes in every state. The combined effect of federal, state, and local taxes can reduce the average annual income by as little as 13.4% or by as much as 33.6%, depending on the state.
In an interview with 24/7 Wall St., Katherine Loughead, a policy analyst with the Tax Foundation, a tax policy think tank, explained some of the factors driving the differences. In states rich in natural resources like oil and natural gas, policy makers can raise revenue by taxing energy companies rather than individual incomes. “Those states are able to rely more on extraction taxes … and therefore do not have to rely on an income tax,” Loughead said.
Indeed, resource-rich states like Alaska and Wyoming are among the seven states that do not levy a personal income tax. Partially as a result, taxes have a relatively small impact on the net income of the average resident.
Meanwhile, many states without valuable natural resources have to rely more heavily on revenue sources shouldered largely by state residents. These are typically a mix of income, sales, and other taxes like excise, gas, and motor vehicle taxes. In half of all states, taxes on property account for the largest share of state and local revenue — and some of the states where residents pay the largest share of their annual income in taxes are also the states with the highest property taxes.
Americans living in states without the advantage of a booming tourism industry or natural resources are not doomed to pay more in taxes, however. “Of course different states do have different revenue needs, and not all states are raising as much,” Loughead said. States with larger budgets per capita will always need to raise more money, regardless of who pays.
To identify the average post-tax income in each state, 24/7 Wall St. calculated the average federal income tax and all state and local taxes per capita by state and subtracted the amounts from the personal income per capita. Individual federal income tax figures were calculated by subtracting income tax refunds from gross collections using data from the Internal Revenue Service’s Statistics of Income program for 2018. Data on net collections for state and local governments came from the U.S. Census Bureau’s Survey of Government Finances and are as of 2016. All other tax data came from the Tax Foundation.