The Most Tax-Friendly States for the Rich
Wealthier Americans tend to pay a smaller share of their income in state and local taxes than lower-income Americans. According to a 2018 report released by The Institute on Taxation and Economic Policy, a Washington D.C.-based think tank, the highest-earning 1% of American families pay just 7.4% of their income in state and local taxes annually on average. Meanwhile, the families that fall into the middle 20% of earners pay 9.9% of their income, and the lowest earning 20% of families pay 11.4% of their income on average.
While U.S. tax policy generally appears to favor the wealthy, the tax advantages the wealthiest 1% enjoy are even stronger in some states than in others.
Using data from ITEP’s 2018 report “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States,” 24/7 Wall St. ranked all 50 states based on the effective tax rate on the top 1% of earners — that is, the share of income paid in state and local taxes. Notably, these figures do not include federal taxes paid.
Although no two state tax policies are exactly alike, the most tax-friendly states for the rich tend to share a few similarities. First, the states ranking highest on this list have either very low or no income tax. When taxes that tend to impose higher burdens on the rich — such as income tax — are very low, state and local governments have to collect revenue by other means, usually through taxes that tend to impose a greater burden on middle- and low-income Americans.
One way states with little or no income tax meet budget obligations is through sales and excise taxes. A heavy reliance on sales and excise tax disproportionately benefits wealthier residents. According to ITEP, the share of their income middle-income families pay in such taxes is more than five times the share wealthy families pay. Here is a list of states with the highest and lowest sales tax.
While some states are more advantageous than others for the wealthy, there are measures Americans of all income levels can take to reduce the amount they hand over to the federal government as well as state and local governments. Here is a list of 17 investments and strategies to help lower your taxes.