In the U.S. federalist system, each state government decides how to generate revenue — that is, which taxes to collect, and how. No state tax code is identical, and largely as a result, what the average American pays annually in taxes varies from state to state.
24/7 Wall St. reviewed each state’s tax burden — the portion of income that goes to state and local governments taxes — from the report, “Facts & Figures 2017: How Does Your State Compare?” provided by tax policy research organization Tax Foundation.
> Taxes paid as pct. of income: 7.3%
> Income per capita: $42,094 (16th lowest)
> State income tax collections per capita: $46 (8th lowest)
> Property tax collections per capita: $830 (7th lowest)
> General sales tax collections per capita: $992 (18th highest)
Despite Tennessee’s second highest statewide sales tax rate of 7.0%, the tax burden is still one of the lightest in the country because of low individual income and property tax rates. Tennessee is in the process of phasing out its individual income tax. The intent of the bill, enacted last year, reduces the tax rate by 1% annually and will be eliminated in 2021.
Tennessee is one of only three states with both a tax burden that is less than 10% and a pension fund that meets nearly all of its obligations. The Tennessee pension fund had 99% of the assets it needed to meet its obligations for the 2014 fiscal year.
According to the report released Monday, tax burdens in the 2012 tax season were as low as 6.5% in Alaska and as high as 12.7% in New York.
Americans also pay taxes to other states. Out-of-state visitors pay sales taxes as tourists, investors pay capital gains taxes on investments in other states, and drivers filling up at the gas station bear the cost of extraction and severance taxes levied by oil-rich states. For this reason, the tax burden is not always a perfect reflection of taxes collected.
Approximately 78% of taxes Americans pay go to their own state and local governments. The variation in tax burden between states is due largely to differences in each state’s tax code. High tax states tend to collect more taxes and at higher rates.
Individual income tax collections per capita in fiscal 2015 exceeded the national average of $967 in all of the 10 states with the highest tax burdens. Similarly, in all but two of the 10 states state and local property tax collections per capita in fiscal 2014 were greater than the average of $1,462 across all states.
By contrast, states with low tax burdens tend to collect fewer taxes and at lower rates. Five of the seven states with no individual income tax, for example, are among the 10 states with the lowest tax burdens.
A myriad of cultural, historical, and economic factors help explain the differences in state tax structures. At the root of a state’s tax system is what Tax Foundation experts characterize as a deal between residents and their governments.
“The level of services that citizens of a certain state want is a very personal decision to that state,” said Tax Foundation policy analyst Morgan Scarboro in an interview.
Scott Drenkard, director of state projects at the Tax Foundation, added, “There are some states that offer really high taxes and really great public services.”
Generally, states with lower income residents tend to have lower tax burdens. All but three of the 10 states with the lowest tax burdens report lower-than-average per capita income.
Eight of the 10 states with the highest tax burdens, on the other hand, report per capita income greater than the national average of $48,112 a year. The three states with the highest tax burdens — Connecticut, New Jersey, and New York — have 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. Personal income per capita for each state is for 2015 and came from the U.S. Bureau of Economic Analysis. State individual income tax collections per capita are for fiscal 2015, state and local property tax collections per capita are for fiscal 2014, state general sales tax collections per capita are for fiscal 2015, all from the “Tax Foundation’s Facts & Figures 2017: How Does Your State Compare?” report. Sales tax rates, including combined rates, gasoline excise tax rates, cigarette excise tax rates, spirit and wine excise tax rates are as of January 1, 2017 and were also provided by the Tax Foundation. We also considered economic data including poverty rates and homeownership rates from the U.S. Census Bureau’s 2015 American Community Survey.
Click here to see the states with the highest and lowest taxes.