When tax time comes around, it's all too easy to focus on the Feds – after all, those Federal income taxes generally make up the biggest part of the average American's tax bill. But state taxes shouldn't be ignored - where you live can have a massive impact on your tax liability. Want to minimize your payouts to the Governor's house? Stay away from the states that have the highest per capita taxes. (If filing your taxes leaves you frustrated and confused, you're not alone. Learn more, in The History Of Taxes In The U.S.)
In Pictures: 6 Millionaire Traits That You Can Adopt

Lots of people just assume that the easiest way to figure out which states cost the most are the ones with the highest income tax rates - but that's not necessarily so. After all, there are a number of different ways that states collect revenues, and they all take a toll on consumers' wallets.

In fact, on average, income taxes aren't even the biggest contributor to states' coffers - that distinction goes to sales tax. Other common revenue generators include motor vehicle taxes, property taxes, corporate taxes and so-called "sin" taxes (taxes on alcohol, tobacco and gambling). (The number of taxes that we now consider a given did not always exist. Read more, in The History Of Taxes In The U.S.)

But to get a fair assessment of which states are the most expensive for its residents, it's necessary to extract corporate taxes and anything else that's not paid for by individuals – after all, while Alaska may have one of the highest per capita revenues in the U.S., most of that money comes from severance taxes (taxes paid by energy companies to extract Alaska's natural resources), not from residents' bank accounts. When you distill the state's taxes down to the ones paid by individuals, Alaskans actually pay the least state taxes in the country.

So then, which states top off our list? Here's a glimpse at the top five tax collecting states, based on data from the first quarter of 2010.

  1. Hawaii
    The Aloha State may be renowned as one of the most beautiful states in the Union, but that beauty comes at significant cost: the average Hawaiian paid out $1,010 in state taxes in the first quarter of the year, the highest of any state. The two biggest components to the state's revenues were income and excise taxes.

    Unlike many other states, Hawaii doesn't have a sales tax - instead, Hawaiians pay gross receipts (or excise) taxes on each of their purchases. That means that items like rent, medical bills and food are all taxable purchases in Hawaii, unlike other states with traditional sales tax. That also means that tax-exempt non-profits have to pay out Hawaii's excise tax regardless of their status in other states. (Real estate costs in Hawaii are also high. Read more, in Simple Ways To Save In Retirement.)

  2. Connecticut
    Don't let its small size fool you - generous tax rates and a population of high-income residents have helped Connecticut rake in the number-two spot in our list of most expensive state tax collectors. Connecticut has the third-highest median income in the country, a result of its proximity to the offices of New York City's most affluent businesspeople (and the financial industry that's booming in Connecticut itself). That fact means that income taxes make up more than half of Connecticut's cash inflows - a much larger proportion than can be found in most other states. Sales taxes ring in as the second biggest contributor.

    In the first quarter of 2010, Connecticut's residents averaged a payout of $902. (the government isn't always right. Find out more, in Inaccurate Tax Return, Now What?)

  3. New York
    Taxes are similarly high in the Empire State, where residents paid out an average of $829 each during the first quarter of this year. As with Connecticut, a hefty state income tax helped the third most populous state in the U.S. bring in its biggest portion of state revenues.

    New York has an even higher maximum income tax rate than Connecticut though, a factor that pushed this state to the number-three spot despite a paltry sales tax rate of 4%. (Before you pack the van in search of a new life, read 10 Reasons Why Moving Might Not Make You Richer.)

  4. Minnesota
    While it may seems surprising that Minnesota has one of the highest per capita state tax rates in the country, at $675 for the first quarter of 2010, it's still a far cry from the top three tax collecting states. The North Star State's biggest contributors are split fairly evenly between sales and income taxes, with one notable exception - Minnesota actually has a separate, higher sales tax on alcohol products. (These taxes turned out to be extremely beneficial - so we kept them. Read more, in "Temporary" Taxes That Stuck.)

  5. Massachusetts
    Massachusetts brings in a close fifth place, with a per capita tax of $621 per resident. Like Minnesota, the Commonwealth sports one of the higher sales tax rates of the states, but more interesting is the state's flat personal income tax. Unlike most states, which charge a tiered tax (like the Federal government), Massachusetts residents pay 5.3% of their income across the board.

    That means that of all seven flat tax states, Massachusetts has the highest tax bill. And it ultimately contributes to the state's number-five position on this list.

Living with Taxes
There are plenty of reasons why Americans would want to live in tax-heavy states. From job opportunities to tropical volcano views, all five of the states that made the list of highest tax territories have no shortage of residents ready to pony up again on April 15.

Catch up on your financial news; read Water Cooler Finance: Goldman Fined, Financial Fixes And Apple's "Apology".

Related Articles
  1. Taxes

    Tax Breaks For Volunteering

    Your volunteer ventures could earn you some welcome tax deductions, along with the satisfaction of helping others.
  2. Taxes

    Six Ways Your Tax Preparer Knows You’re Lying

    Cheating on your taxes is asking for trouble. You might get away with it, but you’re playing with fire and likely to get burned.
  3. Insurance

    Medicare 101: Do You Need All 4 Parts?

    Medicare is the United States’ health insurance program for those over age 65. Medicare has four parts, but you might not need them all.
  4. Taxes

    The Purpose Of The W-9 Form

    The W-9 form provides key data your clients need if you're an independent contractor. Just be sure you're not really an employee who should fill out a W-4.
  5. Economics

    5 States with the Highest GDP Per Capita

    Learn about the top five states ranked by their real gross domestic product (GDP) per capita as of 2014: Alaska, North Dakota, New York, Connecticut and Wyoming.
  6. Taxes

    Revisiting the Internet Sales Tax Bill: 2013 Vs. 2015

    Learn about the Marketplace Fairness Act of 2015 being reviewed by congress and the differences between it and the 2013 Marketplace Fairness Act.
  7. Taxes

    5 States Without Sales Tax

    Learn about the five states that do not charge sales taxes and about other taxes the states levy instead in order to generate revenue.
  8. Economics

    Understanding Donald Trump's Stance on China

    Find out why China bothers Donald Trump so much, and why the 2016 Republican presidential candidate argues for a return to protectionist trade policies.
  9. Economics

    Will Putin Ever Leave Office?

    Find out when, or if, Russian President Vladimir Putin will ever relinquish control over the Russian government, and whether it matters.
  10. Budgeting

    Basics For Buying An Apartment In Manhattan

    Here's info to help you get the apartment hunt started right.
  1. Do tax brackets include Social Security?

    A portion of your Social Security benefits may be subject to federal taxation using tax brackets. Your tax bracket is determined ... Read Full Answer >>
  2. Are personal loans tax deductible?

    Interest paid on personal loans is not tax deductible. If you take out a loan to buy a car for personal use or to cover other ... Read Full Answer >>
  3. Does a Flexible Spending Account (FSA) cover braces?

    Funds from a Flexible Spending Account (FSA) can be used to cover costs associated with installing, maintaining and removing ... Read Full Answer >>
  4. Does QVC charge sales tax?

    QVC, an American TV network, is registered with states to collect sales or use tax on taxable items. QVC is also required ... Read Full Answer >>
  5. Do 401k contributions reduce AGI and/or MAGI?

    Traditional 401(k) contributions effectively reduce both adjusted gross income (AGI) and modified adjusted gross income (MAGI). ... Read Full Answer >>
  6. Does a Flexible Spending Account (FSA) cover glasses?

    The funds in a Flexible Spending Account (FSA) can be used to cover most common medical expenses; this includes the cost ... Read Full Answer >>

You May Also Like

Trading Center