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.)
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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.
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.)
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?)
- 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.)
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.)
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.
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