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. Investing News

    Obama Wants to Double Wall Street Regulation

    President Obama wants to double the budgets of the SEC and the CFTC over the next five years.
  2. Economics

    Does Big Money Hurt or Help Clinton and Rubio?

    Marco Rubio and Hillary Clinton lead their parties in raising money from Wall Street. Is that a help or a hindrance?
  3. Taxes

    Why People Renounce Their U.S Citizenship

    This year, the highest number of Americans ever took the irrevocable step of giving up their citizenship. Here's why.
  4. Fundamental Analysis

    The Evolution of Obamacare Since Its Inception

    Find out whether the Patient Protection and Affordable Care Act, also known as Obamacare, has lived up to its lofty projections from 2010.
  5. Investing News

    Obama Floats $10 a Barrel Oil Tax

    President Obama intends to propose a $10 a barrel tax on oil; consumers might have to cough up 25 cents more per gallon.
  6. Taxes

    Taxes: H&R Block Vs. TurboTax Vs. Jackson Hewitt

    There are more and more tax services to help ease the pain of filing income taxes. Here's our take on three of the biggest.
  7. Taxes

    Confused About Estimated Tax Deadlines for 2016?

    If you run a business or have investment income, pay attention to this year's estimated tax deadlines. Here are the details, and what's new for 2016.
  8. Retirement

    Retirement Plan Tax Prep Checklist

    Here's a list of items you need to have in order by tax time, including paying attention to those pesky required minimum distributions.
  9. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  10. Stock Analysis

    China Mobile: Just How Big is It? (CHL, CHU, CHA)

    The story behind China Mobile, the biggest company you might never have heard of.
  1. When should my tax refund arrive?

    More than 90% of income-tax refunds arrive in less than three weeks, according to the Internal Revenue Service (IRS). However, ... Read Full Answer >>
  2. How do I file taxes for income from foreign sources?

    If you are a U.S. citizen or resident alien, your income (except for amounts exempt under federal law), including that which ... Read Full Answer >>
  3. Are Flexible Spending Account (FSA) items tax deductible?

    Flexible Spending Accounts (FSAs) are employer-sponsored, tax-favored savings plans expressly for the future reimbursement ... Read Full Answer >>
  4. How Long Should I Keep My Tax Records?

    The Internal Revenue Service (IRS) has some hard and fast rules regarding how long taxpayers should keep their tax records. As ... Read Full Answer >>
  5. 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 >>
  6. 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 >>
Trading Center