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All Contents © 2016The Kiplinger Washington Editors
Lots of people fret about how much they have to pay Uncle Sam, but he’s not the only tax man you have to worry about: Your state can squeeze you for plenty of taxes, too.
State income taxes or property taxes could cost you thousands of dollars every year. High sales taxes or gas taxes could slowly drain your funds every time you pull out your wallet.
Updated for 2016, here is our list of the 10 least tax-friendly states in the U.S., where you’ll pay above-average taxes on income, property, gas and almost everything you buy. The same states occupy the five “top” spots on our list as they did in 2015; Minnesota is the biggest mover on the list, now the No. 6 least-friendly state for taxes, in part due to a new top tax rate on the state’s highest earners. In many cases, taxes may rise even higher in the years ahead. Our review of states’ fiscal health reveals crippling deficits and pension liabilities that could lead to future tax hikes, service cuts or both.
Take a look. It’s not pretty.
Our calculation of each state’s effective tax rate is based on hypothetical individual and joint taxpayers with a variety of income sources. See last slide for a full explanation of our methodology.
By Sandra Block, Senior Associate Editor
| October 2016
National Park Service
State income tax: 1% (on income of up to $7,850/individual, $15,700/joint) - 13.3% (on income more than $1 million/individual, $1,052,886/joint)
Effective income tax rate: 3.2%/individual, 5.2%/joint
Average state and local sales tax: 8.48%
Gas taxes and fees: 38 cents per gallon (national average is 30 cents)
California tops our least-friendly list, thanks to a combination of high income taxes and hefty taxes on purchases and gas. California’s top income tax rate of 13.3% (the highest in the U.S.) doesn’t kick in until income exceeds $1 million; still, a married couple with earned income of $150,000 would pay about $7,500 a year in state income taxes.
California also has the highest statewide sales tax, at 7.5%. The average state and local combined rate is 8.48%; in some cities, the combined rate is as high as 10%, according to the Tax Foundation. Food and prescription drugs are exempt.
California’s gas taxes are down from a year ago, but they’re still the fifth-highest in the country. California also hits car owners with an annual vehicle license fee (VLF) of 0.65% of the purchase price of the vehicle (or the value when it was acquired) that’s reduced each year for the first 11 years of car ownership. For example, the VLF on a two-year-old vehicle purchased for $25,000 would be $147.
Californians pay lower property taxes than residents of other high-tax states, but in a state with some of the highest real estate prices in the U.S., they’re no bargain. The property tax on the state’s median home value of $412,700 is $3,160.
SEE ALSO: The Most-Overlooked Tax Deductions
Edmund Garman via Flickr/Creative Commons
State income tax: 1.4% (on income of up to $2,400/individual, $4,800/joint) - 8.25% (on income of more than $48,000/individual, $96,000/joint)
Effective income tax rate: 6.5%/individual, 7.1%/joint
Average state and local sales tax: 4.35%
Gas taxes and fees: 44 cents per gallon (varies by county)
Hawaii has the highest effective income tax rate of all 50 states (only Washington, D.C., has a higher rate). A married couple with taxable income of $150,000 a year, two children, $5,000 in dividend income and mortgage interest of $10,000 would pay more than $9,300 a year in state income taxes. A single resident with $45,000 in earned income would pay more than $2,700.
Hawaii’s average combined state and local sales tax rate is 4.35%, among the lowest in the U.S. However, that’s misleading because few purchases, other than prescription drugs, are exempt from tax. Vehicles are subject to a 4% sales tax (technically an excise tax levied on businesses), even if they’re purchased on the mainland.
While property values are high, property taxes as a percentage of home value are the lowest in the U.S. The property tax on the state's median home value of $528,000 is $1,401, according to the Tax Foundation.
State income tax: 3% (on income of up to $10,000/individual, $20,000/joint) - 6.99% (on income of more than $500,000/individual, $1 million/joint)
Effective tax rate: 4.1%/individual, 5.2%/joint
State sales tax: 6.35%
Gas taxes and fees: 38 cents per gallon
The Constitution State is an expensive place to live. Connecticut’s property taxes are the fourth-highest in the U.S. The median property tax on the state’s median home value of $267,200 is $5,369.
There are no local sales taxes in Connecticut, so you’ll pay only the statewide rate of 6.35% on most of your purchases. Luxury items, such as cars valued at $50,000 or more or jewelry worth more than $5,000, are taxed at 7.75%, which means a $6,000 engagement ring would cost you $6,465. And if those baubles are a gift, keep in mind that Connecticut is the only state with a gift tax (the other is Minnesota), which applies to real and tangible personal property in Connecticut and intangible personal property anywhere for permanent residents.
Connecticut faces serious financial pressures that could force it to raise taxes even more. The state has more than $83 billion in unfunded pensions, and total liabilities exceed its assets by 34%, according to the Mercatus Center at George Mason University, which ranks Connecticut 50th in its analysis of states’ fiscal health.
SEE ALSO: The Seven Deadly Taxpayer Sins
Roman Iakoubtchik via Flickr/Creative Commons
State income tax: 4.0% (on income of up to $8,450/individual, $17,050/joint) - 8.82% (on income of more than $1,070,350/individual, $2,140,900/joint). New York allows localities to impose their own income tax; the average levy is 2.11%, according to the Tax Foundation.
Effective income tax rate: 5.5%/individual, 6.4%/joint
Average state and local sales tax: 8.49%
Gas taxes and fees: 43 cents per gallon (varies by county)
The Empire State has a hefty effective income tax rate, and its average sales tax rate is the ninth-highest in the country, according to the Tax Foundation. Food and prescription and nonprescription drugs are exempt from taxes, as are greens fees, health club memberships, and most arts and entertainment tickets.
The property tax on the state's median home value of $279,100 is $4,703, the 10th-highest in the U.S.
The tax on cigarettes is $4.35 per pack, the highest in the U.S. New York City tacks on an additional $1.50 per pack.
State income tax: 1.4% (on income of up to $20,000) - 8.97% (on income of more than $500,000). New Jersey allows localities to impose their own income tax; the average levy is 0.5%, according to the Tax Foundation.
Effective income tax rate: 2.1% individual, 3.7%/joint
Average state and local sales tax: 6.97%
The effective tax rate for Garden State residents is relatively low compared with some other tax-unfriendly states. But while New Jersey gives residents a break on income taxes, it brings the hammer down when they buy a home. New Jersey’s property taxes are the highest in the U.S.; the property tax on the state’s median home value of $313,200 is $7,452.
Food, prescription and nonprescription drugs, clothing and footwear are exempt from the 7% state sales tax. Because some designated Urban Enterprise Zones, such as Newark, charge a reduced 3.5% sales tax on certain sales, New Jersey’s average state and local combined sales tax rate is actually 6.97%, according to the Tax Foundation.
Plus, with more than $188 billion in unfunded pension liabilities, the state’s long-term financial prospects are grim. A report by J.P. Morgan estimates that, in order to cover its massive debts, New Jersey would need to raise taxes by 26%, cut spending by 24% or increase pension plan participants’ contributions by 471%.
m01229 via Flickr/Creative Commons
State income tax: 5.35% (on income of up to $25,180/individual, $36,820/joint) - 9.85% (on income of more than $155,650/individual, $259,420/joint)
Effective income tax rate: 5.8%/individual, 6.6%/joint
Average state and local sales tax: 7.27%
Gas taxes and fees: 29 cents per gallon
The North Star State added a new top income tax rate of 9.85% for high earners in 2015. But what makes Minnesota really stand out is its relatively high income tax rate of 5.35% even for the state’s lowest earners.
Food, clothing, and prescription and nonprescription drugs are exempt from the state sales tax of 6.875%. A few cities and counties add their own local sales tax. The average combined state and local sales tax rate is 7.27%, according to the Tax Foundation. The sales tax for vehicles is 6.5%, slightly lower than the overall state sales tax, and vehicles are not subject to local sales taxes.
The property tax on Minnesota's median home value of $188,300 is $2,148, the 20th-highest in the U.S.
Minnesota offers some property-tax relief for qualified homeowners. Homeowners whose property taxes are high relative to their incomes are eligible for a property tax refund.
SEE ALSO: 15 IRS Tax Audit Red Flags
State income tax: 5.8% (on income of up to $21,050/individual, $42,100/joint) - 7.15% (on income of more than $37,500/individual, $75,000/joint)
Effective income tax rate: 6.1%/individual, 6.6%/joint
State sales tax: 5.5%
Gas taxes and fees: 30 cents per gallon
Maine has been working to lower its income tax bite: In 2016, the top rate fell from 7.95% to 7.15%. However, the state’s “low” rate is 5.8% — higher than some other states’ top rate.
Maine is one of only a few states that prohibit local jurisdictions from imposing their own sales tax, so you won’t pay more than 5.5%, no matter where you live or shop. Food for home consumption and prescription drugs are exempt from sales taxes, but prepared foods in restaurants are taxed at 7%.
Maine imposes an annual excise tax on vehicles that’s based on the car’s age and value. The owner of a three-year-old car with a manufacturer’s suggested retail price of $19,500 would pay $263.25.
The property tax on Maine's median home value of $174,800 is $2,335, the 16th-highest in the country.
State income tax: 3.55% (on income of up to $39,900/individual, $69,900/joint) - 8.95% (on income of more than $415,600/individual, $421,900/joint)
Effective income tax rate: 3.5%/individual, 5.2%/joint
Average state and local sales tax: 6.17%
Gas taxes and fees: 31 cents per gallon
Vermont’s effective tax rates are lower than those imposed in nearby New York, but it’s a pricey place to live if you’re wealthy. Vermont limits deductions to $15,500 for single residents and $31,000 for married couples — costing millionaires about $5,000 in additional state taxes every year.
The Green Mountain State is also an expensive place to own a home. The property tax on the state's median home value of $214,600 is $3,797, the eighth-highest in the U.S.
The average state and local combined sales tax rate is 6.17%, according to the Tax Foundation. Food, clothing, and prescription and nonprescription drugs are exempt from sales tax. Under a law that took effect in 2015, soft drinks aren’t exempt from sales tax. Restaurant meals are taxed at 9%; the tax on alcoholic beverages served in restaurants is 10%.
SEE ALSO: 9 Items You Might Be Surprised Are Taxable
Roman Boed via Flickr/Creative Commons
State income tax: 3.75%
Average state and local sales tax: 8.64%
Gas taxes and fees: 34 cents per gallon
The Prairie State’s income tax dropped to a flat rate of 3.75% from 5% on Jan. 1, 2015.
The bad news is that taxes on just about everything else in Illinois are high and could go higher as lawmakers grapple with the largest state budget deficit in the U.S. And the low flat tax may not last: With total liabilities exceeding assets by 48%, the state needs to raise taxes by 17%, cut services by 16% or increase worker pension contributions by 400%, according to a report by J.P. Morgan.
Property taxes in Illinois are the second-highest in the nation. The property tax on the state’s median home value of $171,900 is $3,952.
And the combined average state and local sales tax is 8.64%, the 7th-highest rate in the U.S, according to the Tax Foundation. In some municipalities, combined state and local sales taxes are as high as 10%. Qualifying food and prescription and nonprescription drugs are taxed at 1%.
State income tax: 3.75% (on income of up to $60,850) - 5.99% (on income of more than $138,300)
Effective income tax rate: 3.8%/individual, 4.3%/joint
State sales tax: 7%
The Ocean State’s 7% state sales tax rate is the second-highest in the U.S., but the state has no local sales taxes to add to it. Groceries, most clothing and footwear, and prescription drugs are exempt. Over-the-counter drugs, such as aspirin, are taxed unless you have a prescription. The tax also applies to the portion of any individual sale of clothing and footwear that exceeds $250. The sales tax on vehicles is 7%.
Rhode Island is expensive for homeowners. The property tax on the state’s median home value of $236,000 is $3,855, the 11th-highest in the U.S.
To create our rankings, we evaluated data and state tax-policy details from a wide range of sources. These include:
We looked at each state's tax agency, plus this helpful document from the Tax Foundation. To help us rank the most- and least-friendly states, The Tax Institute at H&R Block prepared an analysis that determined the effective tax rate for two income scenarios: One for a single filer making $45,000 a year taking the standard deduction, and one for a more complex tax profile: a married couple filing jointly, with two dependent children, an earned income of $150,000, qualified dividends of $5,000, and $10,000 of mortgage interest to deduct.
Median income tax paid and median home values come from U.S. Census' American Community Survey and are 2014 data.
We also cite the Tax Foundation's figure for average sales tax, which is a a population-weighted average of local sales taxes. In states that let municipalities add sales taxes, this gives an estimate of what most people in a given state actually pay, as those rates can vary widely.
The American Petroleum Institute
Each state's tax agency as well at the Tax Foundation
Each state's tax agency.
The Tax Foundation
Each state's tax agency, plus a lodging tax study published in 2015 by HVS Convention Sports and Entertainment Consulting.
Each state's balance sheet gives an indication of what its tax future might look like. We drew on the study Ranking the States by Fiscal Condition by the Mercatus Center at George Mason University.
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