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All Contents © 2016The Kiplinger Washington Editors
The Internet has given rise to a mobile workforce of telecommuters, independent contractors and entrepreneurs who can work where they want to live, instead of living where they have to work. But if you enjoy this kind of flexibility, proximity to ski slopes or beaches shouldn’t be your only criteria in selecting a home state. You should also calculate how much state taxes will extract from your paycheck and pocketbook. The difference from state to state can be dramatic — thousands of dollars every year.
Updated for 2016, here is our list of the 10 most tax-friendly states in the U.S. Five of the states on our list, including the top four, have no state income tax at all. Wyoming, our new No. 1 state this year, is one of those – and maintains a vibrant economy that will insulate residents from tax hikes for years to come.
Before you start packing the U-Haul, though, consider the possible trade-offs of moving to a low-tax state. If your state can’t afford to maintain its roads, you could end up spending more on car repairs than you’ll save in taxes. You may be willing to pay above-average property taxes in exchange for excellent schools.
One other caution: Some states have been able to keep their taxes low because of an abundance of wealth derived from natural resources. But as oil prices continue to plummet, states such as Alaska may have to look elsewhere for revenue.
Take a look.
By Sandra Block, Senior Associate Editor
| August 2016
National Park Service
State income tax: None
Average state and local sales tax: 5.42%
Gas taxes and fees: 24 cents per gallon (national average is 30 cents)
Wyoming tops our tax-friendly list because, despite the decline in the price of oil, revenue from mineral rights continues to flow. That has enabled the Equality State to keep taxes low across the board. There is no income tax, and the gas tax is well below the national average of 30 cents per gallon. Prescription drugs and most groceries are exempt from sales taxes. And at 2 cents per gallon, Wyoming has the lowest beer tax in the U.S.
People who move to these parts like to own a lot of land, and low property taxes make that dream affordable. (The state’s average size of ranches and farms ranks first in the U.S. at 2,736 acres.) The property tax on the state’s median home value of $201,000 is $1,206, the ninth-lowest in the U.S.
At a time when many states are facing massive debts (and tax hikes to make up for them), Wyoming’s economy is as robust as its most rugged residents. The Mercatus Center at George Mason University ranked Wyoming third in its analysis of states’ fiscal health.
SEE ALSO: 9 Items You Might Be Surprised Are Taxable
Average local sales tax: 1.78%
Gas taxes and fees: 12 cents per gallon
Gas taxes here are the lowest in the U.S., and Alaskans pay no income taxes or state sales taxes. While municipalities impose local rates of as much as 7.5%, the average sales tax is 1.78%, according to the Tax Foundation. Anchorage, Alaska’s largest city, has no sales tax.
The property tax on the median home value of $254,500 is $2,987. That’s among the higher property tax rates nationwide, but it’s not outrageous.
Alaska gives each legal resident who has lived in the state for a full year an annual "Permanent Fund Dividend." The 2015 distribution was $2,072 — an $8,000 bonus for a family of four. However, low oil prices and a drop in production have triggered efforts to reduce the amount of the PFD. Gov. Bill Walker wants to reduce the 2016 dividend to $1,000; he has also proposed a 3% state sales tax.
Average state and local sales tax: 6.66%
Gas taxes and fees: 37 cents per gallon
Florida has no income tax, and its property taxes are below the midpoint for the U.S. The property tax on Florida’s median home value of $162,700 is $1,631.
Average combined state and local sales taxes are about average for the U.S., although in some counties the combined rate is as high as 7.5%. Food and prescription and nonprescription drugs are exempt.
Vehicles are taxed at the state’s 6% sales tax rate, but a county sales tax (based on where the buyer lives) is due on the first $5,000 of the purchase price or on each lease payment.
SEE ALSO: The Most-Overlooked Tax Deductions
Average state and local sales tax: 7.98%
Gas taxes and fees: 34 cents per gallon
The Silver State is another no-income-tax haven. The property tax on Nevada's median home value of $192,100 is $1,426, 12th-lowest in the U.S.
A state with no income tax, modest property taxes and no oil revenue to speak of must get money somewhere, and in Nevada that means above-average sales taxes. The average combined state and local sales tax rate is 7.98%, according to the Tax Foundation. Food and prescription drugs are exempt from the state’s 6.85% sales tax, but counties may tack on up to 1.25%. Gas taxes are above the national average.
In addition to sales taxes, vehicle owners are charged an annual “government services tax” that’s based on the vehicle’s value and age. The tax on a two-year-old vehicle with an original sticker price of $20,000 would be $298.
State income tax: 2.59% (on income of up to $10,000/individual, $20,000/joint) - 4.54% (on income of more than $150,000/individual, $300,000/joint)
Effective income tax rate: 3.0%/individual, 3.1%/joint
Average state and local sales tax: 8.25%
Gas taxes and fees: 19 cents per gallon
Unlike the four states above it on our list, Arizona has a state income tax. But the top income tax rate of 4.54% doesn’t kick in until taxable income exceeds $150,000 for single filers or $300,000 for married couples.
State gas taxes are well below the national average of 30 cents per gallon.
Like most states, Arizona excludes prescription drugs and food for home consumption from state sales taxes. However, all 15 counties levy an additional tax that ranges from 0.25% to 2%, and some extend that tax to groceries. The average combined state and local sales tax rate is 8.25%, according to the Tax Foundation.
The property tax on the state’s median home value of $176,700 is $1,330, below average for the U.S.
Arizona imposes an annual vehicle license tax. The tax is based on an assessed value of 60% of the manufacturer’s base retail price, reduced by 16.25% for each year since the vehicle was first registered in Arizona. The rate is $2.80 for new vehicles and $2.89 for used vehicles, for each $100 of assessed value. So for a vehicle costing $18,000, the vehicle license tax for the first year would be $302.
Finchlake2000 via Flickr/Creative Commons
State income tax: 2% (on taxable income of up to $12,500/individual, $25,000/joint) - 6% (on income of more than $50,000/individual, $100,000/joint)
Effective income tax rate: 3.2%/individual, 3.9%/joint
Average state and local sales tax: 9%
Gas taxes and fees: 20 cents per gallon
The Pelican State is a particularly attractive destination for homeowners. Its property taxes are the third-lowest in the nation. The property tax on the state’s median home value of $143,600 is $710.
Another plus: At 20 cents per gallon, Louisiana’s gas tax is well below the national average of 30 cents.
Louisiana’s top income tax rate of 6% kicks in at $50,000 of taxable income. However, residents can deduct all of their federal income tax from state taxable income.
Local parishes and jurisdictions can add their own levies to the state sales tax, boosting the average combined rate to 9%, according to the Tax Foundation. In some jurisdictions, sales taxes are as high as 11.66%.
SEE ALSO: States Targeting Snowbirds Fleeing to Tax-Friendlier Climates
State income tax: 2% (on income of up to $500/individual, $1,000/joint) - 5% (on income of more than $3,000/individual, $6,000/joint)
Effective income tax rate: 4.9%/individual, 4.9%/joint
Average state and local sales tax: 8.97%
Gas taxes and fees: 21 cents per gallon
Alabama’s property taxes are the second-lowest in the U.S. (Hawaii has the lowest on a percentage basis, partly because of the sky-high value of property there.) Property tax on the state’s median home value of $125,600 is $539.
However, the Yellowhammer State’s combined state and local sales tax rate is the fifth-highest in the U.S. And unlike most states, Alabama doesn’t exempt food from its sales tax. Prescription drugs and insulin-related items are exempt.
The state’s relatively low top income tax rate of 5% kicks in at $3,000 for single filers and $6,000 for married couples. However, Alabama allows residents to deduct all federal income tax from state taxable income.
Average state and local sales tax: 5.84%
Gas taxes and fees: 30 cents per gallon
Sure, it’s cold in the winter. But low taxes will offset some of the cost of staying warm. South Dakota has no income tax, and combined state and local sales taxes are below average for the U.S. While prescription drugs are exempt from sales taxes, however, food, nonprescription drugs and many services are taxed. The state imposes a 4% excise tax on vehicles when they're titled.
Property taxes are above average for the U.S. The property tax on South Dakota’s median home value of $142,300 is $1,876.
Loco Steve via Flickr/Creative Commons
State income tax: 3% (on less than $5,000 of income) - 5% (on more than $10,000 of income)
Effective income tax rate: 4.6%/individual, 4.9%/joint
Average state and local sales tax: 7.07%
Mississippi’s income tax rate kicks in early, resulting in an effective tax rate of 4.6% for single filers and 4.9% for married filers. Beginning in 2018, however, income tax rates will gradually be reduced. By 2022, the first $5,000 of taxable income will be exempt.
Gas taxes are 3 cents per gallon lower than in neighboring Louisiana (where gas taxes are also low). The property tax on the Magnolia State’s median home value of $104,000 is $854, the 19th-lowest in the nation.
Mississippi’s state sales tax rate of 7% is the second-highest in the U.S. (only California, at 7.5%, is higher), and Mississippi is one of a minority of states that charges sales tax on groceries. But prescription drugs, residential utilities, motor fuel and newspapers are all exempt, and localities add very little on top of the state’s rate, if anything.
Vehicle sales are taxed at 5%, two percentage points below the general sales tax rate. Mississippi also charges an annual personal property tax based on vehicles’ age and value. Rates are set at the county level. In Lafayette County, for example, you’d pay $285 on a vehicle valued at $20,000.
SEE ALSO: The Seven Deadly Taxpayer Sins
Lee Cannon via Flickr/Creative Commons
State income tax: 2.2% (on income from $2,001 to $5,000) - 6.6% (on income of $60,000 or more)
Effective income tax rate: 4.4%/individual, 5.6%/joint
Average state and local sales tax: None
Gas taxes and fees: 23 cents per gallon
Delaware’s income tax rates escalate quickly, with the top bracket ensnaring those who earn only $60,000 or more.
Still, Delaware remains a low-tax oasis amid high-tax states along the Eastern seaboard. It has no sales tax (one reason its Rehoboth Beach outlets are a big tourist draw), and its gas taxes are well below average. Property taxes as a percentage of home value are the fourth-lowest in the U.S. The property tax on the state’s median home value of $230,500 is $1,224.
Excise taxes on beer and wine are also modest: 16 cents per gallon for beer and 97 cents for a gallon of wine.
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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