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All Contents © 2017The Kiplinger Washington Editors
By Sandra Block, Senior Editor
David Muhlbaum, Online Editor
| October 2017
Depending on where you live, state income taxes and 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. And it could get worse: Tax-reform proposals in Congress seek to eliminate or cap the federal deduction for state and local taxes paid, making their impact on your wallet that much greater.
For 2017, we prepared tax returns for two sample filers (see our methodology on the last slide for more details.) That gave us a better grasp of how each state’s income tax structure really hits – and points up the impact of local income taxes. Some states permit localities to impose their own income taxes, which range from a few percentage points in rural Ohio counties to New York City's rather astonishing 3.9 percent.
Updated for 2017, 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.
Take a look. Have a Kleenex handy. #1, Maryland, is the least tax-friendly.
See last slide for a full explanation of our methodology.
Maryland vaults to the top of our least tax-friendly list this year for one reason: steep local income taxes. Maryland is among a handful of states that allow localities to levy their own income taxes on top of state income taxes. When you include these taxes, the state’s effective income tax rate soars. A married couple with income of $155,000 a year would pay more than $10,700 a year in Maryland income taxes. That’s nearly half of what they would already owe the Federal government.
State and local sales taxes are 6%; food, prescription drugs and nonprescription drugs are exempt.
The property tax on Maryland’s median home value of $286,900 is $3,142, slightly below the average rate for the U.S.
Edmund Garman via Flickr/Creative Commons
The North Star State’s top tax rate of 9.85% is one of the highest in the U.S. But what makes Minnesota really stand out—and not in a good way—is its income tax rate of 5.35% even for the state’s lowest earners. A single resident with income of $45,000 a year would pay more than $2,000 in state income taxes.
The median property tax on Minnesota's median home value of $186,200 is $2,200, slightly above the average rate for the U.S.
Food, clothing, and prescription and nonprescription drugs are exempt from the state sales tax of 6.9%. A few cities and counties add their own local sales tax, bringing the average combined state and local sales tax rate to 7.27%. 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.
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.
The Empire State has a hefty effective income tax rate, and its average sales tax rate is the 9th-highest in the country. (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 $283,400 is $4,600, the 11th-highest in the U.S.
Gas taxes, too, are intense – 12 cents per gallon higher than the national average.
The state 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.
Roman Boed via Flickr/Creative Commons
Burdened by the largest state budget deficit in the U.S., Illinois ranks #49 in the annual ranking of states’ fiscal health by the Mercatus Center at George Mason University. (Only New Jersey ranks lower.) Residents are paying the price: State lawmakers increased the Prairie State’s flat tax to 4.95% from 3.75%, effective July 1.
And the bad news doesn’t stop there. Property taxes in Illinois are the second-highest in the nation. The property tax on the state’s median home value of $173,800 is $3,995.
Sales taxes are high, too. The combined average state and local sales tax is 8.64%, the 7th-highest rate in the U.S. 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%.)
National Park Service
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.
The property tax on Maine's median home value of $173,800 is $2,259, the 17th-highest in the U.S., according to the Tax Foundation.
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 8%.)
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.
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 $15,000 for single residents and $31,500 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 $217,500 is $3,795, the ninth-highest in the U.S.
The average state and local combined sales tax rate is 6.18%. (Food, clothing, and prescription and nonprescription drugs are exempt from sales tax.) Restaurant meals are taxed at 9%; the tax on alcoholic beverages served in restaurants is 10%.
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, 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 this general excise tax – even non-tangible items, like designing and consulting services, are taxable. 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.
Gas taxes are 44 cents a gallon, the third highest in the U.S.
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 7.25%. The average state and local combined rate is 8.25%; in some cities, the combined rate is as high as 10%. (Food and prescription drugs are exempt.)
With gas taxed at 41 cents per gallon—the 5th highest in the U.S.—you’ll pay dearly to drive with your top down on the Pacific Coast highway. 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 $385,500 is $3,104, according to the Tax Foundation.
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 $270,500 is $5,327.
And you’ll pay the eighth-highest gas taxes every time you fill up.
On the plus side, there are no local sales taxes in Connecticut, so you’ll pay only the statewide rate of 6.35% (slightly below average) on most of your purchases. Groceries, prescription and non-prescription drugs aren’t taxed, but just about everything else is, including a broad range of services. 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 including tax.
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 $315,900 is $7,410.
Food, prescription and nonprescription drugs, clothing and footwear are exempt from the 7% state sales tax. Because some areas, 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 only 6.85%.
As any East Coast traveler can tell you, New Jersey is no longer a place where you can hop off an exit and buy cheap gas. In late 2016, New Jersey Gov. Chris Christie signed legislation that raised the state’s gas tax from 14 to 37 cents per gallon—the ninth-highest in the country.
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 determine the effective tax rates in each state, we prepared sample tax returns in each state for two income scenarios, using Credit Karma's online tax filing software for 2016. Our single filer made $45,000 a year and took the standard deduction. Our joint filer was a married couple with two dependent children, an earned income of $150,000, qualified dividends of $5,000, and $10,000 of mortgage interest and $3,000 of property taxes to deduct. To include local income taxes, we domiciled each return in the state's most populous location, with one exception: New York State, in which New York City's exceptionally high local income tax would have skewed the outcome.
Median income tax paid and median home values come from U.S. Census' American Community Survey and are 2015 data.
We also cite the Tax Foundation's figure for average sales tax, which is 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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