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All Contents © 2018The Kiplinger Washington Editors
By Sandra Block, Senior Editor
David Muhlbaum, Senior Online Editor
| October 4, 2017
While the unemployment rate has hovered below 5% since mid-2016, wages have remained relatively flat, with average salary increases expected to increase just 3% in 2018. For many workers, the only way to get a big raise is to change jobs, and that often means moving to another state.
But before you accept an offer, you should check out the cost of living in your prospective employer’s city. You’ll want to look at home prices, of course, and the area’s public schools, because sending your kids to private school could wipe out your increase in salary. And don’t overlook the hit you’ll take from state and local taxes. Our annual guide to state taxes shows that tax rates are literally all over the map—and the difference could make a real impact to your personal bottom line.
Updated for 2017, here is our list of the 10 most tax-friendly states in the U.S. The top five states on our list have no state income tax at all.
Take a look. #1, Wyoming, is the most tax-friendly.
See last slide for our methodology.
National Park Service
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. Prescription drugs and most groceries are exempt from sales taxes. And at 2 cents per gallon, Wyoming has the lowest beer tax in the land.
People who move to these parts like to own a lot of land, and low property taxes make that dream affordable. The property tax on the state’s median home value of $194,800 is $1,196, the ninth-lowest in the U.S.
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 1.76%, according to the Tax Foundation. Anchorage, Alaska’s largest city, has no sales tax. The property tax on the median home value of $250,000 is $2,956. That’s slightly above the average for the U.S.
Here’s the kicker: Alaska gives each legal resident who has lived in the state for a full year an annual "Permanent Fund Dividend." But the dividend has been shrinking in recent years, reflecting low oil prices and a drop in production. This year, each legal resident will receive $1,100, down from a peak of $2,072 in 2015.
Stay tuned, though: Gov. Bill Walker has proposed imposing a state sales tax or income tax to close the state’s nearly $3 billion budget deficit.
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.
Property taxes here are above average for the U.S. The property tax on South Dakota’s median home value of $140,500 is $1,879.
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 $159,000 is $1,686.
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 8%. (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.
The Silver State is another no-income-tax haven. Also, the property tax on Nevada's median home value of 173,700 is $1,481, 20th-lowest in the U.S.
But 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%. (Food and prescription drugs are exempt from the state’s sales tax, but counties may tack on as much as 1.25%.)
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 $238. (Clark and Churchill counties add their own taxes to fund road construction; for this sample vehicle, they would add another $60.)
Courtesy Aaronyoung777 via CC BY 4.0
The Peace Garden State imposes only modest sales taxes that favor agriculture (new farm machinery is taxed at only 3%) and has been cutting income taxes for several years in a row. While North Dakota has an income tax, the average effective rate is vanishingly low – plenty of counties in other states have higher income taxes.
Food and prescription drugs are exempt from sales taxes. Alcoholic beverages are taxed at 7%.
The property tax on a median home value of $153,800 is $1,722, just below the average rate for the U.S.
Lee Cannon via Flickr/Creative Commons
Delaware’s income tax rates escalate quickly, with the top bracket ensnaring those who have taxable income of only $60,000 or more.
Its gas taxes are well below average, and the First State has no sales tax at all (one reason its Rehoboth Beach outlets are a big tourist draw). New Jersey, in response, has halved sales tax on many items in Salem County, which borders Delaware.
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 $231,500 is $1,243, according to the Tax Foundation.
How does the First State do it? In part by being a very friendly place for businesses to incorporate, and then collecting fees and taxes from these absentee businesses, whose real operations are elsewhere.
Arizona’s top income tax rate of 4.54% doesn’t kick in until taxable income exceeds $152,668 for single filers or $305,336 for married couples.
The property tax on the state’s median home value of $167,500 is $1,356, below average for the U.S.
And at 19 cents per gallon, state gas taxes are well below the national average.
Like most states, Arizona excludes prescription drugs and food for home consumption from state sales taxes. However, all 15 counties levy additional taxes, as do many other municipalities, and some jurisdictions extend their taxes to groceries. The average combined state and local sales tax rate is 8.25%, according to the Tax Foundation.
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 $2.89 for new vehicles and $2.80 for used vehicles, for each $100 of assessed value. For example, for a new vehicle that costs $25,000, the first year assessed value would be $15,000 and the VLT would be $420.
Finchlake2000 via Flickr/Creative Commons
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 $144,100 is $707.
Another plus: At 20 cents per gallon, Louisiana’s gas tax is well below the national average.
Louisiana’s top income tax rate of 6% kicks in at $50,000 of taxable income for a single filer. 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 9.98%. In some jurisdictions, sales taxes are as high as 12%.
Loco Steve via Flickr/Creative Commons
Mississippi’s income tax rate kicks in early, resulting in an average 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 is taxed at 19 cents per gallon, the second-lowest rate in the U.S. 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.)
The property tax on the Magnolia State’s median home value of $103,100 is $813, the 15th-lowest in the nation.
Mississippi’s state sales tax rate of 7% is the second-highest in the U.S. (only California, at 8.25%, 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.
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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