With the passage of the fiscal cliff deal and the expiration of the payroll tax holiday, most Americans will be paying more taxes this year – but the hike could hurt more depending on what state you live in.
PHOTO GALLERY: Click Here to See the 10 Worst States for Taxes
The Tax Foundation's 2013 State Business Tax Climate report recently ranked the best and worst states for taxes to enable business leaders, policymakers and taxpayers understand how their states measure up. The 10 best include low-population, western states including Wyoming and South Dakota, as well as a few eastern states like New Hampshire and Florida. And what did they have in common? They had low rates or lacked one of the five major taxes – individual income, corporate, property, sales, or unemployment insurance.
According to the report, the lesson is simple: A state that raises sufficient revenue without one of the major taxes, all things being equal, has an advantage over those states that levy every tax in the state tax collector’s arsenal. They’ll be more competitive in attracting new business and more effective at generating economic and employment growth, since high taxes are a turn-off for both businesses and individuals.
How the Rankings Were Calculated
- Individual Income Tax
While the top income tax rate ranges from 11 percent in Hawaii to 3.07 percent in Pennsylvania, the ranking for income tax also takes into account which states have an AMT, how complex the income tax code is, whether states impose a "marriage penalty" (when two singles can have a lower tax bill than a married couple), and whether capital income is taxed. (Seven states have no personal income tax, so their score here obviously reflects that status: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.)
- Corporate Tax
The corporate income tax rate ranges from a high of 12 percent in Iowa to a low of 4.63 percent in Colorado, though many variables are used to calculate the corporate tax ranking in the study including the types of tax credits offered, whether states have simpler, single-rate systems (as opposed to Alaska's 10-bracket system), and whether some state taxes overlap with federal taxes, creating double taxation.
- Sales Tax
The five states without a sales tax Alaska, Delaware, New Hampshire, Oregon, and Montana obviously score the best in this category. States that score the worst have complex sales tax pyramids, impose taxes on business-to-business transactions, have excise taxes on items like tobacco, liquor and gas, and have high average local sales taxes. Tennessee has the highest combined state and local rate of 9.4 percent.
- Property Tax
Property taxes for a state can be measured by both the per capita amount collected and as a percentage of personal income (total property tax collections divided by personal income). New Jersey has the highest per capita property collections ($2,671); Alabama has the least ($506). The state with the highest property tax rate (calculated by the percentage of personal income) is New Hampshire (5.68 percent), while the state with the lowest is Alabama (1.52 percent). States that score well also avoid wealth-based taxes like estate, inheritance, and gift taxes.
- Unemployment Insurance Tax
The unemployment insurance (UI) tax is paid by employers to finance benefits for workers recently unemployed. Each state has one and in many states, different rates apply to different industries. The rate can also depend on the health of a state's UI trust fund. States with the best UI tax score have simpler rate structures with lower minimum and maximum rates, and have few add-ons and surtaxes.
The 10 worst all levied complex, non-neutral taxes that favor some economic activities over others and have comparatively high individual and corporate tax rates.
“Multiple layers of data [show] that domestic migration occurs consistently away from high tax states,” says Mat Franken, founder of ResidencyHQ.com, a resource for residency information. “Our data points to high-tax states losing residents to low-tax states.”
Here's a look at the top 10 worst states for taxes, in descending order, as of July 1, 2012 (the start of FY 2013).