The Most and Least Taxing States to Live and Retire In

by Joel Stonington

 

States facing shrinking revenues approved $23.9 billion in new taxes and fees in 2010. They imposed a further $6.2 billion in taxes in 2011 and proposed $13.8 billion in new taxes for 2012, according to the National Association of State Budget Officers. "Many jurisdictions, many states, many counties, are broke," said Carol Kokinis-Graves, senior writer analyst at Riverwoods (Ill.)-based tax and accounting firm CCH, a Wolters Kluwer business. Along with cutting services, states are getting creative in finding additional revenues. (Think: taxes on yoga classes and lots more "sin" taxes.)
The Tax Foundation annually releases state-local tax burdens for the residents of each state. The burdens are effective tax rates calculated by totaling state-local level taxes paid by taxpayers in each state, then dividing by their income. The burdens also reflect the economic incidence of taxes that are commonly shifted to out-of-state taxpayers.
Does your state lead the pack in levying taxes on income, property, consumption, inheritance, and whatever else it can dream up? Read on to see which states make you pay the most — and the least.
5 Highest State Tax Burdens
1. Connecticut
Income tax: 5%
Sales tax: 6.35%
Property tax per capita: $2,381
Inheritance tax: 7.2% to 16% with $2 million exemption
High taxes in Connecticut are paired with the nation's highest income per capita--$56,001 per person in 2010, according to the Bureau of Economic Analysis. A sales tax increase took effect in July, raising the rate, from 6 percent to 6.35 percent, and adding a further 3 percentage-point levy on luxury goods such as expensive cars and boats. The state collects the third-highest property taxes per capita and is one of 14 states to tax Social Security income, according to CCH.
2. New Jersey
Income tax: 6.37%
Sales tax: 7%
Property tax per capita: $2,625
Inheritance tax: See note*
Regularly listed as a state with one of the highest tax burdens, New Jersey is cited by the Tax Foundation as having the country's highest property tax per capita. It is also one of 14 states to tax Social Security income, according to CCH.
* Transfer to a spouse, lineal descendant, or charitable organization is tax-free; transfer to children-in-law is taxed at 11 percent to 16 percent; all other transfers are taxed at 15 percent to 16 percent.
3. New York
Income tax: 7.85% (8.97% on income over $500,001)
Sales tax: 4%
Property tax per capita: $2,009
Inheritance tax: Estate taxes range from 0.8% to 16%
The high taxes paid by New Yorkers aren't helping to offset a big decline in revenue amid recession. An oft-suggested, ever-controversial stock transfer tax seems to be off the table. A smoke break to think about how much New York would make whenever a share changes hands is not recommended because the state has the country's highest cigarette tax, at $4.35 a pack.
4. Massachusetts
Income tax: 5.3% (flat tax rate)
Sales tax: 6.25%
Property tax per capita: $1,789
Inheritance tax: Estate taxes range from 0.8% to 16%
Even though Massachusetts residents are saddled with the highest amount of debt per person in the U.S.--$11,357 apiece in 2009, according to the Tax Foundation--it seems likely that the state income tax rate will be reduced this year. Voters moved to reduce it to 5 percent years ago but the change has been blocked by lawmakers. With a $2 billion increase in tax revenue due to a strengthening economy--$723 million over the projected take--the tax rate will likely go from 5.3 percent to 5.25 percent, according to MassLive.
5. Maryland
Income tax: 5.5%
Sales tax: 6%
Property tax per capita: $1,171
Inheritance tax: See note*
Sales tax increases are in the cards for Maryland residents. In 2010, income tax brought in $6.2 billion, compared to $3.8 billion in sales tax. With a budget deficit of more than $1 billion looming, lawmakers are looking at tax increases on gasoline, medicine, online shopping, and snacks. A proposed increase in the sales tax on alcohol, from 6 percent to 9 percent, is expected to add $84.8 million to Maryland's 2012 revenue.
* Spouse and linear-descendant and sibling transfer is tax-free; all other transfers are taxed at 10 percent.
5 Lowest State Tax Burdens
1. Mississippi
Income tax: 5%
Sales tax: 7%
Property tax per capita: $785
Inheritance tax: None
Savers will be gratified to find that recent rule changes in Mississippi exempt all IRAs from income tax. The change makes Mississippi one of four states to allow citizens to contribute to retirement accounts without paying state income tax on the money. Mississippi has no inheritance or estate tax.
2. South Carolina
Income tax: 7%
Sales tax: 6%
Property tax per capita: $963
Inheritance tax: None
South Carolina had the least tax collections per person in 2009 (the most recent year available), according to the Tax Foundation. including corporate taxes. If you are looking to get married, the state has a $50 tax credit for prior counseling.
3. Tennessee
Income tax: None
Sales tax: 7%
Property tax per capita: $752
Inheritance tax: See note*
Tennessee does not tax income, apart from a 6 percent levy on interest and dividends. Capital gains are exempt. Still, investors should be aware that the state inheritance tax allows tax-free transfer only to a spouse.
* Transfer to a spouse is tax-free; all other transfers are taxed at 5.5 percent to 9.5 percent.
4. Alabama
Income tax: 5%*
Sales tax: 4%*
Property tax per capita: $495**
Inheritance tax: None*
With low state debt, Alabama ranks among the states with the lowest taxes collected per capita--$1,770 per person in 2009, according to U.S. Census data and the Tax Foundation. It also has the lowest state and local property tax collections per person. At least one obsolete tax law remains on the books--Alabama's tax for the neediest Confederate veterans from the Civil War. The tax now supports the 102-acre Confederate Memorial Park, built on the site of the Old Soldiers Home for Confederate Veterans and complete with a museum (left), according to an article by the Associated Press.
* Income (highest bracket available), sales, and inheritance tax information were provided by CCH, a Wolters Kluwer business.
** Property tax statistics are derived from a Tax Foundation analysis of 2008 U.S. Census Bureau data.
5. Alaska
Income tax: None
Sales tax: None
Property tax per capita: $1,559
Inheritance tax: None
Alaska gets significant income from corporate taxes, mostly from the oil-and-gas industry. The state collects high revenue per person--$7,145 in 2009, according to the Tax Foundation--without collecting income, sales, or inheritance tax. Local investors don't pay state tax on capital gains because there is no income tax. However, at $1,559 per person, property taxes are relatively high.
Click here to see the full list of The Most & Least Taxing States
As ranked by the Tax Foundation State and Local Tax Burden Per Capita, Fiscal Year 2009

Posted in: The Most and Least Taxing States to Live and Retire In