Although a little late this year, due largely to the federal government’s 17-day shutdown in 2013, tax season is here. And, according to a new report, what you owe in taxes could be largely determined by where you live.
The report, released by the Office of Revenue Analysis of the government of the District of Columbia, reviewed the estimated property, sales, auto and income taxes for a hypothetical family at various income levels in 2012 in the largest city within each state. City tax burdens vary widely. A family of three earning $75,000 in Cheyenne, Wyo., paid just $3,475, or 4.6% of its income, in state and local taxes. In Bridgeport, Conn., a family of three earning $75,000 paid $16,333, or 21.8% of its income — a total that does not even include federal taxes.
Not surprisingly, tax rates influence overall tax burdens significantly. This is especially true for property taxes. Seven of the cities with the highest tax burdens also had among the 10-highest property tax rates, according to the Office of Revenue Analysis. Homeowners in Columbus, Ohio, which had the fifth-highest tax burden in the nation, paid an effective rate of $3.57 for every $100 in home value, the highest such rate in the U.S.
Lori Metcalf, fiscal analyst at the Office of Revenue Analysis, noted in an interview with 24/7 Wall St. that property taxes tended to comprise a higher share of state and local tax burdens. Because of this, “the trend that you see in the property tax should be reflected in the overall burden.”
Another tax that is often important in determining the overall tax burden is the income tax. This is especially true for cities with the lowest tax burdens, seven of which are located in states that do not have an income tax. Only one of the five cities with the lowest tax burdens, Billings, Mont., is not located in a state that has no income tax.
Yet the relationship between income taxes and higher tax burdens is not as straightforward. To highlight this, Metcalf noted that higher incomes families usually live in higher-value homes. “This means that when you pay income taxes you’ll have a larger deduction because you’ll have a larger property tax based on a more expensive home and a larger mortgage interest deduction,” Metcalf explained. As a result of this deduction, homeowners’ income tax burdens are often reduced, obscuring the relationship between income taxes and overall tax burdens.
Several factors not reviewed by the Office of Revenue Analysis, whose study focused primarily on the characteristics of tax systems, may play a role in determining tax burdens. One such potential factor is unemployment. In many cities with low tax burdens, the unemployment rate was also very low. Sioux Falls, S.D., and Billings, Mont., had among the lowest unemployment rates in the nation in 2012. At the other end of the spectrum, Detroit, Mich., and Providence, R.I., had both hefty tax burdens and high unemployment.
A number of the cities with the lowest tax burdens were located in states that are considerably less densely populated, such as Alaska, Wyoming, and South Dakota. Even some of the cities themselves are in less densely populated metro areas. Birmingham, Ala., had one of the lowest tax burdens in the U.S. and was located in the least densely populated metro area of any reviewed. By comparison, many of the cities with high tax burdens are located in more densely populated parts of the country, such as the Northeast.
While this falls outside the scope of the report, it is possible that the reason areas with low population density have lower tax burdens is because the cost of running these cities is less. Local governments with fewer residents can spend less on government services. As a result, the government does not have to make as much in taxes.
Several low-tax burden cities were also located in states that had a relative abundance of fossil fuels, including oil, natural gas, and coal. Houston, Tex., is located in the nation’s top state for oil and natural gas production. Cheyenne is the largest city in Wyoming, which accounts for a large portion of the nation’s coal output. A 2012 study by the National Conference of State Legislators found that Alaska, Montana, and Wyoming, all of which have cities with low tax burdens, relied on taxing oil and gas activity for much of their revenue.
Based on the Office of Revenue Analysis report: “Tax Rates and Tax Burdens in the District of Columbia — A Nationwide Comparison,” 24/7 Wall St. reviewed the cities where a hypothetical family of three in different income brackets had the highest and the lowest combined tax burdens. To calculate tax burden, the report identified four different types of taxes: income, property, automobile, and sales. The report examined tax systems in the largest city in each state, as well as in Washington, D.C. All estimates are for the 2012 fiscal year.
Median housing value and median income data used by the report to determine property value are for metro areas. When two cities were located within the same metro area, county level data was used. 24/7 Wall St. also reviewed income figures for these areas from the U.S. Census Bureau, as well as area unemployment rates as of 2012 from the Bureau of Labor Statistics.
These are the cities with the highest taxes:
1. Bridgeport, Conn.
• Taxes for family earning $25,000: $4,001 (4th highest)
• Taxes for family earning $150,000: $33,208 (the highest)
• Unemployment rate: 7.8%
No large U.S. city had a higher tax burden than Bridgeport, where a family of three earning $150,000 a year paid more than 22% of its income in state and local taxes. However, the metro area, which includes affluent Fairfield County, is wealthier than much of the U.S. and was used to calculate home values and property burdens by the Office of Revenue Analysis. More than 20% of households had an annual income of at least $200,000, more than any other metro area reviewed.
The city’s high tax burden was due in large part to property taxes, as the area had both high home values and high effective property tax rates. Also propelling the city to the top of the list was Connecticut’s relatively high income tax burden of 5.2% on families earning $150,000 per year as well as a high tax burden for car owners.
2. Philadelphia, Pa.
• Taxes for family earning $25,000: $3,794 (7th highest)
• Taxes for family earning $150,000: $25,317 (3rd highest)
• Unemployment rate: 8.6%
Philadelphia’s poorer families were subject to a much higher tax burden than those in most other large cities. A family of three earning $25,000 in 2012 paid $788 in income taxes that year, more than all but one other large city. The city’s property tax burden was also considerably high for most income levels that year. A family whose earnings fell into the $100,000 tax bracket, for example, paid more than $11,806 in property taxes in 2012, second-most among large cities.
Read Also: What is OTC Tax?
After a new property tax valuation system was implemented and some residents’ tax assessments more than tripled, the city introduced a “gentrification relief program” at the end of 2013. Fuel was also heavily taxed in 2012, with gasoline costing an additional 31 cents per gallon due to state taxes, which were among the highest in the U.S.
3. Milwaukee, Wisc.
• Taxes for family earning $25,000: $3,245 (26th highest)
• Taxes for family earning $150,000: $26,296 (2nd highest)
• Unemployment rate: 7.4%
Like a number of other cities with high tax load, Milwaukee residents faced especially high property tax burdens. The effective property tax rate in the city was 3%, higher than all but a few regions reviewed. Also driving up taxes was an especially high income tax burden in the city. The state used a graduated income tax system, meaning tax rates are higher for families that earn more, although Milwaukee had no local income taxes. In 2013, the state reformed its tax code, lowering the highest rate as well as the number of overall tax brackets. Governor Scott Walker recently pushed the state assembly to cut both property taxes and the income tax rate for the state’s lowest tax bracket.
4. Baltimore, Md.
• Taxes for family earning $25,000: $2,950 (16th lowest)
• Taxes for family earning $150,000: $24,747 (4th highest)
• Unemployment rate: 7.2%
Baltimore area residents are fairly well-off compared with most of the country — median household income was nearly $67,000 in 2012, among the nation’s highest. Baltimore’s property tax burden is especially high. Families of three earning $150,000 paid $13,772 in property taxes in 2012. Families earning $25,000 had no income tax burden, but those earning $150,000 paid more than 5% of their income in state and local income taxes alone, the sixth-highest percentage of any city reviewed.
5. Columbus, Ohio
• Taxes for family earning $25,000: $2,953 (17th lowest)
• Taxes for family earning $150,000: $22,333 (6th highest)
• Unemployment rate: 6.1%
A family of three earning $25,000 a year in Columbus faced only an 11.8% tax burden, lower than more than half of all cities reviewed. However, tax burdens for families with higher earnings were among the highest in the nation. This is due in large part to the city’s real estate taxes. Although the housing values in the city were not especially high, lower than the average for cities reviewed, residents faced especially high property taxes. At 3.57%, Columbus had the highest effective property tax rate of any city.
6. Providence, R.I.
• Taxes for family earning $25,000: $3,381 (21st highest)
• Taxes for family earning $150,000: $21,294 (7th highest)
• Unemployment rate: 10.3%
Providence’s unemployment rate was 10.3% in 2012, the third worst out of all cities reviewed. Families of three earning lower incomes can receive a state earned income tax credit. For those families earning $25,000 per year, the income tax burden in Providence was negative. Providence families paid more in automobile taxes and fees than their counterparts in any other large city reviewed. Rhode Island residents were taxed more than 30 cents by the state per gallon of gas in 2012, the ninth-highest of any city.
7. Portland, Maine
• Taxes for family earning $25,000: $2,788 (12th lowest)
• Taxes for family earning $150,000: $22,463 (5th highest)
• Unemployment rate: 5.9%
Taxes in Portland are actually quite favorable to lower-income residents. A family of three earning $25,000 had no income tax burden and paid just $568 in state sales taxes. At the other end of the spectrum, however, wealthier families faced especially high tax burdens. A hypothetical family earning $150,000 spent $22,463, or 15%, of their income on state and local taxes.
In 2011, Governor Paul LePage lowered the state’s highest income tax rate and eliminated state income taxes for many low-income Mainers. Maine indexes both its tax brackets and tax exemption for inflation in order to account for price changes. However, higher than average property and gas tax burdens drive up tax burdens for Portland residents. Despite the recent tax reforms, the tax burdens of Portland residents remained relatively high due to high tax burdens on real estate and cars.
8. Louisville, Ky.
• Taxes for family earning $25,000: $3,118 (23rd lowest)
• Taxes for family earning $150,000: $20,524 (8th highest)
• Unemployment rate: 8.3%
Kentucky uses a graduated income tax system, where residents earning higher incomes pay higher income taxes. Local tax rates, however, did not rise with income. Income tax burdens on a hypothetical family earning $25,000 annually were among the highest compared with other large American cities. Property tax burdens were also among the highest in the nation for families in most tax brackets that year.
On the other hand, state gas taxes were relatively low, at just 16.4 cents per gallon, less than in the vast majority of cities considered. Tax revenue should also increase if the city’s population continues to grow. Louisville’s population more than doubled — growing by more than 136% — in the 10 years prior to 2012.
9. Detroit, Mich.
• Taxes for family earning $25,000: $3,421 (18th highest)
• Taxes for family earning $150,000: $19,145 (12th highest)
• Unemployment rate: 10.5%
Detroit taxpayers faced a particularly high income tax burden. A hypothetical family of three earning just $25,000 in 2012 paid $446 in state and local income taxes, or 1.8% of its income, more than residents of all but a few other cities. Likely causing this high tax burden on lower-income families is the flat income tax rates both the state of Michigan and Detroit have, while a majority of states have increasing tax rates for higher income levels.
Additionally, few cities had higher property taxes than Detroit, where the effective tax rate was almost 3%. Property tax burdens would likely be higher if area homes were more valuable. However, Detroit’s homes were among the least valuable in the nation.
10. Wilmington, Del.
• Taxes for family earning $25,000: $2,296 (2nd lowest)
• Taxes for family earning $150,000: $20,332 (9th highest)
• Unemployment rate: 8.6%
Delaware is one of only five states in the U.S. that does not impose a sales tax. The state, including Wilmington, however, makes up for the lack of sales tax in other ways, such as property taxes. A hypothetical family of three earning $150,000 paid $14,701 in property taxes in 2012, more than most cities reviewed. The high property tax burden in Wilmington is likely the result of high property values, rather than taxes, in the city as of 2012.
A family of three earning $150,000 that year was assumed to live in a home valued at $831,784, more expensive than in all but three other large cities. In fact, local properties were taxed $1.77 per $100 of property value, on par with much of the country.
Which State has the Cheapest Tax in the USA?
Personal income tax rates in the United States vary depending on the economic and fiscal priorities of each state. These rates have a direct impact on residents’ financial planning and well-being. Let’s look at which states have the cheapest income tax rates.
For those seeking a lighter tax touch, certain states offer low — or even no — personal income tax, making them attractive destinations for individuals and families looking to maximize their earnings. Here’s a look at the states where residents enjoy the lowest personal income tax rates:
States with no personal income tax:
Some states have decided to do away with personal income tax altogether, giving residents the advantage of keeping more of their earned income. These include:
- Alaska
- Florida
- Nevada
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
New Hampshire does not have an earned income tax, but it does tax interest and dividend income.
Beyond the rates:
While the absence of state income tax can be appealing, it is important to consider the overall tax burden, as states may have higher property or sales taxes to offset the lack of income tax revenue. Additionally, each state has different costs of living and public services that might balance out the tax savings.
Being in a state with low or no income tax can be a major financial advantage, but it’s important to look at the full picture when deciding where you might save the most money. Remember to examine all tax implications, including sales, property, and other state-specific taxes and fees.
