STATEN ISLAND, N.Y. — As tax season rolls around, many Americans focus on how much they owe the federal government. However, what often gets overlooked is the impact of state and local taxes, which can be significant and vary widely depending on where a person lives.
A recent study from WalletHub, an online financial advisory site, highlights the states where residents pay the most in state and local taxes. The study analyzed various tax categories such as income tax, property tax, vehicle tax, and sales tax to determine where Americans are giving the most money back to their respective governments.
According to Chip Lupo, an analyst at WalletHub, “Every year during tax season, Americans are reminded of just how much of their hard-earned income isn’t theirs to keep. Living in the right state can ease the stress of tax time, though, as taxpayers in the least expensive states pay less than half as much as those in the most expensive states.”
Methodology of the Study
WalletHub researchers calculated effective tax rates for income tax, real estate tax, vehicle property tax, and sales and excise tax for all 50 states. They then combined these rates to determine an overall effective state and local tax rate. The research also looked at the average annual amount of state and local taxes paid by residents, based on the state’s median household income.
Top 5 States with Highest Taxes
Among the states analyzed, Illinois emerged as the leader with the highest total effective state and local tax rate. Illinois residents pay an average of 16.58% in taxes, amounting to $12,270 annually on the state’s median household income.
New York came in second with a total effective tax rate of 14.74%, with residents paying approximately $13,774 annually in state and local taxes. The breakdown of New York’s tax rate is as follows: 6.15% for real estate tax, 3.8% for income tax, and 4.79% for sales and excise tax.
Although New York’s tax rate is the second-highest, New Yorkers pay the second-largest total amount of state and local taxes in the country, just behind New Jersey, where residents pay an average of $15,032 annually.
Breakdown of Taxes Paid Across the Top 10 States
Here’s a closer look at the top 10 states with the highest effective total state and local tax rates:
- Illinois
- Effective Total State & Local Tax Rate: 16.58%
- Annual Taxes Paid on Median Household: $12,270
- New York
- Effective Total State & Local Tax Rate: 14.74%
- Annual Taxes Paid on Median Household: $13,774
- Connecticut
- Effective Total State & Local Tax Rate: 14.54%
- Annual Taxes Paid on Median Household: $13,231
- New Jersey
- Effective Total State & Local Tax Rate: 13.98%
- Annual Taxes Paid on Median Household: $15,032
- Pennsylvania
- Effective Total State & Local Tax Rate: 13.94%
- Annual Taxes Paid on Median Household: $9,955
- Kansas
- Effective Total State & Local Tax Rate: 13.76%
- Annual Taxes Paid on Median Household: $9,090
- Nebraska
- Effective Total State & Local Tax Rate: 13.22%
- Annual Taxes Paid on Median Household: $9,003
- Iowa
- Effective Total State & Local Tax Rate: 13.14%
- Annual Taxes Paid on Median Household: $8,456
- Ohio
- Effective Total State & Local Tax Rate: 12.75%
- Annual Taxes Paid on Median Household: $7,974
- Texas
- Effective Total State & Local Tax Rate: 12.54%
- Annual Taxes Paid on Median Household: $9,093
The Impact on Taxpayers
The amount that residents in these states pay in taxes can have a significant impact on their finances. For example, New Yorkers pay an average of $13,774 in state and local taxes annually. This is nearly double the amount paid by residents of Ohio, who pay an average of $7,974 in taxes.
The breakdown of these taxes—real estate tax, income tax, and sales tax—highlights the diverse ways in which local governments generate revenue. In states like New York, property taxes are a major contributor to the overall tax burden, while income and sales taxes play a more significant role in states like Illinois and New Jersey.
The WalletHub study also indicates that the tax burden on residents is often linked to the median household income in each state. Wealthier states with higher incomes tend to have higher taxes, while states with lower incomes may have lower taxes, although this is not always the case.
Why This Matters to Residents
For residents, understanding the tax landscape in their state is crucial for financial planning. Taxes can take a significant portion of income, which is why many people opt to move to states with lower tax rates. For instance, states like Texas, which has a lower effective tax rate of 12.54%, may appeal to individuals seeking to reduce their tax burden.
Taxpayers in high-tax states like New York and Illinois may feel the strain, especially if they are not receiving a corresponding level of public services or benefits. While these states offer amenities such as better infrastructure and education, the high tax burden may not always feel justified to residents.
Conclusion
The WalletHub study sheds light on the significant differences in tax rates across the U.S. Residents of high-tax states like New York, Illinois, and New Jersey pay a considerable portion of their income in state and local taxes. For those looking to reduce their tax burden, it may be worth considering a move to a state with lower taxes, such as Texas or Ohio.
As tax season continues, Americans are reminded of how much of their hard-earned income is spent on taxes, and the results of this study highlight how location plays a major role in determining how much taxpayers pay each year.
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