Tax Watch: States of America Report


It seems there are elected officials in the states of the union who believe that raising the taxes is the answer for state expenses instead of a set budget to follow and reducing expense when necessary. Wisconsin has just raised its sales tax, increasing the burden upon citizens who are paying $3 per gallon at the pump and trying to make ends meet in their personal budget with rising costs and no income increase to meet those costs.  [GazetteXtra, Herald Times] Presently the states with the highest sales tax are California (7.25%), Mississippi (7%), Tennesssee (7%), Rhode Island (7%), Minnesota (6.5%) and Washington at 6.5%. Most states exempt prescription drugs from sales taxes and some also exempt food and clothing purchases, and there are a few who exempt non-prescription drugs as well. Alaska, Delaware, Montana, New Hampshire and Oregon do not collect sales tax. Every state collects excise tax on gasoline, diesel fuel and gasohol, which is in addition to the sales tax for these commodities. Nine states permit cities or counties to impose a local tax on fuel. Sales tax is collected on tobacco products, as well as excise tax – alcoholic beverages are included in this additional taxation. Presently there are 41 states who impose income tax. New Hampshire and Tennessee only tax income from interest and dividends. Seven states do not tax income: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Out of the 41 states who impose income tax, 35 base the taxes upon federal returns, usually taking a portion of what you pay the IRS or using the federal adjusted gross income or taxable income as the starting point to determine what citizens pay. Some states exempt retirement pensions from taxation, to include military retirees because of federal law that imposes limitations upon taxing retirees. Five states allow no exemptions or tax credits for pension and other retirement income that is counted in federal adjusted gross income: California, Connecticut, Nebraska, Rhode Island, and Vermont. Three states do not allow IRA contributions to be deducted from taxable income: New Jersey, Massachusetts and Pennsylvania. The states that do not tax retired military pay are: Alabama, Alaska, Florida, Hawaii, Illinois, Kansas, Kentucky*, Louisiana, Massachusetts, Michigan, Mississippi”, Missouri”, Nevada, New Hampshire, New Jersey, New York, North Carolina*, Oregon*, Pennsylvania, South Dakota, Tennessee, Texas, Washington, Wisconsin, and Wyoming. (* denotes states that have conditions to the tax policy). Most states give senior citizens a break on their property taxes. Forty states provide either property tax credits or homestead exemptions that limit the value of assessed property subject to tax. All 50 states offer some type of property tax relief program, such as freezes that will lock in the assessed value of your property once you reach a certain age, or deferral taxes until the homeowner moves or dies. Based upon a 2002 census, the following states have the lowest property taxes per capita/year: Arkansas ($191), Alabama ($285), Kentucky ($376), New Mexico ($380), and Oklahoma ($425). The states with the highest local property taxes are: New Jersey ($1,871), Connecticut ($1,733), New York ($1,402), and Rhode Island ($1,369). Ten states still collect an inheritance tax: Indiana, Iowa, Kansas, Kentucky, Maryland, Nebraska, New Jersey, Oregon, Pennsylvania and Tennessee. Connecticut phased out their inheritance tax in 2005. However, in all states, transfers of assets to a spouse are exempt from taxation. In some states, transfers to children and close relatives are also exempt. Despite federal changes in estate taxes, 17 states and the District of Columbia have kept their estate taxes: Illinois, Kansas, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, North Carolina, Ohio, Oregon, Rhode Island, Vermont, Virginia and Wisconsin. The most friendly states to retirees are (2005): Hawaii, Wyoming, Delaware, Alabama, Lousiana, Nevada, Alaska, Colorado, Washington, and Arizona. The worst states are (in descending order): Wisconsin, Nebraska, Kansas, Idaho, New York, Maine, Illinois, Minnesota, Missouri, and Texas. The following is a list of the various tax burdens that is imposed by states: Property taxes, Sales and Gross Receipts, Selective Sales Taxes (alcoholic beverages, amusements, insurance premiums, motor fuels, pari-mutuels, public utilities, tobacco products and others); Licenses (alcoholic beverages, amusements, corporation, hunting and fishing, motor vehicles, motor vehicle operators, public utilities, occupation and business); Other Taxes would include individual income, corporation net income, death and gift, documentary and stock transfer, severance pay, et cetera). The top five states with the lowest tax burden according to a percent of income are: Alaska (6.6%), New Hampshire (7.3%), Delaware (8.4%), Tennessee (8.6%), and Alabama at 8.8%. The average among the 50 states is 10.6%. The five states with the highest tax burden are: Maine (13.5%), New York (12.9%), Ohio (12.0%), Minnesota (11.9%), and Hawaii (11.7%). Alaska has the lowest tax burden because of the tax they levy on oil extracted from the state taxes that are included in the price of oil sold, which means they get a cut from consumers across the country. Alaska sends checks to its residents at tax time for this collection.

Sources:

State Tax Handbook (2006)

Federation of Tax Administrators

The Tax Foundation

National Council of State Legislatures

U.S. Department of Commerce, Bureau of Economic Analysis

[Figures are as of January 2006]

2 comments on “Tax Watch: States of America Report

  1. ElleMaye says:

    Re: Three states do not allow IRA contributions to be deducted from taxable income: New Jersey, Massachusetts and Pennsylvania.

    Does this mean that when I had a regular IRA that I converted to a Roth IRA in PA, that I ACTUALLY ENDED UP PAYING TAXES ON IT TWICE? First, when I contributed to the regular IRA when PA taxed it as an unallowed deduction and second when I converted to the Roth IRA and it was classified in the “regular taxable income” category?

  2. Keith says:

    ElleMaye:
    Thanks for your comment/question and your welcomed visit.
    The feds started the income tax system and the states soon saw the potential and joined in.
    First of all, whenever you invest something in anything, the funds used are already taxed – income tax. You are then taxed again for any capital gains you made for that year in that investment program. Most states comply with the federal income tax rules that IRAs are not taxed (no matter how much of a return you get on it from year to year) until you retire (because it is a retirement fund) or decide to spend it (unless you “roll over” the amount into another investment) and then you are charged by the government in the form of taxation under the income tax regulations. This is just one example of why the present tax system needs to go away and be buried forever.
    In regards to the state of Pennsylvania, you need to ask this question to their tax division. If they are like the federal agency, IRS, most of them can’t analyze something so complex. This is another reason why income tax must be replaced with the Fair Tax. It is weird that your state will not recognize a certain IRA and then when you change it, they “penalize” you by enforcing a tax.
    First, Americans must unite and insist that income tax (16th Amendment) be rescinded, and then replaced with the Fair Tax system (see Rep. John Linder’s (GA) site who carefully explains it all). Mr. Linder is one of the few remaining in Congress who actually REPRESENTS the PEOPLE – and knows that getting rid of the income tax system and replacing it with a consumer flat tax will be better for citizens as well as the government. It is no wonder that so many people “cheat” on their income tax preparation every year – with that and the cost of living – who could resist the chance? The Fair Tax will cost less for the government to enforce, there will not be much of a chance for anyone to cheat, citizens will actually see how much government is costing them, and other benefits. And when the economy turns sour, the government will feel it along with the rest of us – because people will spend less, therefore fewer tax funds will generate. This may, indirectly, finally create an atmosphere where the officials we elect will be more frugal with OUR money.
    I am sure you are aware of the inflation atmosphere within our economy – both by reading and experiencing the cost of living steady rise versus our income. Government’s answer to this is to raise taxes – at all levels. They never think of trimming what they spend, because all of what they spend is “necessary”. Unfortunately, for the common populace, we cannot squeeze much more money into our paychecks via raises because the employer is experiencing the same crunch that we are. It’s a real cycle, isn’t it?
    There are two things we Americans can do: (1) eliminate the income tax and change it to the Fair Tax system; (2) start voting more responsibly, paying attention to the issues and what each candidate represents or how they address the issues. This applies from your local city council right up to the White House. It is time to return this nation back to the people – not either of the two main political parties (and its media minion), but to the People and for the People. It wouldn’t hurt to limit the government down to more manageable operation – as was worked out when creating the Constitution and the Bill of Rights (original ten amendments).
    I am sorry I couldn’t answer your question in a more detailed manner, but providing you with incorrect information based upon, shall we say my state, would be more harmful. Remember that I am an advocate against misinformation, so don’t be disappointed that I couldn’t go into more detail. However, I am in tune with what you are saying. We are in an inflation mode across the country and our governor and the state legislature has implemented as the first of the year the biggest tax increase in Wisconsin’s history – a prime example of fixing the government budget by raising taxes instead of budgeting the treasury more wisely.
    And as a side note concerning the presidential candidates – Rep. Ron Paul is the few people in Congress who actually have saved taxpayer funding by being frugal with his office expenses, et cetera. Ex-Senator Fred Thompson is another candidate who cares about expenses and is for the Fair Tax.
    Thanks so much for presenting this question/comment and visiting LP Journal and making it an interesting place to visit. Maybe you can relay to us what you find out about how Pennsylvania deals with such a situation because some readers are from the state of Pennsylvania.
    Best Regards to a fellow American …

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