4/30/2011 12:00 AM ET|
The best and worst states for taxes
Where you live can make a big difference in how much you pay in taxes. So can whether you smoke and how you get to work in the morning.
States may use similar methods to fund their budgets -- taxes on income, sales, property, fuel, alcohol, tobacco -- but each does so its own way.
There are 50 states in the union and, it seems, 50 formulas for collecting taxes. For example, only seven states -- Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming -- don't assess income taxes, and New Hampshire and Tennessee have income taxes on just dividends and interest. These states balance the lack of income taxes with other taxes.
If you're lucky enough to live in one of five states -- Alaska, Delaware, Montana, New Hampshire and Oregon -- you won't pay a penny in state sales tax. If you live in California, though, you get hit with 8.25% in sales tax every time you ring up a purchase -- and there may be local taxes on top of that.
Alaska also represents the low end in gas taxes, with 8 cents a gallon levied at the pump. California once again sits at the top of the scale, taxing fill-ups at 48 cents a gallon.
A smoker wanting to save some dough might prefer to live in Missouri, which charges just 17 cents a pack -- but should definitely avoid New York, with its per-pack tax of $4.35. A heavy drinker might want to move from Washington, where spirits are taxed at the rate of more than $26 a gallon, to Wyoming or New Hampshire, which boast no excise taxes on spirits.
That's not to mention the countless other ways to incur, avoid or defer taxes. Each state also sets its own formula for estate, property and inheritance taxes, as well as taxes on Social Security and pension income.
Of course, even Ted Taxpayer and Debbie Deduction, two people making the same salary and living in the same neighborhood, may pay different amounts in taxes. If Ted's house is worth more, he can expect to pay higher property taxes. If Debbie buys fewer goods and services, she saves on sales taxes. Car choices and personal habits also weigh heavily on tax burdens. After all, a nonsmoker won't pay anything in tobacco taxes.
Higher taxes on the way
If you think you're paying too much in state and local taxes now, hang on. Experts say huge state budget shortfalls created by the nationwide economic slump are forcing states to demand more taxes. Rising sin taxes are already evident around the nation, but that won't stop states from seeking additional sources of revenue.
Unlike the federal government, all state governments (except Vermont) are legally bound to balance their budgets without the luxury of simply borrowing more money. They've got to reduce services or increase revenue -- or both.
Many have already turned to gambling. "There are only six or seven states that don't have lotteries now," says Josh Barro, an economist with the Tax Foundation, a nonpartisan tax research group in Washington, D.C. "The states see it like free money."
Tobacco products have also taken a heavy hit. The reasons may not be entirely altruistic, but according to the American Lung Association, higher taxes have proved to reduce tobacco use, especially among youths. Some states made big boosts in cigarette taxes last year, including New York ($2.85 more a pack) and Massachusetts ($1 more).
Taxes you'll see next
What other state taxes are in the wings?
Out-of-staters will continue to be tapped via taxes on goods and services like rental cars and hotel rooms. If you don't live in the state, you can't vote out the politicians who create the taxes, so such taxes are "politically one of the easiest things to do," Barro says.
Some taxes are politically explosive, though. Raising income tax rates on the wealthy, for instance, could backfire by causing those people to move out of the state. As states continue to struggle, though, expect them to take long looks at ways to raise revenue.
Realistically, a downturn is the worst possible time to raise taxes because people are the least able to afford them. Don't expect tax increases prompted by the economic meltdown to go away anytime soon, though. As an unknown wag once said, there's nothing more permanent than a temporary tax increase.
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