These 5 states don’t tax your income — but there’s a catch

It’s no secret that taxes differ immensely from state to state. But in a recent GOBankingRates ranking that determined the most tax-friendly states for the middle class by using data from the Institute on Taxation and Economic Policy, an important theme emerged: Residents who live in some states that don’t impose a personal income tax are dealing with tax inequality.

The research found that just because a state doesn’t have an income tax, that doesn’t necessarily mean you’ll pay lower or fewer taxes. States ultimately need to find ways to fill the gap of no income tax, and they do it through other forms of taxation, such as sales and property taxes. And depending on whether the state has a progressive or regressive taxation system, lower- and middle-income residents could experience a blow to their wallets. 

RELATED: Take a look at the average tax refund in every U.S. state:

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Average tax refund in every U.S. state
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Average tax refund in every U.S. state

Texas

Average refund: $3,206

Number of refunds: 10,087,693

Total income tax refunded: $32.3 billion

Louisiana

Average refund: $3,115

Number of refunds: 1,611,412

Total income tax refunded: $5 billion

Connecticut

Average refund: $3,099

Number of refunds: 1,396,609

Total income tax refunded: $4.3 billion

Oklahoma

Average refund: $3,098

Number of refunds: 1,300,577

Total income tax refunded: $4 billion

New York

Average refund: $3,059

Number of refunds: 7,712,210

Total income tax refunded: $23.6 billion

New Jersey

Average refund: $3,013

Number of refunds: 3,479,321

Total income tax refunded: $10.5 billion

Wyoming

Average refund: $2,989

Number of refunds: 214,649

Total income tax refunded: $641.6 million

North Dakota 

Average refund: $2,983

Number of refunds: 277,422

Total income tax refunded: $827.4 million

Florida

Average refund: $2,933

Number of refunds: 7,854,538

Total income tax refunded: $23 billion

Mississippi

Average refund: $2,922

Number of refunds: 1,018,429

Total income tax refunded: $2.97 billion

California

Average refund: $2,911

Number of refunds: 13,594,703

Total income tax refunded: $39.5 billion

Washington D.C.

Average refund: $2,900

Number of refunds: 277,399

Total income tax refunded: $804.5 million

Illinois

Average refund: $2,900

Number of refunds: 4,973,653

Total income tax refunded: $14.4 billion

Maryland

Average refund: $2,861

Number of refunds: 2,329,288

Total income tax refunded: $6.7 billion

Massachusetts

Average refund: $2,850

Number of refunds: 2,704,250

Total income tax refunded: $7.7 billion

Alaska

Average refund: $2,843

Number of refunds: 276,887

Total income tax refunded: $787 million

Nevada

Average refund: $2,830

Number of refunds: 1,111,952

Total income tax refunded: $3 billion

Georgia

Average refund: $2,832

Number of refunds: 3,606,774

Total income tax refunded: $10.2 billion

Alabama

Average refund: $2,802

Number of refunds: 1,650,125

Total income tax refunded: $4.6 billion

Virginia

Average refund: $2,771

Number of refunds: 3,129,030

Total income tax refunded: $8.7 billion

Arkansas

Average refund: $2,759

Number of refunds: 989,288

Total income tax refunded: $2.7 billion

Tennessee

Average refund: $2,726

Number of refunds: 2,465,816

Total income tax refunded: $6.7 billion

Utah

Average refund: $2,681

Number of refunds: 1,033,141

Total income tax refunded: $2.8 billion

Washington

Average refund: $2,681

Number of refunds: 2,749,362

Total income tax refunded: $7.4 billion

Arizona

Average refund: $2,672

Number of refunds: 2,244,925

Total income tax refunded: $6 billion

Kansas

Average refund: $2,665

Number of refunds: 1,044,275

Total income tax refunded: $2.8 billion

New Mexico 

Average refund: $2,657

Number of refunds: 724,549

Total income tax refunded: $1.9 billion

South Dakota

Average refund: $2,651

Number of refunds: 321,372

Total income tax refunded: $852 million

West Virginia

Average refund: $2,649

Number of refunds: 649,049

Total income tax refunded: $1.7 billion

Kentucky

Average refund: $2,648

Number of refunds: 1,590,274

Total income tax refunded: $4.2 billion

Delaware

Average refund: $2,648

Number of refunds: 365,749

Total income tax refunded: $968.4 million

Rhode Island

Average refund: $2,643

Number of refunds: 436,490

Total income tax refunded: $1.1 billion

Pennsylvania

Average refund: $2,643

Number of refunds: 5,071,264

Total income tax refunded: $13.4 billion

Colorado

Average refund: $2,636

Number of refunds: 2,014,233

Total income tax refunded: $5.3 billion

North Carolina

Average refund: $2,629

Number of refunds: 3,580,471

Total income tax refunded: $9.4 billion

Nebraska

Average refund: $2,615

Number of refunds: 711,103

Total income tax refunded: $1.8 billion

Indiana

Average refund: $2,612

Number of refunds: 2,577,994

Total income tax refunded: $6.7 billion

Iowa

Average refund: $2,602

Number of refunds: 1,141,151

Total income tax refunded: $3 billion

New Hampshire

Average refund: $2,602

Number of refunds: 558,359

Total income tax refunded: $1.4 billion

Missouri

Average refund: $2,601

Number of refunds: 2,220,029

Total income tax refunded: $5.7 billion

South Carolina

Average refund: $2,569

Number of refunds: 1,719,299

Total income tax refunded: $4.4 billion

Hawaii

Average refund: $2,564

Number of refunds: 535,763

Total income tax refunded: $1.4 billion

Michigan

Average refund: $2,560

Number of refunds: 3,776,668

Total income tax refunded: $9.7 billion

Ohio

Average refund: $2,517

Number of refunds: 4,570,589

Total income tax refunded: $11.5 billion

Minnesota

Average refund: $2,516

Number of refunds: 2,112,212

Total income tax refunded: $5.3 billion

Idaho

Average refund: $2,457

Number of refunds: 561,133

Total income tax refunded: $1.4 billion

Wisconsin

Average refund: $2,436

Number of refunds: 2,236,886

Total income tax refunded: $5.4 billion

Montana

Average refund: $2,401

Number of refunds: 372,817

Total income tax refunded: $895 million

Oregon

Average refund: $2,398

Number of refunds: 1,431,924

Total income tax refunded: $3.4 billion

Vermont

Average refund: $2,392

Number of refunds: 254,192

Total income tax refunded: $608 million

Maine

Average refund: $2,336

Number of refunds: 509,896

Total income tax refunded: $1.2 billion

Average tax refund by state
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See the Study: Most Tax-Friendly States for the Middle Class

Regressive Taxation vs. Progressive Taxation: Why Does This Matter?

First things first, what’s the difference between progressive and regressive taxes? In a progressive taxation system, upper-income families pay a larger share of their incomes in taxes compared to those with lower incomes, according to the ITEP. On the other hand, in a regressive tax system, poor and middle-income families pay a larger share of their incomes than the wealthiest families.

According to ITEP’s data, these are the five states with the most regressive state and local tax systems:

  1. Washington
  2. Texas
  3. Florida
  4. South Dakota
  5. Nevada

One of the most obvious shared features among these five states is that they do not levy an income tax. Another is the heavy reliance on sales and excise taxes. And in the case of Florida and Texas, these states rely heavily on higher-than-average property taxes.

The worst offender among the five is Washington, where the poorest families contribute nearly 18 percent of their income to taxes. Washington, with its booming tech hub in Seattle and lack of income tax, is drawing more people to it. However, the reality of Washington’s sales, excise and property taxes on everyone but the richest is quite burdensome.

Find Your City: The Average American’s Tax Bill in the 50 Biggest U.S. Cities

5 Worst States for Tax Inequality

Let’s take a closer at the five most unequally taxed states in the U.S.

5. Nevada

In Nevada, sales and excise taxes consume 7.1 percent of the lowest 20 percent of families’ incomes. Compare that to 4.5 percent paid by the middle 20 percent, and just 0.7 percent paid by the top 1 percent of families.

Taken all together, the lowest 2 percent of families pay 10.2 percent of their income in taxes. And the top 1 percent pay out a mere 1.9 percent.

4. South Dakota

State and local taxes in South Dakota consume 11.2 percent of the poorest 20 percent’s income and only 2.5 percent of the top 1 percent’s income. That means the poorest families are paying around 4.5 times the share of taxes that the top 1 percent is paying.

3. Florida

Florida relies heavily on property taxes to fill the void from not charging a state income tax. But its property taxes are particularly punishing on the lowest income earners. The lowest 20 percent of families spend 3.9 percent of their income on property taxes, which is three times what the top 1 percent pay from their income (1.3 percent). Sales and excise taxes take away another 8.7 percent of the poorest 20 percent’s income.

In total, the poorest 20 percent of families have to dish out 12.7 percent of their income in state and local taxes. The top 1 percent only have to pay 2.3 percent.

2. Texas

Everything’s bigger in Texas, including the share of taxes the lower- and middle-class pay from their income compared to the richest. State and local taxes consume 9.7 percent of the middle 20 percent’s income. And the lowest 20 percent lose 13 percent of their family income to state and local taxes.

Meanwhile, the richest 1 percent contribute only 3.1 percent. Based on these percentages, that means the middle 20 percent are paying more than three times their share of taxes — and the poorest 20 percent pay over four times.

Texas State Taxes: Here’s Everything You Need to Know

1. Washington

In Washington, the top 1 percent of families contribute 3 percent of their income to state and local taxes. By contrast, the middle 20 percent — families earning $44,000 to $70,100 — lose 11 percent of their income to taxes. Lastly, the lowest 20 percent are paying a harsh 17.8 percent of their income toward state and local taxes.

Property taxes in Washington are particularly rough on the poorest 20 percent of families. The middle 20 percent of earners contribute 2.9 percent of their family incomes to property taxes, which is more than double the top 1 percent’s share (1.3 percent). But the lowest 20 percent contribute 4.5 percent, which is about 3.5 times what the top 1 percent contribute.

What to Do If You Live in a State With a Regressive Tax System

It might sound obvious, but one way to survive in a regressive tax system is to increase your income and find ways to protect your paycheck from taxes.

For example, talk to a tax expert about saving money in a tax-deferred retirement account to reduce your taxable income. Or, if you’re thinking about buying a home soon, consider the tax benefits of homeownership. You can reduce your taxable income, for example, by taking advantage of the mortgage interest deduction.

Lastly, because these states exact much of their tax revenue from state and local sales and excise taxes, the key to saving money could be to live in local jurisdictions with lower sales tax rates. A county with a lower local sales tax rate can bring down the combined state and sales tax rate.

Keep reading to see the average American’s tax bill in every state.

More from GO Banking Rates:   
The Most and Least Tax-Friendly States for Retirees 
These States Have the Lowest Property Taxes 
Americans Could Be Saving More — They Just Don’t Know It Yet  

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This article originally appeared on GOBankingRates.com: These 5 States Don’t Tax Your Income — but There’s a Catch

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