The best and worst tax states for low-income residents

Where you live can make a big difference in how far your money goes. The cost of living expenses such as housing and food can eat into your budget a lot more in some places than others, and state taxes can also vary widely.

If you don’t make much money, you could easily find yourself struggling more in some states than in others.

WalletHub recently put together a study detailing the way that taxes in each state and the District of Columbia affect the income of low-, middle- and high-income residents. The study ranked the states and D.C. based on the total tax burden as a percentage of income for each type of earner.

Following are the five worst and five best states when it comes to the tax impact on residents with a low income, which WalletHub defined as $25,000.

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Best and worst tax states for low-income residents
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Best and worst tax states for low-income residents

No. 5 worst state: Indiana

Sales and excise tax as a percentage of income: 6.16%

Property tax as a percentage of income: 2.79%

Income tax as a percentage of income: 2.88%

Total tax burden as a percentage of income: 11.82%

Indiana is the fifth-worst state for taxation of residents with a low income. Sales and excise taxes hit these residents particularly hard. Indeed, the Hoosier State’s statewide sales tax rate of 7% is one of the highest in the nation, according to the Sales Tax Institute.

No. 4 worst state: Pennsylvania

Sales and excise tax as a percentage of income: 5.55%

Property tax as a percentage of income: 3.15%

Income tax as a percentage of income: 3.36%

Total tax burden as a percentage of income: 12.06%

Not only is Pennsylvania one of the five worst states in which to be a low-income taxpayer, it is also one of the five worst states for taxpayers with middle incomes, which WalletHub defined as annual earnings of $50,000. 

For low-income residents, sales and excise taxes constitute the greatest share of their total burden. Pennsylvania levies a statewide sales tax of 6%, and some local governments also levy a sales tax of as high as 2%, according to the Sales Tax Institute. That means the combined sales tax rate is as high as 8% in some parts of the state.

No. 3 worst state: Hawaii

Sales and excise tax as a percentage of income: 8.43%

Property tax as a percentage of income: 2.42%

Income tax as a percentage of income: 2.09%

Total tax burden as a percentage of income: 12.94%

The Aloha State has the lowest effective real-estate property tax rate in the country, according to a separate recent analysis by WalletHub, as we recently reported in “This Surprising State Has the Lowest Property Tax Burden.”

Despite this, Hawaii ranks rather low — coming in at third-worst for both low- and middle-income residents — when it comes to the state’s total tax burden as a percentage of those residents’ income

No. 1 worst state: Washington

Sales and excise tax as a percentage of income: 11.14%

Property tax as a percentage of income: 3.45%

Income tax as a percentage of income: 0%

Total tax burden as a percentage of income: 14.59%

If you don’t like having an income tax, Washington can be a great choice. It’s one of the seven U.S. states that do not levy any income taxes, as we recently reported in “Hate Income Taxes? Be Glad You Don’t Live in These 6 Places.”

However, property taxes and especially sales taxes can be problematic for low-income residents here. In fact, state taxes in the Evergreen State are quite regressive overall: While the total tax burden eats up 14.59% of the earnings of low-income residents, it claims 11.26% of the earnings of middle-income residents and only 7.32% of high-income residents’ earnings.

No. 1 worst state: Washington

Sales and excise tax as a percentage of income: 11.14%

Property tax as a percentage of income: 3.45%

Income tax as a percentage of income: 0%

Total tax burden as a percentage of income: 14.59%

If you don’t like having an income tax, Washington can be a great choice. It’s one of the seven U.S. states that do not levy any income taxes, as we recently reported in “Hate Income Taxes? Be Glad You Don’t Live in These 6 Places.”

However, property taxes and especially sales taxes can be problematic for low-income residents here. In fact, state taxes in the Evergreen State are quite regressive overall: While the total tax burden eats up 14.59% of the earnings of low-income residents, it claims 11.26% of the earnings of middle-income residents and only 7.32% of high-income residents’ earnings.

No. 5 best state: South Carolina

Sales and excise tax as a percentage of income: 4.78%

Property tax as a percentage of income: 2.41%

Income tax as a percentage of income: 0.81%

Total tax burden as a percentage of income: 7.99%

Like Hawaii, South Carolina has one of the lowest effective real-estate property tax rates in the United States, according to a separate recent analysis by WalletHub. Overall, South Carolina is also one of the best states in which to be a low-income resident when it comes to the share of earnings claimed by taxes.

No. 4 best state: Utah

Sales and excise tax as a percentage of income: 4.67%

Property tax as a percentage of income: 1.65%

Income tax as a percentage of income: 1.31%

Total tax burden as a percentage of income: 7.63%

Utah isn’t just one of the best places to be a low-income taxpayer. Utah is a state where there isn’t a lot of difference in the tax impact on residents overall, no matter how much you earn. Taxes take up 7.63% of the earnings of low-income residents, compared with 7.75% for middle-income residents and 7.93% for high-income residents.

One bummer for retirees, though: Utah is one of a handful of states that tax Social Security retirement benefits, as we recently reported in “13 States That Tax Social Security Benefits.”

No. 3 best state: Montana

Sales and excise tax as a percentage of income: 1.7%

Property tax as a percentage of income: 3.73%

Income tax as a percentage of income: 1.33%

Total tax burden as a percentage of income: 6.77%

With sales and income taxes taking a smaller share of their earnings, low-income residents have it a little easier in the Treasure State than most other parts of the U.S. Montana is also one of the best states to make a middle income, ranking No. 3 for those residents as well.

Like Utah, however, Montana is one of the 13 states that tax Social Security income.

No. 2 best state: Alaska

Sales and excise tax as a percentage of income: 2.68%

Property tax as a percentage of income: 3.19%

Income tax as a percentage of income: 0%

Total tax burden as a percentage of income: 5.87%

Alaska is one of the best places to live for taxes, no matter your income level. In fact, while is it the second-best state for low-income residents when it comes to taxes, it also is the best state for the tax impact on middle- and high-income residents. Being one of the seven states without a statewide income tax definitely helps.

No. 1 best state: Delaware

Sales and excise tax as a percentage of income: 2.06%

Property tax as a percentage of income: 1.63%

Income tax as a percentage of income: 1.54%

Total tax burden as a percentage of income: 5.24%

Not only is Delaware the best state for the tax impact on low income residents, it also ranks No. 2 for how taxes affect those with a middle-income level. Perhaps not surprisingly, Delaware also has one of the lowest effective real-estate property tax burdens in the country, a separate recent analysis by WalletHub found.

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