The best and worst states for middle-class taxpayers
Few people like paying taxes, but some have more reason to gripe about their tax burden than others. A study from the Institute on Taxation and Economic Policy found that the vast majority of state and local tax systems in the United States are inequitable and upside-down. In other words, state and local taxes take a much greater bite out of the income of low- and middle-income families than wealthy families. This is due in large part to the lack of a graduated personal income tax in many states, as well as an overreliance on consumption taxes such as retail sales taxes, excise taxes, and value-added taxes. One of the key takeaways of the study (which excludes elderly taxpayers) is that the tax structures in a staggering 45 states exacerbate income inequality. Cheapism took a closer look at the ITEP data, which was published in 2018, to identify which states in the country are best for middle-class taxpayers and which are worst.
15th Worst: Hawaii
In Hawaii, state and local taxes eat up about 11.6% of the annual income for middle-income households, which the study characterizes as families with a yearly income of between $36,000 and $55,700. At the other end of the income scale, state and local taxes take up about 8.9% of the annual income for earners in the top 1% (whose income is $457,100 or more). Incomes are more unequal in Hawaii after state and local taxes are collected than before, according to the report.
14th Worst: Louisiana
Middle-income households in Louisiana are defined as those whose annual earnings are between $32,500 and $50,300. For those whose income is within this range, state and local taxes take a 10% share of annual earnings. But for the top 1% in Louisiana (households earning more than $473,000 annually), state and local taxes eat up about 6.2% of their yearly income.
13th Worst: Ohio
In Ohio, middle-income households are defined as those bringing in between $33,900 and $55,500 annually. For residents in this income range, state and local taxes take a 10.7% share of their annual earnings. For the top 1% however (annual income of more than $455,700) the impact of state and local taxes is just 6.5%.
12th Worst: Indiana
Indiana is among the nine states in the country that does not apply a graduated personal income tax rate under which higher tax rates are applied at higher income levels. Instead, Indiana applies a flat tax rate on personal income, which contributes to a regressive tax structure in the state that adversely impacts low- and middle-income families. For middle-income earners ($36,100 to $58,000), Indiana state and local taxes deplete an 11.1% share of their annual income. However, for the upper 1% (annual income of $436,100 or more) that figure is 6.8%.
11th Worst: Arizona
For middle-class residents of the Grand Canyon State, the state and local tax burden can be a tough pill to swallow. Households with an annual income of between $35,300 and $55,000 will see a 9.4% share of annual income going toward state and local taxes. For the top 1% ($424,300 or more annually), the state and local tax burden amounts to about 5.9 percent of their yearly income.
10th Worst: Wyoming
Ten states in the ITEP study were labeled the “Terrible 10” for having the most regressive tax systems in the country. The study describes the states in this category as places “with upside-down tax systems that ask the most of those with the least. These 'Terrible 10' tax their poorest residents — those in the bottom 20 percent of the income scale — at rates up to six times higher than the wealthy. Middle-income families in these states pay a rate up to four times higher as a share of their income than the wealthiest families.” In Wyoming, state and local taxes take a 7.5% share of annual earnings for middle-income residents (those earning between $48,800 and $70,900 annually). For the upper 1% earners in the state, however, the state and local tax burden is just 2.6% of their annual income.
9th Worst: Oklahoma
Another member of the Terrible 10, Oklahoma is not doing the middle-class many favors. The study reports that it is among three states that “levy personal income taxes but have structured them in a way that makes them much less progressive than in other states.” The other states in this category are Pennsylvania and Illinois. Oklahoma applies a graduated rate structure but applies the top income-tax rate beginning at an annual income of just $12,200 for married couples, making the income tax essentially a flat tax in practice. For middle-class earners ($34,500-$56,100) in Oklahoma, state and local taxes take up a 10.7% share of annual income, while for the top 1% ($455,600) state and local taxes face a 6.2% impact.
8th Worst: Illinois
Illinois uses a flat personal income-tax rate, which taxes the income of the wealthiest families in the state at the same marginal rate as the poorest. Meanwhile, for middle-income families ($40,800 to $63,800) in Illinois, the state and local taxes will drain a steep 12.6% of their annual income. For the top 1% ($537,400 and above) the state and local tax burden amounts to 7.4% of their income.
7th Worst: Pennsylvania
Another state called out by the report for using a flat income-tax rate that taxes the income of the wealthiest families at the same marginal rate as the poorest, Pennsylvania is also a tough place to be a middle-income household. Those earning between $38,100 and $62,200 see 11.1% of their income going toward state and local taxes. At the top 1% (incomes of $511,000 or more) state and local taxes amount to about 6% of annual income.
6th Worst: Tennessee
In addition to being a member of the Terrible 10, the state of Tennessee is recognized in the ITEP report for being among six states that rely heavily on particularly regressive sales and excise taxes. States in this category derive roughly half to two-thirds of their tax revenue from sales and excise taxes, compared to the national average of 35%. For middle-income ($31,800 to $51,300) earners in Tennessee, the sales and excise tax amounts to 6.7% of their annual income, while for the top 1% ($471,200 or more), it amounts to just 1.2% annually of their income. Overall, state and local income taxes in Tennessee will take an 8.5% share of the annual earnings of middle-income residents and a 2.8% share of the income for the top 1%.
5th Worst: Nevada
Nevada has a lot in common with Tennessee. It, too, is a member of the Terrible 10, and like Tennessee, Nevada is recognized in the ITEP report for being among six states that rely particularly heavily on regressive sales and excise taxes. For middle-income residents of the state ($35,100 to $53,600), the sales and excise taxes will deplete about 4.5% of annual earnings. While that may not seem excessive, for the top 1%, the same taxes only take up a 0.7% share of annual earnings. Overall, state and local taxes in Nevada will drain 7.6% of a middle-income household’s annual earnings and for the top 1% the impact is about 1.9%.
4th Worst: South Dakota
In addition to being a member of the Terrible 10, South Dakota is called out by the ITEP report for taxing food at the full sales tax rate. The other states that do so include Arkansas, Tennessee, Hawaii, Kansas and Oklahoma. Middle-income earners in South Dakota ($40,400 to $67,100) see about 8.9% of their annual income taken up by state and local taxes. The top 1% (those earning in excess of $559,000) spend just 2.5% of their income on such taxes.
3rd Worst: Florida
Florida is another example of a state that’s both a member of the Terrible 10 and also among the six states that rely heavily on regressive sales and excise taxes, deriving from half to two-thirds of its state tax revenue from these specific taxes. If you’re in a middle-income household in Florida ($31,400 to $49,500), about 5.8% of your annual income is spent on sales and excise fees and taxes. For the top 1%, however, the fees amount to less than 1% of their annual income. Overall, state and local taxes in Florida will take an 8.1% bite out of the annual earnings of middle-income households, but for the richest residents of the state they amount to about 2.3% annually.
2nd Worst: Texas
In the Lone Star state, sales and excise taxes make up more than half of all revenue. For middle-income households (earning $35,800 to $56,000), that amounts to 6.8% of their annual earnings. For the top 1% ($617,900 or more), these taxes will deplete just 1.2% of their annual income. Looking at the bigger picture, all state and local taxes combined will drain 9.7% of a middle-income household’s earnings, but for the top 1%, there’s just a 3.1% impact.
Washington has the most unfair state and local tax system in the country, according to the ITEP report. This is particularly apparent in the vast chasm between the impact of state and local taxes on middle-income earners and the top 1%. Those who earn between $44,000 and $70,100 in the state will see a steep 11% of that money go toward these local fees, while the top 1% expend a paltry 3% of their income on the very same fees. Though the state does not charge an income tax, it more than makes up for that fact in other ways, raising more than 60% of all revenue through regressive consumption taxes. “No-income-tax states like Washington, Texas, and Florida do, in fact, have average to low taxes overall. However, they are far from ‘low-tax’ for poor families,” according to the report. “In fact, these states’ disproportionate reliance on sales and excise taxes make their taxes among the highest in the entire nation on low-income families.”
15th Best: West Virginia
While West Virginia does land among the top 15 on the list, it’s still not an ideal place for middle-income households. The ITEP report notes that “West Virginia has the 37th most unfair state and local tax system in the country. Incomes are more unequal in West Virginia after state and local taxes are collected than before.” However, the difference between what middle-income households and the top 1% pay for state and local taxes is less dramatic here than in many other states. Middle-income earners (those making $29,500 annually to $48,100) will spend about 8.5% of the income on such fees, while those in the top 1% (earning $401,600 or more) will spend about 7.4% of their income on the same fees.
14th Best: Idaho
In Idaho, there’s a similar gap between what the middle-income earners and top 1% spend on state and local taxes. For those earning between $34,300 annually and $54,500, state and local taxes absorb about 8.1% of their income. For the top 1% (those earning in excess of $410,900), state and local taxes will have a 7.2% impact.
13th Best: South Carolina
While South Carolina isn’t among the worst places to be a middle-income household, the state is highlighted in the report for providing some fairly lucrative tax loopholes for the wealthiest of cities, thus undermining a progressive tax structure. In particular, the report says South Carolina offers one of the most regressive state income-tax loopholes in the form of a capital-gains tax break. Overall, middle-income households ($30,800 to $49,700) here spend about 8.1% of their annual earnings on state and local taxes. The top 1% ($416,000 or more) see about 6.8% of their income absorbed by state and local taxes.
12th Best: Utah
Utah applies a flat tax rate to personal income, which does not win it many points in the ITEP report, as flat tax rates mean the same rate applies to the poorest and the wealthiest citizens. Overall, middle-income taxpayers ($39,600 to $63,900) in the state spend about 8.2% of annual income on state and local taxes, while the 1% ($486,500 and above) spend about 6.7% of their earnings on such fees.
11th Best: Oregon
Oregon appears to have a fairly equitable state and local tax structure, though the report still points out that incomes are more unequal after state and local taxes are applied here. Middle-income earners ($37,200 to $63,300) spend 9.1% of their annual income on state and local fees and taxes. The top 1% ($483,400 or more) spend about 8.1% of their income on the same fees.
10th Best: Maryland
There’s only a 1.6 percentage point difference between what middle-income households and the top 1% spend on state and local taxes in Maryland. Those earning between $43,600 and $65,900 spend 10.6% annually on such fees, while the top 1% ($534,800 or more) spend 9%.
9th Best: Montana
In Montana, the top 1% ($448,500 or more) spends 6.5% of its income on state and local taxes. For the middle class ($35,800 to $56,500), these levies cost about 7.1% of annual earnings. Though Montana isn’t among the worst on this list, the ITEP report does note that it is among a group of states that allow substantial tax breaks for the wealthy that undermine tax progressivity. In particular, Montana allows deductions for federal income taxes paid, which benefits the wealthiest of residents. “These tax breaks can create an odd — and unfair — situation where the highest income taxpayers devote a lower percentage of their income to income taxes than their middle-income neighbors,” the report said.
8th Best: New York
In New York, middle-income earners ($36,400 to $60,900) spend a steep 12.4% of their income on state and local taxes. The top 1% (income of $780,000 or more), meanwhile, spend about 11.3%, which is still no bargain.
7th Best: Maine
Maine earns kudos in the ITEP report for being among 10 states with more equitable tax systems. Such tax systems are often made more equitable through the use of targeted, refundable, low-income tax credits or refundable earned-income tax credits. Maine, for instance, provides a sales tax credit, and a dependent care tax credit, among others, according to the report. State and local income taxes take a 9.6% bite out of the annual income for a middle-class household, which are those that earn between $35,800 and $56,100 in the state. For the top 1% (households earning in excess of $434,500), state and local taxes cost 8.6% of annual earnings.
6th Best: New Jersey
New Jersey is among 10 states that earned positive scores on ITEP’s Tax Inequality Index. In other words, these states have tax systems that do not worsen income inequality. Instead, they’ve implemented thoughtful and progressive tax policy that have made the systems somewhat more equitable for those who earn the least. Middle-income taxpayers in New Jersey (those earning between $45,300 and $74,800) spend about 10.1% of their income on state and local taxes. The top 1% (those who earn $897,300 or higher) spend about 9.8% of their earnings on these fees.
5th Best: Minnesota
Minnesota is another state that earned a positive score on ITEP’s Tax Inequality Index thanks to a tax system that does not worsen income inequality. Middle-income households, those earning between $43,600 and $70,700 annually, spend about 9.7% of their income on state and local taxes. Those who earn $573,500 or more and make up the top 1% spend about 10.1% on state and local taxes. “The large income gap between lower- and middle-income taxpayers, as compared to the wealthy, is somewhat narrower after state and local taxes than before,” according to the report.
4th Best: Delaware
Yet another state that deserves thumbs up for its efforts at creating a progressive local tax system, Delaware also earned a positive score on ITEP’s Tax Inequality Index. Its state and local tax system does not worsen income inequality. Middle-income earners in Delaware, those who bring home between $37,400 and $59,200 annually, spend about 5.6% on state and local taxes. The top 1% ($444,900 and above) spend 6.5% of their earnings on such taxes.
3rd Best: Vermont
Home to one of the least regressive state tax systems in the country, the significant income gap between the wealthy and lower- and middle-income taxpayers is made somewhat narrower by Vermont’s state and local tax structure. Middle-income households ($39,100 to $59,500) spend 10.1% of their annual income on state and local taxes, while the top 1%, those earning $460,100 or more, spend slightly more at 10.4%.
2nd Best: District of Columbia
The District of Columbia has a very progressive income-tax structure. It has established a six-tier graduated tax rate that varies from 4% to 8.95%. The top tax rate is reserved for millionaires. Most residents pay a lower rate. What’s more, those at the lowest end of the income scale are provided a generous earned income tax credit. Overall, middle-income earners here (those making $44,200 to $70,700) spend about 9.8% on local taxes, while those in the 1% income category (making $919,300 or more) spend about 9.5% of their income on local taxes. When it comes to sales and excise taxes, middle-income earners spend 4.5% of their income on these fees, while the 1% only spend about 0.6% of their income on them.
California is the best place in the country for middle-class taxpayers (at least by some accounts). The ITEP study found that the substantial income gap between lower- and middle-income taxpayers and the wealthy is somewhat narrower after state and local taxes than before. “California’s overall tax system is relatively progressive largely because of graduated marginal income tax rates, additional tax on income over $1 million, and limits on tax breaks for upper-income taxpayers,” the study said. Middle-income taxpayers in California (those who earn between $39,100 and $62,300) spend 8.3% of their income on state and local taxes. The top 1% pays 12.4%.