These 5 States Spend Your Tax Dollars the Smartest

Find out if your state gets the top return on the taxes it collects from you.

May 3, 2014 at 9:46AM

Even with tax season having ended last month, millions of Americans are still angry about how much they have to pay in taxes. With federal, state, and local revenue agencies all clamoring for your cold, hard cash, the last thing you want to find out is that your taxing authority is wasting the money they've taken from you.

Recently, WalletHub took a look at how well states do at taking the taxes they collected and providing the key services that residents expect. With services ranging from education, health, and safety to infrastructure, economic conditions, and air and water quality, a select few state governments to a great job in rationing tax revenue and effectively delivering what residents want. Let's look at the five states that the study found did the best job.

Best State Tax
Images courtesy U.S. Mint.

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Flaring in North Dakota. Source: Wikimedia Commons/Joshua Doubek

5. North Dakota
North Dakota ranked ninth in terms of taxes, as it's the only state among the top five that actually imposes a state income tax on its residents. But unlike many higher-ranked states, it did a good job of providing government services, finishing 14th in the study. Although North Dakota does a relatively poor job with education, health, and safety services, it finished in the top four in infrastructure, economic development, and lack of pollution. With the Bakken shale play having led to a huge oil boom in the state, North Dakota looks even more attractive to many would-be residents.

4. Washington
Washington's taxes ranked sixth in the study, reflecting a fairly high sales tax but a lack of a state income tax. But among the top five overall picks, Washington does the best at providing government services, ranking at No. 10. Although the state weighs in with below-average performance in maintaining infrastructure, its solid results in health, environmental, and educational issues justify the top-10 rating. With the boom in the aerospace industry, Boeing (NYSE:BA) has taken advantage of the relatively favorable tax climate in Washington, choosing to keep its primary production facilities in-state after posturing with threats to go elsewhere.

3. South Dakota
South Dakota also has no state income tax and ranks No. 5 in terms of tax rates. It also does a good job with government services, placing 15th among the states. Like its neighbor to the north, infrastructure and environmental factors are South Dakota's best strong suits, but education and safety pose substantial challenges. Moreover, without the energy resources North Dakota has, South Dakota has relied more on becoming a home to the credit card divisions of Wells Fargo (NYSE:WFC), Citigroup (NYSE:C), and other major financial institutions because of favorable laws on interest rates.

Ak Pic

Alaska energy terminal. Source: ConocoPhillips.

2. Alaska
Alaska is the worst among these top five at providing government services, ranking just below the median at No. 26. But with no state income tax and only limited local sales taxes, Alaska is second in terms of attractive tax rates. Moreover, while the state ranks dead last in safety-related services -- in part because of the geographical challenges of providing such services -- Alaska actually scores well on environment, infrastructure, and the economy. Given the importance of the energy industry to Alaska, high oil prices have helped bolster Alaska's economy for decades and will continue to play a role in the state's future.

1. Wyoming
Wyoming tops the list, also boasting the best tax rating in the U.S. and finishing at a respect 13th in terms of government services. With the best infrastructure in the nation and strong scores in economic and environmental issues, Wyoming offsets some of its weaker scores in education, health, and safety services. The energy boom has played a role in Wyoming's strength as well, and what's surprising is that even with no state income tax and plenty of economic opportunity, Wyoming remains the least populous state in the nation.

As you consider how much you pay in taxes, turn to the study and find out how well your state does at spending your tax dollars. If you're not happy with the answer, then these five states might be appealing to you if you have the flexibility to consider a move.

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Dan Caplinger owns warrants on Wells Fargo. The Motley Fool recommends Wells Fargo, owns shares of Citigroup and Wells Fargo, and has options on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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