These 5 States Squander Your Tax Dollars the Worst

Find out if your state wastes the taxes it collects from you.

May 4, 2014 at 9:46AM

No one likes paying more in taxes than they have to. But the worst thing is when your state and local governments don't make the best use of the tax revenue they collect.

Recently, WalletHub did a study on how good a job various state governments do in making best use of their tax revenue to provide essential services for their residents. Those services include education, health, and safety, as well as infrastructure, economic conditions, and air and water quality. Although some states do a great job of making the most of their tax dollars, others don't provide much bang for the buck when it comes to giving residents what they want. Let's look at the states -- inclusive of D.C. -- that the study found did the worst job.

Worst State Tax
Images courtesy U.S. Mint.

Tobacco

Tobacco plantation. Source: Wikipedia.

5. North Carolina
North Carolina ranked ninth-worst in terms of delivering government services to its residents, which is particularly bad given that it finished in the bottom third in terms of favorable tax structure. The state finishes consistently in the bottom 20 in nearly all areas, with only safety services rising into the top half. Meanwhile, North Carolina's tax burden was 12% higher than the national average, with a 5.8% income tax and a 4.75% state sales tax that jumps to nearly 7% when you add in local sales taxes. Despite the rise of technology services in the Research Triangle area of the state, North Carolina is still the nation's leader in tobacco production, and both Reynolds American (NYSE:RAI) and Lorillard (NYSE:LO) have headquarters within the state.

4. District of Columbia
Washington, D.C., also had a bad combination of tax and government services, ranking eighth worst on the services front and No. 15 in terms of worst taxes. The district does worst in the areas of health and pollution, but even in its best areas of safety and economic performance, it fails to get into the top half of jurisdictions across the country. Meanwhile, individual income tax rates range all the way up to 8.95%, and a 5.75% sales tax combined with high property tax collections make Washington, D.C., a particularly unfavorable tax environment. D.C.'s challenges as a completely urban area with a complex governance structure between local and federal control make it tough for government authorities to coordinate services effectively.

Louisiana Capitol

Louisiana State Capitol. Image: Flickr/Stuart Seeger

3. Louisiana
Louisiana's tax rates actually are relatively good, ranking in the best third of the nation in terms of attractiveness given its low property taxes and top income tax rate of just 6%. But the state is the third worst at providing essential government services, finishing second-to-worst in education and appearing in the bottom dozen for infrastructure and health services. An economy driven by energy and tourism has led to boom and bust periods, especially in light of the devastation that Hurricane Katrina did in 2005. Along with Mississippi and other Gulf states, Louisiana has gotten millions from BP (NYSE:BP) for tourism promotion since the Gulf oil spill, but even with the rise of promising energy-production areas like the Haynesvile Shale, Louisiana still struggles to recover from all the catastrophes it has faced.

2. Mississippi
Like Louisiana, Mississippi has relatively low taxes, appearing among the best 15 states in the country. It has a top income tax rate of just 5%, and although sales taxes come in at 7%, property taxes are relatively low. But Mississippi ranks worst in the nation in delivering government services, with the worst economic environment in the country and bottom-10 showings in education and health services. Mississippi just barely gets into the top half in terms of safety. Perhaps most tellingly, Mississippi is the most reliant of any state on federal-government support.

Walton

Image: Jonathan Babin via Flickr.

1. Arkansas
Arkansas tops the overall list, with the second-worst services in the country and taxes that put the state in the worst half of the nation. State income taxes range as high as 7%, with a state and local sales tax that averages more than 9% despite low property taxes. Arkansas ranks in among the 10 worst for health and safety services as well as economic environment, despite being home to the nation's biggest retailer, and it fails to crack the top half in any of the six major areas. Financial literacy is also a major problem in Arkansas, where the state ranks next to last in the nation, hurting the ability of its residents to improve their financial lives.

Residents in these areas are all too familiar with the economic challenges they face. As you look at how your state performs, keep in mind that despite dealing with the problems that every state and local government has to address, you might be much better off than some of your compatriots.

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Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned. 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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