Author: Matthew Frankel, CFP | May 01, 2019
What makes a state tax-friendly?
There are several different kinds of taxes Americans pay. Of
course, residents of all 50 states are subject to federal income taxes, but
individual states have varying degrees of state and/or local income taxes,
sales taxes, and property taxes.
To level the playing field, we can look at a metric
known as “Tax Freedom Day.” This is the date when the average resident of a
certain area has earned enough money from work to cover all federal, state, and
local taxes. For the average American, Tax Freedom Day is April 19, but
residents of some states can cover their tax burden far earlier.
With that, here are the most tax-friendly states in the U.S., based on data compiled by the Tax Foundation.
8. Georgia (Tie -- April 9 Tax Freedom Day)
Spoiler Alert: There are quite a few ties on this list. In
fact, because of ties, there are a total of 11 states that technically rank
among the “top 10” most tax-friendly states based on Tax Freedom Days, starting
with a four-way tie for the No. 8 spot.
Georgia’s 5.75% top individual income tax rate is on the lower end among states with income taxes. Plus, Georgia charges no property tax on vehicles, unlike some of its southern neighbors.
Georgia is also very tax-friendly for retirees, with big exemptions for Social Security and other types of retirement income.
8. Mississippi (Tie -- April 9)
Mississippi has a 5% top state income tax bracket, which is
one of the lowest among states with an income tax. Property taxes are low, and
Mississippi drivers pay the third-lowest gasoline tax in the U.S. Mississippi
is also a tax-friendly state for its older residents, excluding pension income
as well as IRA and 401(k) withdrawals from taxable income.
8. South Carolina (Tie -- April 9)
The Palmetto State’s top income tax bracket of 7% isn’t
exactly one of the lowest, and the state has one of the highest vehicle
property tax rates in the nation. However, South Carolina makes up for this
with the fourth-lowest residential property tax rate in the U.S., as well as
some of the lowest excise tax rates on things like gas and cigarettes. In fact,
South Carolina collects the lowest amount of excise taxes per capital in the
U.S. Furthermore, South Carolina is rather tax-friendly for retirees, with no
tax on Social Security income and other deductions for retirement income.
8. Arizona (Tie -- April 9)
With a 4.54% top state income tax rate, Arizona’s
per-capital income tax revenue is one of the lowest among states that have an
income tax. The state also has one of the lowest excise tax rates on gasoline,
and property taxes on homes are well below average.
6. Idaho (Tie -- April 7)
Idaho’s 6.03% average combined state and local sales tax
rate is one of the lowest among states that have a sales tax. And while its
6.925% top state income tax bracket isn’t exactly low, it’s not on the high end
of the spectrum either. Furthermore, Idaho has the second-lowest cell phone tax
rate in the U.S., below-average property taxes on homes, and no property taxes
6. Arkansas (Tie -- April 7)
Arkansas has a moderate 6.9% top state income tax bracket
and the third-highest combined state and local sales tax rate (9.43%) in the
United States. Even so, low property and gasoline taxes help Arkansas rank
among the most tax-friendly U.S. states.
3. Tennessee (Tie -- April 5)
Tennessee has the highest average sales tax rate in the
U.S., with a total of 9.47% between state and local taxes. Tennessee also
has the highest excise tax on beer in the entire nation. However, Tennessee is
an extremely tax-friendly state otherwise with a low 2% state income tax,
below-average property taxes on homes, and no property taxes on vehicles.
3. Oklahoma (Tie -- April 5)
Oklahoma has one of the highest combined state and local sales tax rates in the U.S. with a 8.92% average. However, the 5% top state income tax rate, low gasoline taxes, and the lack of property taxes on personal vehicles is enough to put Oklahoma in the No. 3 position on the list of tax-friendly U.S. states.
3. Alabama (Tie -- April 5)
While its 9.14% average combined state and local sales tax
rate is well above average, Alabama property taxes are second-lowest in the
U.S. Plus, the state ranks towards the bottom of the list on gasoline and
cigarette taxes, and its 5% top state income tax rate is well below the
1. Louisiana (Tie -- April 4)
At first glance, it may seem strange for Louisiana to be
tied for most tax-friendly state. After all, its 9.45% combined state and local
sales tax rate is the second-highest in the U.S., and while its 6% top state
income tax bracket is below average, it’s certainly not among the lowest.
However, Louisiana is tax-friendly in several other ways. It ranks among the lowest in the nation for property tax on residences, and its excise taxes on gasoline and other items are well below average. And among states that charge property tax on vehicles, Louisiana has the lowest rate. Louisiana is also one of the more tax-friendly states for retirees, with significant tax exemptions for pension income.
1. Alaska (Tie -- April 4)
Not only does Alaska have no state income tax and no state
sales tax, but it has no property taxes on vehicles either. And as you might
expect from such an oil-rich state, Alaska has the lowest gas tax in the
Now, Alaska does get some tax revenue from its residents. It has above-average excise taxes on things like cigarettes, beer, and spirits, and has the second highest cell-phone tax in the U.S. In addition, now that recreational marijuana usage is legal, Alaska collects a $50 tax per ounce.
There are other ways states get revenue besides individual taxes
It’s fair to mention that states have several other ways to
bring in revenue other than individual income taxes. Just to name a few, some
states receive federal aid, some charge above-average corporate taxes to
businesses, and some derive a significant amount of money from tourism.
Some of the states on this list bring in a lot of money from these and other sources. One obvious example is Alaska, which makes a ton of money from its abundant oil resources. Mississippi and Louisiana are Nos. 1 and 2, respectively, when it comes to federal aid as a percentage of revenue.
The bottom line is that individual taxes are a major component of revenue for all states, but they don’t exactly tell the full story when it comes to state revenue.
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