Taxes. It's a five-letter word that can make even a grown adult shudder in fear.
Most Americans don't enjoy paying taxes, but it's a necessary evil that allows the federal, state, and local governments to continue operating. Without taxes, there would be no way for governments to obtain funding.
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Tax season, which is well under way, can be a particularly painful process for Americans because the U.S. tax code now contains north of 10 million words, and has undergone around 5,000 changes just since 2001. At the same time, it can be pretty sweet once taxpayers get over the hump and actually prepare their taxes, given that more than 70% of taxpayers wind up with a refund from the federal government each year.
Don't forget about sales and local tax rates
However, taxes shouldn't be something the average American thinks about once annually. For most consumers, taxes are an everyday part of their lives.
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According to data compiled by the Tax Foundation, 45 states (along with Washington, D.C.) collect a statewide sales tax, while 38 states also impose local tax rates, which can obviously vary by county or town. While you might be tempted to avoid shopping in a state with a high sales tax rate, the states with the highest sales tax don't necessarily even crack the top 10 in terms of highest combined tax rate when local taxes are factored in.
For example, California has the highest statewide sales tax in the country at 7.25%. Believe it or not, this is actually down year over year from 7.5% due to the expiration of Prop 30, which added an extra 25 basis-point tax to fund to the state's education program. However, California's average local tax rate is only 1%, making for a combined sales and local tax rate of 8.25%. That might sound like a lot, but it's only the 10th highest in the country.
Likewise, Indiana has the second-highest statewide sales tax rate at 7%. But, it's one of the 12 states that doesn't have local taxes, meaning its 7% combined tax rate is only the 21st highest in the country.
Consumers are being hit hardest by sales and local taxes in these states
In other words, statewide sales tax and average local tax rates by themselves only tell half the story. Here are the seven states where the combined sales and average local tax rates are the highest in the country (as of Jan. 1, 2017).
| State | Sales Tax | Average Local Tax | Combined Tax Rate |
|---|---|---|---|
| Louisiana | 5.00% | 4.98% | 9.98% |
| Tennessee | 7.00% | 2.46% | 9.46% |
| Arkansas | 6.50% | 2.80% | 9.30% |
| Alabama | 4.00% | 5.01% | 9.01% |
| Washington | 6.50% | 2.42% | 8.92% |
| Oklahoma | 4.50% | 4.36% | 8.86% |
| Illinois | 6.25% | 2.39% | 8.64% |
Data source: Tax Foundation. Table by author.
As you can see, Louisiana is probably the last state you'd want to live in as a consumer. The statewide sales tax of 5% comes in as a pedestrian 33rd compared to the other states, but its average local tax of 4.98% is the second highest in the country. In fact, Louisiana's local tax rate maxes out at 7%, meaning some areas could have a combined tax rate of a whopping 12%!
The difference is even more pronounced in Alabama, which came in with the fourth-highest combined tax rate for consumers. Its statewide sales tax of 4% actually makes it the 10th-lowest in the country! However, it has the highest average local sales tax, and a max local tax rate of 7%, meaning some towns can charge as much as 11% combined.
Where you live matters
There's obviously some give and take with these tax rankings, too. For instance, Washington residents may face the fifth-highest combined tax rate in the country, but they also have no state income tax.
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Ultimately, these combined tax rates can have a positive or negative impact on the economies and businesses of these states. For Washington, it can be a bit of a mixed bag. For instance, Oregon, which is Washington's neighbor, has no sales tax. This means Washington businesses can frequently lose out to consumers who'll take a trip to Oregon to make large purchases and save money. But Oregon also has a high state income tax, giving Washington residents the advantage with no state income tax.
Other states aren't as lucky. For instance, New Jersey has a combined tax rate of 6.85%, placing it right at the median of the pack, 25th. However, neighboring Delaware has no statewide or local income taxes, which means New Jersey can lose a lot of potential business to Delaware. It also makes New Jersey, which has the highest average property tax rate in the country, look especially undesirable by comparison for those who own homes there.
These data from the Tax Foundation serves as a good reminder that where you live does matter, and that a little tax planning could go a long way to reducing what you'll owe to the federal, state, and local governments.
