The majority of U.S. states have overall tax burdens of between 7% and 9% of the average resident's personal income, according to a new report by personal finance website WalletHub. However, residents of the 10 highest-tax states in the nation pay significantly more than the average -- more than 13% in the most extreme case. And keep in mind that this is in addition to Federal income taxes and payroll taxes.
Here's a rundown of the 10 highest-tax U.S. states, and why their residents could end up with an even higher tax burden in 2018 and beyond.
Image source: Getty Images.
More than just income tax
It's important to consider a state's entire taxation picture, not just one component of it. For example, many people only think of income tax when they hear the phrase "state taxes," but the reality is that there is more to it. Specifically, many states generate lots of revenue from property taxes. As a personal example, I grew up in New Jersey, and I remember my father telling me that the property taxes on our home were actually more expensive than the mortgage payment. Most states also use sales taxes as a major revenue driver.
For example, Texas has no state income tax, but it has property and sales taxes that are significantly above average. In fact, the average Texas resident pays 8.15% of their income in these other state taxes. Now, the lack of a state income tax certainly helps alleviate some of residents' tax burden, but the point is that Texas isn't exactly a "low-tax" state simply because it doesn't have a state income tax.
The 10 highest-tax states in the U.S.
With that in mind, personal finance website WalletHub recently ranked all 50 U.S. states in terms of how much state taxes residents pay, as a percentage of their income. For example, a total tax burden of 10% implies that the average resident of the state pays 10% of their personal income in various state taxes.
Here are the top 10 for 2018, as well as how the tax burdens break down into the three major categories -- property, income, and sales taxes.
|
State |
Total Tax Burden |
Property Taxes |
Income Taxes |
Sales and Excise Taxes |
|---|---|---|---|---|
|
New York |
13.04% |
4.62% |
4.78% |
3.64% |
|
Hawaii |
11.57% |
2.20% |
2.85% |
6.52% |
|
Maine |
11.02% |
4.80% |
2.69% |
3.53% |
|
Vermont |
10.94% |
5.20% |
2.32% |
3.42% |
|
Minnesota |
10.37% |
3.00% |
3.70% |
3.67% |
|
Connecticut |
10.19% |
4.17% |
3.34% |
2.68% |
|
Rhode Island |
10.14% |
4.70% |
2.31% |
3.13% |
|
Illinois |
10.08% |
4.11% |
2.44% |
3.53% |
|
New Jersey |
10.02% |
5.12% |
2.46% |
2.44% |
|
California |
9.57% |
2.66% |
3.65% |
3.26% |
Data source: WalletHub.
Residents of these states could really miss the unlimited SALT deduction
One of the most significant, and most controversial, changes made by the Tax Cuts and Jobs Act is a reduction in the state and local taxes deduction, also known as the "SALT" deduction.
Under previous tax law, Americans could deduct all of the property taxes paid to their state or local jurisdiction, as well as either their state income taxes or sales taxes, with no cap to the deductible amount. For example, if a resident of New York paid $20,000 in property taxes and $30,000 in income taxes in 2017, they were permitted to deduct the entire $50,000 tax bill on their federal return.
Starting in 2018, the deduction is no longer unlimited -- rather, a maximum of $10,000 of state and local taxes are deductible going forward. In our previous example, our New Yorker who paid $50,000 in property and income taxes will lose $40,000 of their prior deduction.
To be fair, other provisions of the Tax Cuts and Jobs Act could help offset this in many cases, such as the lower federal tax rates and the expanded Child Tax Credit. Even so, the loss of the unlimited SALT deduction could certainly result in higher tax bills for many residents of these high-tax states.
