Top 10 States With Fairest Taxes

WalletHub compared tax data with taxpayer sentiment to find which states have the fairest tax system

As the race for the 2016 elections takes off, WalletHub turned its attention to state and local tax systems to determine where citizens are paying the fairest rates.

WalletHub compared the tax structures in each state to responses from a survey of 1,050 taxpayers about what they think a fair tax system looks like.

Respondents agreed that as a household’s annual income increases, it should pay taxes at a higher rate. Respondents agreed that the poorest households, those that earn $5,000 per year, should pay a state and local tax rate of 2.5%. Respondents said a fair tax rate for $2.5 million households would be 16.4%.

When looking at fair tax rates according to respondents’ political persuasion, the same trend appears; respondents agree that lower-income households should pay a lower tax rate than higher-income households. The disagreement is in the actual rate.

At lower annual incomes, economically conservative respondents assigned a fair tax rate that was higher than the one noted by liberals. Liberals said households that earn only $5,000 a year should pay just 1.7% in taxes, while conservatives said they should pay 3.1%. However, at the $50,000 per year level, liberals pegged a higher rate as fair compared with conservatives: 7.6% versus 7% according to conservatives. That trend continued up to the $2.5 million level, where liberals felt an 18.7% rate was fair, while conservatives thought 14.6% was appropriate.

“Although conservatives appear to support higher taxes on the poor and lower taxes on the rich, the general trend is the same: All Americans believe a fair state and local tax system imposes higher tax rates on wealthy households than on lower- and middle-income households,” WalletHub wrote in the report.

(Related on ThinkAdvisor: 10 Best & Worst States for High-Income Taxpayers)

However, data from the Institute on Taxation and Economic Policy shows the opposite is true, WalletHub found. The average state and local tax burden for the lowest 20% of earners is 10.9%, while the burden for the top 1% is just 5.4%. Many states rely heavily on income and excise taxes, which fall disproportionately on the poor as a percentage of income.

Thomas Potiowsky, director of the Northwest Economic Research Center in the College of Urban and Public Affairs at Portland State University, said this difference in perceived fairness and actual tax structure might be due to the “Senator Russell Long view of taxes and tax reform": Dont' tax you; don't tax me; tax that fellow behind the tree.

Potiowsky said in the WalletHub report that fair is a subjective interpretation. “I think the main difference in being ‘fair’ relates to the benefit-received principle of taxation,” he said. “I hear people complain that they pay all these taxes and don't receive anything in return. […] The other difference arises based on the ability-to-pay principle of taxation. This idea of ‘fair’ is that higher income and wealth people should pay higher taxes, both absolute and relatively. Here the complaint is from people who feel the wealthy are not paying their ‘fair’ share, and the wealthy who may feel just the opposite. “

Following are the states that WalletHub found had the fairest state and local tax structure, based on their dependency on property, sales and excise, income and other taxes. Lower numbers indicate a lower dependency.

Baltimore Inner Harbor.

10. Maryland

  • Dependency on Property Taxes: 16
  • Dependency on Sales and Excise Taxes: 10
  • Dependency on Income (Personal and Corporate) Taxes: 45
  • Dependency on Other Taxes: 21

Denver skyline.

9. Colorado

  • Dependency on Property Taxes: 30
  • Dependency on Sales and Excise Taxes: 29
  • Dependency on Income (Personal and Corporate) Taxes: 19
  • Dependency on Other Taxes: 18

Battlefield Park and Richmond Skyline. (Photo: AP)

8. Virginia

  • Dependency on Property Taxes: 33
  • Dependency on Sales and Excise Taxes: 8
  • Dependency on Income (Personal and Corporate) Taxes: 38
  • Dependency on Other Taxes: 28

Mormon Temple in Salt Lake City. (Photo: AP)

7. Utah

  • Dependency on Property Taxes: 20
  • Dependency on Sales and Excise Taxes: 34
  • Dependency on Income (Personal and Corporate) Taxes: 31
  • Dependency on Other Taxes: 13

University of Minnesota marching band. (Photo: AP)

6. Minnesota

  • Dependency on Property Taxes: 18
  • Dependency on Sales and Excise Taxes: 23
  • Dependency on Income (Personal and Corporate) Taxes: 37
  • Dependency on Other Taxes: 20

Great Big Idaho Potato Truck in Boise.

5. Idaho

  • Dependency on Property Taxes: 22
  • Dependency on Sales and Excise Taxes: 25
  • Dependency on Income (Personal and Corporate) Taxes: 33
  • Dependency on Other Taxes: 30

Old Capitol building in Dover.

4. Delaware

  • Dependency on Property Taxes: 2
  • Dependency on Sales and Excise Taxes: 2
  • Dependency on Income (Personal and Corporate) Taxes: 42
  • Dependency on Other Taxes: 48

Myrtle Beach Boardwalk (Photo: AP)

3. South Carolina

  • Dependency on Property Taxes: 34
  • Dependency on Sales and Excise Taxes: 24
  • Dependency on Income (Personal and Corporate) Taxes: 15
  • Dependency on Other Taxes: 33

Portland Rose Festival Dragon Boat Race in Tom McCall Waterfront Park. (Photo: AP)

2. Oregon

  • Dependency on Property Taxes: 32
  • Dependency on Sales and Excise Taxes: 3
  • Dependency on Income (Personal and Corporate) Taxes: 46
  • Dependency on Other Taxes: 40

Teepee in a Montana Lake.

1. Montana

  • Dependency on Property Taxes: 42
  • Dependency on Sales and Excise Taxes: 4
  • Dependency on Income (Personal and Corporate) Taxes: 28
  • Dependency on Other Taxes: 46

--- Related on ThinkAdvisor:

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