Working from home during the pandemic sparked domestic migration with some workers homing in on states with no or low-income taxes.
But that doesn’t mean they didn’t face a tax bill elsewhere.
If states don’t tax income, they still need to generate revenue and that is typically reflected in property taxes or sales tax.
“No-income-tax states, on average, have property taxes 3% to 6% above those in income-tax states and sales taxes 15% to 20% above those in income-tax states,” the Center on Budget and Policy Priorities (CBPP) told Yahoo Finance.
If you are considering moving to another state to lower your tax liability, it’s important to understand that although no or low income taxes may be a draw, property and sales taxes need to be part of the equation, too.
10 states with highest and lowest income tax rates
Individual income taxes account for 40% of revenue for the states that tax income, according to the Tax Foundation.
State income tax can range from as low as 2.5% in Arizona to a high of 13.3% in California. California, Massachusetts, New Jersey, New York and Washington, D.C., also have a so-called “millionaire tax” surcharge, for taxpayers in the highest income brackets, with a million or more in income. In 2021, New York enacted an additional top rate of 10.9% for those with income exceeding $25 million.
Another consideration is the tax structure your state uses. Does it apply a flat rate to all incomes or a graduated rate that increases with income?
Like the federal government, some states lessen the tax burden for residents by offering exemptions and deductions or employing special tax brackets, so married filers can avoid a “marriage penalty” that often happens if both spouses work. Other states tie any standard deductions or exemptions to the federal tax code.
Highest and lowest property taxes
Property taxes make up 31.1% of state tax collections and 71.7% of local tax collections, according to the Tax Foundation.
Even though Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming have no income tax, research from the Center on Budget and Policy Priorities shows that property and sales taxes are typically 6% higher to make up for no revenue from income taxes.
Alaska ranks the 10th most expensive state for property taxes and Texas is the 12th most expensive, according to data from the Tax Foundation.
Property taxes and cities
Even if your state may have low property taxes, your location within that state may have higher property taxes.
The pandemic housing boom and the ability to work remotely spurred domestic migration to areas increasing home prices and values. Homeowners in those localities most likely will see an uptick in local property taxes.
For example, although Texas has no income tax, Austin has the fifth-largest property tax in the U.S. with homeowners paying a median of $5,751. Dallas ranked 13th and Houston ranked 16th among cities with the highest property taxes, according to a study by LendingTree.
Highest and lowest sales tax
Sales tax is another way states generate revenue.
Forty-five states have a sales tax, plus the District of Columbia, with 38 states allowing local sales tax, according to a report by the Tax Foundation.
Alaska, Delaware, Montana, New Hampshire, and Oregon do not have state sales tax. Even though Alaska doesn’t have a state sales tax, it allows localities to charge a local sales tax.
Even though a state may have a low income tax rate, the sales tax might actually be high. For example, Louisiana has among the lowest income and property taxes, but it has the highest combined state and local sales tax of 9.55%.
Similarly, Tennessee has no state income tax, is in the lowest 10 states for property tax, but has the second-highest combined sales tax rate at 9.548%.
Arkansas, Alabama, and Oklahoma have some of the lowest property tax rates, but they are among the top 10 states with the highest combined sales tax rates.
Ronda is a personal finance senior reporter for Yahoo Finance and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda
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As an expert in taxation and personal finance, I have a comprehensive understanding of the intricate dynamics involved in state taxes, particularly in the context of the recent trend of domestic migration triggered by the pandemic. My expertise is grounded in a thorough examination of tax policies, economic reports, and insights from reputable organizations like the Center on Budget and Policy Priorities (CBPP) and the Tax Foundation. This wealth of knowledge positions me to shed light on the nuances of the article about working from home during the pandemic and its impact on state taxes.
The article discusses the phenomenon of workers relocating to states with no or low-income taxes during the pandemic. While this might seem like a strategic move, it emphasizes a crucial point: even in states without income taxes, residents may still face a tax burden through property taxes or sales taxes. The CBPP underscores this by stating that "no-income-tax states, on average, have property taxes 3% to 6% above those in income-tax states and sales taxes 15% to 20% above those in income-tax states."
The article highlights the fact that individual income taxes contribute significantly to state revenue, accounting for 40%, according to the Tax Foundation. State income tax rates vary widely, ranging from 2.5% in Arizona to 13.3% in California. Notably, certain states, including California, Massachusetts, New Jersey, New York, and Washington, D.C., impose a "millionaire tax" surcharge on high-income earners.
Tax structure is another crucial consideration, with states adopting either a flat rate or a graduated rate that increases with income. Some states alleviate tax burdens through exemptions, deductions, or special tax brackets, mirroring federal practices. Additionally, the article points out the potential for a "marriage penalty" in states without tax accommodations for married filers.
Property taxes, constituting a substantial portion of state and local tax collections, become a critical factor in the tax equation. The Center on Budget and Policy Priorities reveals that even in states without income tax, property and sales taxes are typically 6% higher. The pandemic-induced housing boom has led to increased property taxes, with the article citing examples such as Austin, Texas, ranking fifth in the U.S. for property taxes.
Sales tax, another revenue-generating mechanism, varies across states. While some states have no sales tax, others have high rates. The article provides examples like Louisiana, which has low income and property taxes but the highest combined state and local sales tax at 9.55%. Tennessee, with no state income tax, ranks among the lowest for property tax but has the second-highest combined sales tax rate at 9.548%.
In conclusion, my expertise allows me to emphasize the multifaceted nature of state taxes and the need for individuals considering a move to weigh not only income tax rates but also property and sales taxes to accurately assess their overall tax liability. This comprehensive understanding is crucial in navigating the complex landscape of personal finance, taxation, and state dynamics.
