Best and Worst States for Taxes -and more issues about taxes

[Chiwas]

Paying a lot? Where you can get a rate break

Philipp Harper

The state of your tax bill depends in no small measure on your state.


That's because the tax burdens imposed by the 50 states are as varied as their landscapes. You can pump up your business's bottom line by being smart about where you decide to operate.

Of course, taxes aren't the only criteria people apply when choosing a business venue. If they were, Alaska would be far more crowded; by almost any measure, its residents pay the lowest tax rate in the nation. More below on where other states rank.

First, though, it's important to understand that judging the severity of a state's total tax bite — business, property and all other taxes combined — is not the straightforward exercise it might appear to be. Here are two caveats to keep in mind when searching for a tax-friendly state:

State-by-state rankings based on the combined federal, state and local tax bill often tell you less about a state's fiscal policies than about the wealth of your neighbors and how that impacts tax rates.

Unless a state-by-state analysis takes into account who actually pays their taxes, and not simply where it is levied, it can sometimes be more misleading than insightful. In other words, "A tax burden is different from tax collection," says Bill Ahern, a spokesman for the Tax Foundation, a nonprofit advocacy group.


Strip out federal taxes for greater accuracy

The problem with combining federal, state and local taxes is that federal levies can skew the results badly.

A state's federal tax burden rises or falls with the average federal rate paid by its residents. So, if a disproportionate share of the state population is made up of wealthy individuals who are taxed at the highest marginal rate, the state will show a disproportionately large total tax bill.

"Connecticut is the classic example of a high total number," Ahern says. "There is a higher percentage of people there paying at the highest federal rate than in any other state."

When used to calculate a combined tax burden, Connecticut's high federal tax bill at least partially obscures what is happening at the state and local levels. Connecticut has the country's highest tax burden, when counting federal taxes. But for state and local taxes only, Connecticut drops down to 10th-highest (see below).

Meanwhile, Ahern adds, "the flip side of the coin is Mississippi," where a low level of personal income means a low per capita federal tax bill.

"State officials in Mississippi say, 'Look how low our tax burden is,'" Ahern says. "But strip out the federal [taxes] and they rise like a rocket."


The best and worst states for taxes

To assess relative state tax burdens accurately, the Tax Foundation adjusts National Income and Product Account data collected by the U.S. Department of Commerce's Bureau of Economic Analysis. One important comparison the foundation makes is of the total tax burden in each state (including federal taxes) to just the state/local tax burden. In both cases, taxes are measured as a percentage of income.

When federal taxes are included, the 10 states that imposed the lowest total tax burdens in 2002 were:

State Income Tax (in %)
1. Alaska
2. Oklahoma
3. (tie) West Virginia
Alabama
5. Tennessee
6. North Dakota
7. South Dakota
8. (tie) Mississippi
Montana
10. Louisiana 27.0
29.0
29.1
29.1
29.2
29.5
29.7
29.8
29.8
30.1

Meanwhile, the highest total taxes were levied in:

State Income Tax (in %)
50. Connecticut
49. Washington
48. New York
47. New Jersey
46. Wyoming
45. Wisconsin
44. Minnesota
43. (tie) Michigan
Illinois
41. California 36.7
35.6
34.7
34.3
34.1
33.2
32.9
32.8
32.8
32.7

Taking federal taxes out of the equation yields a decidedly different result.

When only state and local levies are considered, the 10 tax-friendliest states of 2002 were:

State Income Tax (in %)
1. Alaska
2. Tennessee
3. New Hampshire
4. Texas
5. (tie) Alabama
Colorado
South Dakota
8. (tie) Nevada
Florida
10. Oregon
6.3
8.4
8.6
9.0
9.1
9.1
9.1
9.3
9.3
9.4

The states with the most onerous state and local taxes were:

State Income Tax (in %)
50. Maine
49. New York
48. Wisconsin
47. Hawaii
46. (tie) Minnesota
Rhode Island
44. (tie) Utah
Ohio
42. Vermont
41. Connecticut
12.8
12.3
12.0
11.6
11.3
11.3
11.2
11.2
11.0
10.9

Only four states (Alaska, Alabama, Tennessee and South Dakota) make both top 10 lists, and only four are in both bottom 10 tallies (Connecticut, New York, Wisconsin and Minnesota).

For the record, Mississippi, which ranks No. 8 in terms of total taxes, slips to No. 36 (15th worst) when only state and local taxes are considered.


A tax is a tax is not always a tax

It's also important to distinguish between where a tax is levied and who actually pays it. Just because a state imposes a high tax on a certain resource or area of commerce doesn't mean the residents of that state are on the hook. In fact, residents may actually benefit.

"All corporate taxes — like Alaska's oil tax — are best understood as taxes on the customers and employees and shareholders of the companies," Ahern says.

Tax-friendly Alaska is a case in point. The high taxes imposed on Alaskan oil companies support many state activities, while being paid mostly by people or entities that reside or are based outside the state.

Ahern points to similar revenue bonanzas in Kentucky (bourbon), Wyoming (mining) and Nevada (tourism).

It's worth noting that even unfriendly state tax policies can create business opportunities — usually in surrounding states. For example, the absence of a sales tax in Delaware means that many consumers cross into the state from Maryland, which does have a sales tax, to do their shopping. Not surprisingly, retail outlets have proliferated on the Delaware side of the border.

A couple of other things to keep in mind when trying to make sense of the tax landscape: Roughly 95% of all property taxes are levied locally; and your local tax bill will be, on average, about half of the state toll. So, clearly, it pays to take local fiscal conditions into account when picking a business location.

[reeds]

confirmed...WISCONSIN SUX

[dude1394]

Originally posted by: Chiwas

Paying a lot? Where you can get a rate break


When only state and local levies are considered, the 10 tax-friendliest states of 2002 were:

State Income Tax (in %)
1. Alaska
2. Tennessee
3. New Hampshire
4. Texas
5. (tie) Alabama
Colorado
South Dakota
8. (tie) Nevada
Florida
10. Oregon

How deliciously conservative.

[u2sarajevo]

Originally posted by: reeds
confirmed...WISCONSIN SUX

By the sounds of things reeds I would have expected you to be praising Wisconsin's high taxes... You seem to love to be taxed.

[dude1394]

Yes u2... You wouldn't want to have a pro-growth agenda that will raise tax revenues now would it. I mean reeds how do you explain the increase in tax revenue with the reagan, kennedy tax cuts? And now the bush tax cuts as well.

The problem with the deficit is the demographics and the inability of the politicians to address social security benefits. Of course there is a reason it has been called the third rail, it's because the dimocrats have used it as a hammer demagoging it to death for 50 years now.

[reeds]

"By the sounds of things reeds I would have expected you to be praising Wisconsin's high taxes... You seem to love to be taxed. "

NO- I never once implied that I like to be taxed..im for the wealthiest americans to pay their fare share thats all...I dont make 200k a year, so I am not considered wealthy...im comfortable but not rich by definiton.....

[Chiwas]

The Basics
10 big tax breaks for the rest of us

It's not just the rich who shelter huge amounts of income from the IRS. See how you stack up.

By Jeff Schnepper

------> Think the rich guys get all the tax breaks?

Wrong, deduction denier.

In fact, most of the big tax breaks go to middle-income earners like you and me. We don’t call them tax shelters. But that’s really what they are.

The tax pros call these shelters “tax expenditures.” These darling deductions and credits have the same impact on the federal budget as direct expenditures. That’s because they represent dollars not collected by the government. And each of these expenditures gives special or selective tax relief to only certain targeted groups of taxpayers.

Sounds like a tax shelter -- or at least a loophole -- to me.

These targeted provisions either encourage some desired activity or provide special aid to certain taxpayers. Some of them make a lot of sense. For example, the federal government seeks to encourage certain forms of investment. So, Congress has legislated accelerated rather than straight-line depreciation on new plants and equipment. This produces more tax savings up front, creating additional capital for business to expand.Your money, fast.

Tax-advantaged investments help create new businesses and new jobs. These new jobs produce more paychecks, and those additional paychecks produce more taxes. In the long run, if everything works as it should, everyone wins.

Some tax expenditures have been adopted as relief provisions to ease tax hardships or to simplify tax computations. The elderly and the blind receive special financial benefits through a deduction called the “additional amount,” which is added to their standard deduction. Other tax benefits for the aged -- the retirement income credit and the potential exclusion of Social Security payments from taxable income -- also fall into this personal or hardship category.


Cost: $800 billion per year

Back in 1980, the Congressional Budget Office had 92 provisions that qualified as tax expenditures, at a cost of $206 billion. President Bush’s fiscal year 2004 budget listed 137 individual tax expenditures projected at more than $800 billion.

The financial benefits offered by these tax expenditures resemble those available on the spending side of the budget. A tax expenditure provision can provide special tax relief in any of the following ways:

Special exclusions, exemptions and deductions. These reduce taxable income and result in a smaller tax bills. Examples are tax-exempt municipal bond interest, the exclusion of employee discounts from taxable income, and dependent-care assistance programs.

Preferential rates. These reduce tax bills by applying lower rates to all or part of your income. Congress gave taxpayers a big one this past year: the new special maximum tax rate on long-term capital gains or on qualified dividends. (It’s 5% for taxpayers in the 15% bracket or lower; 15% for everyone else.)

While the dividend and capital gains breaks are available to all, it is true that higher-end taxpayers will derive more benefit than anyone else. The Citizens for Tax Justice estimates that more than half of the benefits will go to taxpayers with incomes above $145,000.

Special credits. These are subtracted from your tax bill, rather than from the income on which your taxes are figured. For example, the child tax credit or the foreign tax credit.

Tax deferrals. Deferrals let you pay later rather than now. Such deferrals really constitute interest-free loans from the IRS. The best-known deferrals today are the contributions we make to Individual Retirement Accounts, 401(k) accounts or similar retirement funds.


The other side of big spending

Tax-expenditure spending and direct spending are two sides of the same coin. Nearly any tax expenditure can be recast as a spending program. One side reduces the revenues collected. The other side increases the actual cash outflows. The real difference is nothing more than a choice between alternative administrative mechanisms.

So much for the theory. In fact, just like spending provisions, these tax expenditures are really the result of pressure applied by special-interest groups seeking relief provisions for their own constituencies.

For example, the additional amount added to the standard deduction for the blind isn’t available for the deaf. I suspect this may have more to do with the political and lobbying power of the two groups than with any inherent difference between the hardships.

What kind of savings are you getting from your own expenditure tax shelters? The Joint Committee on Taxation recently released tax expenditure estimates for fiscal years 2004-2008. Check out the tax shelter deals you may be getting. (Note: These are ranked by size.)


The biggest tax breaks

And if you’re not claiming the tax break, investigate to see if you can.
Health-care benefits. You don’t pay any tax when your employer pays the premiums for your health insurance and health care. Cost to the government over these five years: $602.7 billion.

This total doesn’t include the estimated cost for deductible health insurance and long-term care insurance premiums. That’s an additional $20 billion.

Contributions to retirement accounts. You don’t pay any current tax when you or your employer sock money away in pension and retirement plans. Cost to the government: $522.1 billion.

Lower rates on dividends and long-term capital gains. Cost to the government: $406.3 billion.

The mortgage-interest deduction. We all love the deduction for home-mortgage interest. But renters and those who own their homes free and clear get nothing. Cost to the government: $372.7 billion.

About 73% of the taxpayers who claimed this deduction on their 2002 returns earned $50,000 or more. About 47% of the total earned between $50,000 and $100,000.

State and local income taxes and personal property taxes. You get a deduction for state and local taxes and personal property taxes paid. Cost to the government: $195.2 billion.

About 94% of the 36.7 million tax returns that claimed the income tax deduction reported earnings of $50,000 or more. And 46% of the total earned between $50,000 and $100,000.

Charitable contributions. Very noble of you. But the rest of us kick in a part of your cost. Cost to the government: $158 billion.

About 81% of the 38.1 million tax returns that claimed this deduction reported earnings of $50,000 or more. About 43% of the total had earnings of between $50,000 and $100,000.

Children under age 17. The child tax credit puts $1,000 per child in your pocket. Cost to the government: $173 billion.

About 53% of the 31 million tax returns that claimed this deduction reported earnings of $50,000 or more. And 75% of that group earned between $50,000 and $100,000.

The earned income credit. You qualify for the earned income tax credit, which is targeted at low-income taxpayers. Cost to the government: $179.7 billion.

About 96% of the tax returns that claimed this benefit last year had earnings of $40,000 or less.

Life insurance or annuity contracts. No current tax on the inside investment income. Cost to the government: $137.5 billion.

You die. The basis for all of your assets (the value at which you start to calculate potential capital gains) is stepped up to fair market value on the date of your demise. That means that the tax on all capital gains you earned up to the date of death is lost. Cost to the government: $202.6 billion.

The total for the 10 above? $2.95 trillion over five years. And I haven’t even mentioned that the deduction you get to take for property taxes on your home will cost the feds $77.8 billion over the next five years. (A total of 34.5 million tax returns claimed the real estate property tax deduction last year.)

And the big break you now get on any profits from selling your home: Another $91.4 billion.

I’m not saying that any of these exclusions, deductions, or credits is a bad idea. I’m just shining a light on the fact that all the breaks don’t really go to the big guys.

I guess that if the expenditure puts money in my pocket, it represents good, sound tax policy.

On the other hand, if I’m a renter in a state with a high sales tax and no income tax, your deductions for interest, real estate tax and state income tax are coming out of the taxes I pay. And you’re the one with a real tax shelter. I’m the one making up the difference.

[reeds]

and NO- I never said the rich get all the tax breaks!! I am just saying they should get MUCH LESS tax breaks than they are now...thats it..simple