States and municipalities collect income from a variety of taxes. Some states levy a state income tax, while others rely on property taxes, sales taxes or a combination of all of these taxes. Different kinds of taxes impact people in different ways. Determining which states have the lowest tax rates requires looking at all forms of taxation in the state and the impact these taxes are likely to have on your income.
The lowest income tax is no income tax. Nine states levy no state income tax on their residents at publication: Texas, Wyoming, Alaska, Washington, Tennessee, Florida, South Dakota, Nevada and New Hampshire. Of the states that levy income tax, some use a range of tax rates tied to income, while others levy a flat tax on income. Among the lowest income tax states as of 2012, Alabama taxes at a rate of 2 to 5 percent; Arizona’s income tax rates range from 2.59 to 4.54 percent; Colorado levies a flat 4.63 percent; Indiana taxes at a flat rate of 3.4 percent; tax rates in Kentucky and Louisiana range from 2 to 6 percent; Maryland tax rates are between 2 and 5.5 percent; Massachusetts has a flat tax of 5.3 percent and Michigan’s rate is 4.35 percent; New Hampshire has a 5 percent income tax; New Mexico’s rates range from 1.7 to 4.9 percent; North Dakota residents pay between 1.51 and 3.99 percent; Pennsylvania residents pay 3.07 percent; and Utah’s tax rate is 5 percent.
States, counties, cities and special districts may all collect sales taxes. The total sales you pay on a purchase depends on the total of all the sales taxes collected in the area in which you make your purchase. Also, some areas tax everything, while others exempt items such as food, clothing and medicine. At publication, Alaska, Montana, New Hampshire, Oregon and Delaware have no sales tax. Michigan, West Virginia, Rhode Island, Connecticut, Maine, Indiana, Mississippi, Kentucky, District of Columbia and Maryland have a flat sales tax that’s the same everywhere in the state. For 2012, state sales tax rates ranged from a low of 1.45 percent in Alaska, 4.4 percent in Hawaii, 5 percent in Maine and Virginia to highs of 9.45 percent in parts of Tennessee and 8.8 percent in parts of Washington.
Property taxes affect property owners directly, but they can also impact housing costs for renters. States don’t collect property taxes, but local cities, towns, counties and school districts derive income from property taxes. The Property Tax Foundation looked at property tax rates around the country for the three-year period of 2007 to 2009, by county. They determined that the lowest property tax rates, as a percentage of a home’s value, were in Louisiana and Alabama.
Other State Taxes
States also tax cigarettes and gasoline. According to the Tax Foundation, as of 2012, Alaska has the lowest gasoline taxes, at 8 cents a gallon. Wyoming is next lowest, with a tax of 14 cents a gallon. Virginia had the lowest excise tax on cigarettes, 30 cents a pack. Louisiana, with a 36 cent cigarette tax, was the next lowest.
The taxes you pay in each state depend on the property you own, your income and the source of that income (some states exempt certain portions or kinds of income), your age (most states offer some kind of property tax relief to people over 65 and your habits (drivers and smokers will pay gasoline and cigarette taxes). Alaska, with no income tax or sales tax and low gasoline taxes, has the lowest tax bill for many people, with Louisiana, with low state income tax and property tax rates, as another contender for the lowest-taxed state.
- Retirement Living Information Center: Taxes By State
- IRS: States Without A State Income Tax
- MSN Money: Best, Worst States for Retiree Taxes
- Tax Foundation: State Individual Income Tax Rates As Of January 1, 2012
- The Sales Tax Clearinghouse: State Sales Tax Rates Along With Average Combined City and County Rates
- Tax Foundation: State Gasoline Tax Rates as of January 1, 2012
- Federation of Tax Administrators: State Excise Tax Rates on Cigarettes
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