The Tax Man Cometh: The States with the Highest Taxes

TaxesA recent study by the Tax Foundation, a Washington-based tax policy group that fights for a simpler tax code, listed the states with the highest and lowest taxes. It turns out, New York, New Jersey and Connecticut are the three most expensive states to reside because of the high state and local taxes.

People who live in New York pay 12.8 percent of their income to state and local taxes. New Jersey, meanwhile, pay 12.4 percent and Connecticut pat 12.3 percent. This is due to several factors– higher incomes and more capital gains.

?In New York and New Jersey, taxes are higher because these states are very densely populated, which makes it extremely expensive to provide both city and state services to residents. Workers in service industries also earn more money than similar workers in other states, which also drives up taxes. Another reason taxes are so high in these two states (as well as Connecticut) is the fact that, on average, residents earn high incomes and pay more capital gains taxes,? Andrew Schrage co-owner of Money Crashers, a personal finance website dedicated to exploring better ways to save and spend, points out. ?Another reason New York has high taxes is simply because the state has more of them. Residents pay taxes on a federal, state, and local level. There are also taxes on energy, commuting, and communications. New Yorkers also pay an average state sales tax of almost 9%, one of the highest in the country, in addition to high real estate taxes.?

In Jersey, property tax is a driving force. ?The average amount paid in property tax last year was more than $7,500, the highest in the country,? notes Schrage. And in Connecticut, they keep raising the taxes. ?Recently, Connecticut enacted one of the biggest tax hikes in state history. There is now a luxury tax, and taxes also went up on fuel, income, estates and gifts, and the sales tax increased as well,? says Schrage.

At the other end of the spectrum is Alaska where residents pay only seven percent of their income to state and local taxes. Alaska is the cheapest state for taxes in the country, the study found. Alaskan residents have natural resources to thank for their cheap tax rates. According to the report, the state raises more than 70 percent of its revenue from oil extraction. Other states with the lowest state and local taxes include South Dakota, with a 7.6 percent tax rate, and Tennessee at with a 7.7 percent tax rate. ?Alaska has no state income tax and no state sales tax. The reason these aren?t needed is because the state collects significant funds from oil extraction taxes paid by oil companies. More than 70 percent of all state revenues come from this source,? Schrage explains.

There may be some relief if you are living in a state with high tax.

?Although your options are somewhat limited, there are a few ways to potentially reduce your tax burden if you live in a high tax state,? offers Schrage.

Itemize deductions on your return.
?If you use tax preparation software, it can walk you through the entire process. It also tells you if itemizing is better for you than staying with the standard deduction,? says Schrage. ?Itemizing your return often uncovers tax credits and deductions you didn?t know you qualified for.?

Dispute the assessed property value of your home.
?The process differs greatly by state, and is not an easy one, but if you win your dispute and get your home?s value readjusted, you could reduce your property taxes significantly,? says Schrage.