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Submission + - Are you paying more income tax in your State ? ( 1

JonnyWoodman writes: As tax season approaches you may wonder — how much of every dollar you earn, do you get to keep or spend ?

In many cases it depends on where you live. Understanding your situation is difficult because of the complexity of the tax codes which vary widely between states. So lets put some numbers into an actual tax package, and see where the dust settles. The results were somewhat surprising in that they differed from what I had commonly heard.

To see how states compare, I considered two situations:
  • Case 1: Single Earning $50k/yr, (or Couple earning $100k/yr).
  • Case 2: Single Earning $100k/yr, (or Couple earning $200k/yr).

I assumed these are the earnings of a single person, or the average earnings of each spouse if married filing jointly. Turns out the percentage of taxes by individual earnings, is about the same whether singled or married, for these ranges in the states I checked. However, due to some states having more progressive tax brackets, the rankings changed between the two income level cases.

The first case is close to the census median. The second case considers upper tier earners whose taxes generally take a bigger bite. I considered eight large population states that impose income taxes.

There are 43 states that levy income taxes on your earnings. Seven states have no Income Tax: Texas, Florida, Nevada, South Dakota, Wyoming, Washington, and Alaska. If you live in one of the tax-free states, then you only pay Federal Income Taxes, and perhaps sales and property taxes. While State Income Taxes are usually not as much as Federal Incomes Taxes, you may be able to deduct some of the state taxes on your federal return. New Hampshire and Tennessee do not levy taxes on earned income, but they do tax dividends and income from investments.

Since concrete apples-to-apples comparisons are not readily available, and the tax codes are so complex, I put these numbers into the Open Tax Solver (OTS) tool [1], and got the following "Effective Tax Rates" [2].

Case 1: $50k income per wage earner (single or married):

  1. North Carolina 4.80%
  2. Virginia 4.78%
  3. New York 4.75%
  4. Massachusetts 4.65%
  5. California 3.33%
  6. Pennsylvania 3.07%
  7. New Jersey 2.43%
  8. Ohio 2.27%
  9. Tx,Fl,Nv,Wy,.. 0.0%

Case 2: $100k income per wage earner (single or married):

  1. California 6.23%
  2. New York 5.63%
  3. North Carolina 5.28%
  4. Virginia 5.27%
  5. Massachusetts 4.88%
  6. New Jersey 4.18%
  7. Pennsylvania 3.07%
  8. Ohio 2.93%
  9. Tx,Fl,Nv,Wy,.. 0.0%

Effective Tax Rate is your total tax divided by your total income. It is equivalent to the average amount of tax you paid on average for every dollar you earned.

In comparison, many people discuss tax-brackets. In many states, you pay little tax on the first portion of your income, and then progressively higher rates on the higher portions of your income. So you may have poked into a higher tax bracket but still end up paying a much lower effective tax rate on your total income. Therefore, I believe the Effective Tax Rate is less confusing, and more meaningful for this type of comparison.

In this discussion, earnings are all your wages plus other sources of income, such as interest, dividends, capital gains, pension, social security, etc.. While some of these are taxed at slightly different rates in some cases, for sake of discussion I lumped them together here. I did not consider deductions like property taxes, dependents, etc.. You can always repeat this yourself with your own situation and numbers.

To place these results into perspective, there are many other factors related to what you can buy in a given place with a given dollar. The relative cost of living and desirability of a location must also be considered. There may also be other kinds of taxes, such as local city taxes, sales tax, and property taxes which vary by region.

To be comprehensive, you need to consider the regional cost of living, housing, transportation, and other staples. But this quick comparison may help in understanding the impact of Income tax on your total budget, especially when making choices about where to live.

[1] http://opentaxsolver.sourcefor...
[2] A plot of these results is available at: http://opentaxsolver.sourcefor...

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Are you paying more income tax in your State ?

Comments Filter:
  • It is interesting to note that the states listed here comprise about 50% of the population. The eight taxed states listed have a total of 116 million people, which is 37% percent of the total US population. And the seven non-taxed states have 57.8 million people, or about 18%. I'm not sure if these states are representative of the other states. But my guess is that they are probably reasonably close. Anyway, the result from the reported states is a fairly good sample that applies to many people.

"It might help if we ran the MBA's out of Washington." -- Admiral Grace Hopper