This post originally appeared in The Fiscal Times.
With the passage of the fiscal cliff deal and the expiration of the payroll tax holiday, most Americans will be paying more taxes this year – but the hike could hurt more depending on what state you live in.
What earned Maryland its place among the bottom dwellers? It’s the sixth worst state for individual income taxes, fifth worst for unemployment insurance and the 11th worst state for property taxes. Its one bright spot is its sales tax, where it ranked the 8th best state due to the minimal local sales taxes imposed. According to the report, the Northrop Grumman Corporation chose to move its headquarters out of Maryland and into Virginia, citing the better business tax climate there.
The Hawkeye State gets a black eye for being the second worst state for corporate taxes, with a 12 percent rate. It also ranks 37th in property taxes, 33rd in individual income taxes and 34th in unemployment insurance taxes.
Wisconsin is the fifth worst state for individual income tax rates and ranks 32nd in corporate and 33rd in property taxes. Wisconsin also imposes an Alternative Minimum Tax on individuals. According to the report, states that have mimicked the federal AMT have put themselves at a competitive disadvantage through needless tax complexity.
7. North Carolina
North Carolina is the seventh worst state overall, and is also the eighth worst for individual income tax rates and the forth worst for sales taxes. However, the state’s corporate taxes are decent (ranking 29th) and unemployment insurance taxes rank 5th in the nation.
Minnesota's ranking takes a beating for its corporate tax rate, which is among the highest in the nation at 9.8 percent and is ranked 44th out of 50 states. Minnesota is also 44th in individual income taxes, 40th in unemployment insurance taxes and 35th in sales taxes. Minnesota not only has an Alternative Minimum Tax on individual incomes, but also has an AMT on corporations.
5. Rhode Island
This state has the dubious distinction of being the worst state for unemployment insurance taxes: It taxes employers in a variety of ways for unemployment insurance, with a number of different tax rates and extra surtaxes. Moreover, its 4.88 percent effective rate for property taxes is ranked 46th. The state also ranks 42nd for corporate taxes, with a 9 percent corporate rate. Rhode Island has the second-highest cigarette tax, which is $3.50 per pack of cigarettes.
Vermont gets slammed for high property taxes, which are the third worst in the nation with a 5.27 effective rate. The state’s high individual income tax rate (the top marginal individual income tax is 8.95 percent) and high corporate tax rates helped it earn its spot as the fourth worst tax state in the nation.
The Golden State isn't so golden when it comes to taxes. It's the second worst in individual income taxes and sixth worst in corporate taxes. It earns the 40th spot for sales taxes. In 2005, California-based Intel even decided to build a multi-billion dollar chip-making facility in Arizona due to its favorable corporate income tax system. To make matters worse, in November, California voters passed Proposition 30, preventing planned cuts to education spending by raising the state sales tax from 7.25 percent to 7.5 percent for four years and adding four new income tax brackets to the existing seven. A new top income tax rate of 13.3 percent (up from the current 10.3 percent) is effective for seven years, but retroactive to January 1, 2012.
2. New Jersey
With the exception of unemployment insurance taxes, New Jersey scores poorly in all other categories – corporate, individual, sales and property taxes – making it the second worst state for taxes overall. In a 2012 migration study by moving company United Van Lines, New Jersey was the outbound leader for 2012.
1. New York
And the winner for the worst state for taxes is … the Empire State. It’s the worst state in the country when it comes to individual income taxes, likely due to its high top marginal tax rate of 8.82 percent. It ranks 45th for both unemployment insurance taxes and property taxes, and 38th for sales taxes. (It also has the highest tobacco taxes in the country – $4.35 per pack of cigarettes.) Its best score was 23rd for corporate tax rates. New York was also among the top five outbound states in the United Van Lines migration study.
The Tax Foundation's 2013 State Business Tax Climate report recently ranked the best and worst states for taxes to enable business leaders, policymakers and taxpayers understand how their states measure up. The 10 best include low-population, western states including Wyoming and South Dakota, as well as a few eastern states like New Hampshire and Florida. And what did they have in common? They had low rates or lacked one of the five major taxes – individual income, corporate, property, sales, or unemployment insurance.
According to the report, the lesson is simple: A state that raises sufficient revenue without one of the major taxes, all things being equal, has an advantage over those states that levy every tax in the state tax collector’s arsenal. They’ll be more competitive in attracting new business and more effective at generating economic and employment growth, since high taxes are a turn-off for both businesses and individuals.
How the Rankings Were Calculated
- Individual Income Tax
While the top income tax rate ranges from 11 percent in Hawaii to 3.07 percent in Pennsylvania, the ranking for income tax also takes into account which states have an AMT, how complex the income tax code is, whether states impose a "marriage penalty" (when two singles can have a lower tax bill than a married couple), and whether capital income is taxed. (Seven states have no personal income tax, so their score here obviously reflects that status: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.)
- Corporate Tax
The corporate income tax rate ranges from a high of 12 percent in Iowa to a low of 4.63 percent in Colorado, though many variables are used to calculate the corporate tax ranking in the study including the types of tax credits offered, whether states have simpler, single-rate systems (as opposed to Alaska's 10-bracket system), and whether some state taxes overlap with federal taxes, creating double taxation.
- Sales Tax
The five states without a sales tax Alaska, Delaware, New Hampshire, Oregon, and Montana obviously score the best in this category. States that score the worst have complex sales tax pyramids, impose taxes on business-to-business transactions, have excise taxes on items like tobacco, liquor and gas, and have high average local sales taxes. Tennessee has the highest combined state and local rate of 9.4 percent.
- Property Tax
Property taxes for a state can be measured by both the per capita amount collected and as a percentage of personal income (total property tax collections divided by personal income). New Jersey has the highest per capita property collections ($2,671); Alabama has the least ($506). The state with the highest property tax rate (calculated by the percentage of personal income) is New Hampshire (5.68 percent), while the state with the lowest is Alabama (1.52 percent). States that score well also avoid wealth-based taxes like estate, inheritance, and gift taxes.
- Unemployment Insurance Tax
The unemployment insurance (UI) tax is paid by employers to finance benefits for workers recently unemployed. Each state has one and in many states, different rates apply to different industries. The rate can also depend on the health of a state's UI trust fund. States with the best UI tax score have simpler rate structures with lower minimum and maximum rates, and have few add-ons and surtaxes.
The 10 worst all levied complex, non-neutral taxes that favor some economic activities over others and have comparatively high individual and corporate tax rates.
“Multiple layers of data [show] that domestic migration occurs consistently away from high tax states,” says Mat Franken, founder of ResidencyHQ.com, a resource for residency information. “Our data points to high-tax states losing residents to low-tax states.”
Here's a look at the top 10 worst states for taxes, in descending order, as of July 1, 2012 (the start of FY 2013).