In this article, we will look at the 15 least tax-friendly states for middle-class families. We will also explore the latest tax brackets and analyze the cooperation of big companies in terms of tax payments. If you want to skip our detailed analysis, head straight to 5 Least Tax-Friendly States For Middle-Class Families.
In recent years, the topic of taxation has taken center stage in the realm of economic discourse, particularly as it pertains to the financial well-being of middle-class families. As these families strive to achieve stability and secure their future, the impact of state-level taxation cannot be overlooked. The burden of taxes on the middle class has become a subject of growing concern, prompting us to examine the various factors that contribute to a state’s tax friendliness.
The IRS has recently released the tax brackets for the upcoming 2023-2024 tax season. These brackets have been adjusted to account for the price increases that have occurred in recent years. The upper limits of the brackets have been raised by 7% compared to the previous year. The tax brackets consist of seven tiers, with tax rates ranging from 10% to 37%. Your specific tax rate depends on your filing status and taxable income. It’s important to understand that the brackets determine how much you owe in taxes, with higher income levels being subject to higher tax rates.
Which State Has Lowest Taxes For Middle Class?
Alaska stands out as the best state for middle-class families due to its low tax burden. With no state income or sales tax, Alaskans enjoy a total state and local tax burden of just 5.10% of personal income, the lowest among all 50 states. Additionally, residents receive an annual payment from the Alaska Permanent Fund Corporation, providing further financial support, making it one of the friendliest tax states in the US. However, Alaska’s cost of living is high, primarily due to the fact that high shipping costs are priced-in due to its remoteness. On the other hand, according to Kiplinger, the most tax-friendly state for retirees is Delaware.
Moreover, as of 2022, there are nine states in the United States that do not impose a state income tax. These states include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Residents in these states are not subject to state income tax on their earnings. This tax advantage can be particularly beneficial for individuals and families looking to minimize their tax burden and retain more of their income. Moreover, of all these, Wyoming is considered to be the most tax-friendly state for high earners. Speaking of most tax-friendly states, Wyoming and South Dakota are considered to be the most tax-friendly states for businesses.
Corporate Tax Responsibility: Examining the Big Names
While we have looked at the states with the lowest taxes for high earners and businesses, let’s explore whether big giants are fulfilling their responsibilities of taxes or not and whether they are making it any easier for citizens when it comes to taxation.
In 2022, Shell Plc (NYSE:SHEL) made hefty payments to governments that totaled around $68.2 billion despite the rising inflation. Of this amount, $13.4 billion was paid in corporate income taxes and $8.2 billion in government royalties. Moreover, Shell Plc (NYSE:SHEL) also collected $46.6 billion in excise duties, sales taxes, and similar levies on their fuel and other products on behalf of governments. Moreover, Shell Plc (NYSE:SHEL) has been voluntarily transparent about its tax payments since 2012.
Scott Galloway, who is a marketing professor at NYU, mentioned that Walmart Inc. (NYSE:WMT), despite being worth half as much as Amazon.com, Inc (NASDAQ:AMZN), has paid significantly more income tax since 2008. Walmart Inc. (NYSE:WMT)’s tax payments amount to $64 billion, which is 46 times higher than Amazon.com, Inc. (NASDAQ:AMZN)’s tax payment of $1.4 billion.
In another instance, customers at Walmart Inc. (NYSE:WMT) outlets in Topeka, Kansas, reported being overcharged at the checkout due to a “Walmart tax” issue. After the reduction in the state sales tax rate on food items took effect, some customers were mistakenly charged both the higher, outdated tax rate and the new rate, resulting in double taxation. Walmart Inc. (NYSE:WMT) promptly acknowledged the issue, apologized for any inconvenience caused, and assured customers that the problem has been resolved.
They provided a solution for affected customers to seek a refund by presenting their receipts to a store manager. This responsive action reflects Walmart Inc. (NYSE:WMT)’s commitment to addressing customer needs and ensuring satisfaction.
H & R Block Inc. (NYSE:HRB) has announced a partnership with Microsoft Corporation (NASDAQ:MSFT) to leverage Azure OpenAI services and generative AI technology, aiming to enhance the tax experience for its customers. By combining H&R Block (NYSE:HRB)’s tax expertise with Microsoft Corporations (NASDAQ:MSFT)’s advanced AI models, the collaboration seeks to deliver faster and more consultative tax services.
As the only tax company selected by Microsoft Corporation (NASDAQ:MSFT) for its AI 100 program, H&R Block (NYSE:HRB) gains access to cutting-edge AI technology while prioritizing data security. This collaboration will enable the development of dynamic and personalized tax filing experiences, as thousands of machine learning models, AI algorithms, and generative AI technology work together to provide real-time advice and streamline the filing process.
With that said, let’s move on to the least tax-friendly states for middle class in the US.
Methodology
To determine the 15 least tax-friendly states for middle-class families, we utilized data from the Tax Foundation. Our ranking was based on the states with the highest income tax and sales tax rates. To assign importance to each tax, we assigned a weight of 0.6 to income tax and 0.4 to sales tax. By calculating the weighted average, we have arranged the list in descending order of least tax-friendliness. We also made sure that our rankings align with the tax burden borne by middle class families by picking the highest tax brackets relevant to the income of middle class families in the US.
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Here is a list of the least tax-friendly states for middle-class households:
15. Wisconsin
Income Tax: 5.35%
Sales Tax: 5%
Weighted Average Tax: 5.21%
Wisconsin maintains a flat corporate income tax rate of 7.90 percent. Furthermore, with 5% sales tax rate, and a maximum local sales tax rate of 1.75 percent, it becomes one of most tax unfriendly states for middle class families. When combined, the average of the overall tax burden of the state and local sales tax rate in Wisconsin stands at 5.43 percent.
14. Maryland
Income Tax: 4.75%
Sales Tax: 6%
Weighted Average Tax: 5.25%
Maryland imposes heavy state and local income taxes, placing a heavy burden on middle-class families. However, when it comes to property taxes, they align closely with the national average. On the bright side, Maryland’s tax system is shopper-friendly, with only a 6% state sales tax and no additional local sales taxes, resulting in a below-average overall sales tax burden for its residents.
13. New York
Income Tax: 6.25%
Sales Tax: 4%
Weighted Average Tax: 5.35%
It goes without saying; New York is not among the middle-class friendly states. New York is known for its high-income tax rates, particularly in New York City. However, the state is generally tax-friendly for retirees as it does not tax Social Security benefits. On the other hand, the tax situation for the middle class in New York is less favorable due to the high-income tax rates, which can result in a higher tax burden compared to other states.
12. Illinois
Income Tax: 4.95%
Sales Tax: 6.25%
Weighted Average Tax: 5.47%
Illinois residents experience the highest effective total state and local tax rate in the nation, exceeding 15% based on the median U.S. household income. When considering the combined impact of state and local taxes, Illinois ranks at the top in terms of the total taxes borne by its residents compared to other states. It is also 29th in our list of States With the Lowest to Highest Capital Gains Tax Rate.
11. Virginia
Income Tax: 5.75%
Sales Tax: 5.3%
Weighted Average Tax: 5.57%
In Virginia, the state sales tax rate stands at 5.30 percent, with a maximum local sales tax rate of 0.70 percent. When combined, the average sales tax rate, including both state and local taxes, amounts to 5.75 percent in Virginia. It is one of the Worst States to Retire in for Taxes and Cost of Living.
10. Oregon
Income Tax: 9.9%
Sales Tax: 0%
Weighted Average Tax: 5.94%
While Oregon’s tax structure eschews a statewide sales tax, it compensates with higher income tax rates. This approach probably aims to promote consumer spending and economic growth while maintaining a progressive tax system. The revenue generated from income tax plays a crucial role in funding public services, particularly education and healthcare, ensuring stable funding for essential programs within the state.
9. Iowa
Income Tax: 6.0%
Sales Tax: 6%
Weighted Average Tax: 6%
Iowa’s tax rates can pose challenges for middle-class families due to their relatively high levels. The state imposes a corporate income tax rate ranging from 5.50 percent to 8.40 percent. Moreover, Iowa has a state sales tax rate of 6.00 percent, along with a maximum local sales tax rate of 1.00 percent. When combined, the average state and local sales tax rate in Iowa amounts to 6.94 percent. These higher tax burdens can create financial difficulties for middle-class families, impacting their ability to meet everyday expenses and achieve financial stability.
8. Kansas
Income Tax: 5.7%
Sales Tax: 6.5%
Weighted Average Tax: 6.02%
In recent years, the state underwent significant tax reforms that led to increased tax burdens. However, these reforms resulted in budgetary challenges and revenue shortfalls. To address these issues, the state implemented higher taxes across different categories, including income taxes and sales taxes, to generate additional revenue. These tax hikes have contributed to Kansas being perceived as having a relatively high tax burden compared to other states.
7. Connecticut
Income Tax: 6.0%
Sales Tax: 6.35%
Weighted Average Tax: 6.14%
Connecticut has a burdensome taxation in place, primarily because of its high government costs. The influence of public-sector labor unions on state and local policies has also led to higher expenses for residents, coupled with lower-quality services and the weight of unfunded pension and retiree healthcare obligations from decades ago.
This is evident in the state’s education sector, particularly in K-12 costs. In 2020, Connecticut’s schools expended $21,346 per student, surpassing Massachusetts by 14% ($18,733) and exceeding the national average by 58% ($13,494). These figures shed light on the financial strain imposed on residents as they contend with the consequences of Connecticut’s high tax burden and its impact on critical public services like education.
6. Vermont
Income Tax: 6.6%
Sales: To be calculated: 6%
Weighted Average Tax: 6.36%
Vermont holds the fourth highest tax burden according to WalletHub’s “2023’s Tax Burden By State” report. With an overall tax burden of 10.28%, Vermont ranks second (out of all states) in property taxes at 4.98%, 27th in individual income taxes at 2.07%, and 27th in sales and excise taxes at 3.23%. The high tax rates have led to relocations, impacting economic growth, while property taxes act as regressive wealth taxes at the local level. Hence, this makes it one of the least tax friendly states for middle class families.
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Disclosure: None. 15 Least Tax Friendly States for Middle-Class Families is originally published on Insider Monkey.