While income tax season is upon us, there is a much broader list of other taxes to consider when measuring the total tax burden. As a resident of Texas, I live in a state that has no personal or corporate state or local income taxes. At first glance that sounds great, but what is important is the total tax burden from all sources and their respective impact on economic growth. Depending on the type of tax and the respective goods and services impacted, economic growth can be impacted and directed by the burden taxation or by the lack of a tax.
The incidence of taxation can be known as flat, regressive or progressive. A regressive tax is one that is applied uniformly to all (such as sales taxes), but takes a greater percentage of an individual’s income from lower earners. Included in the incidence of taxation is not only the tax rate, but also the types of goods and services included and excluded from taxation. If, for example, the sales tax is on all food items, the poor pay a much greater percentage of their income on sales taxes and hence it is deemed regressive.
A progressive tax is one in which higher-income earners pay an increasing percentage of their income as tax – such as an income tax with brackets that increase the tax rate as income rises. Depending on inclusions and exclusions, if only luxury goods priced greater than a certain minimum are assessed with a sales tax, the tax is progressive on those with greater incomes as they purchase more of the higher-priced products or services. An example is having no tax on sail boats less than 30 feet in length but a high tax on longer boats. Not only would such a tax be progressive, it would spur people wanting to sail to do so with a boat less than 30 feet.
Sales taxes are perhaps the most common regressive tax in the U.S. but depending in which state a person resides can change. How much do sales tax collections per capita vary across the U.S.? The variability is rather dramatic based on a study by the Tax Foundation across all 50 states and the District of Columbia. The Tax Foundation is a non-profit organization from Washington, D.C. studying the incidence of taxation and the impact on the economy. Tax-wise, some states are better to reside in than others. The top-10 states with the greatest per-capita state sales tax collections for fiscal year 2017 are shown in the following table. The cost per household, however, is not just the per capita sales taxes, but also includes the number of people per household. The table below shows both the average per capita sales tax and the average number of people per household. The resulting implied sales tax collections per household were calculated by multiplying per capita sales tax collections times the average number of people per household.
The next table lists both alphabetically and in rank order average per capita sales taxes by state. Five states have zero state-level sales taxes: Alaska, Delaware, Montana and New Hampshire. Of these five, just Alaska allows localities to charge sales taxes — although the state does not receive any of the revenues – just the local government. Included in the sales taxes per capita in some states are taxes on services reported by the Census Bureau.
To read the entire Tax Foundation study click https://taxfoundation.org/sales-tax-per-capita-2019/?utm_source=Tax+Foundation+Newsletters&utm_campaign=667d206c5e-EMAIL_CAMPAIGN_2019_02_06_03_53&utm_medium=email&utm_term=0_8387957ec9-667d206c5e-427662773&mc_cid=667d206c5e&mc_eid=c79ab314e3
To view the average size per household for all states click https://www.statista.com/statistics/242265/average-size-of-us-households-by-state/
Just because a state is not collecting a single given tax (such as a sales tax) does not necessarily imply a business-friendly environment tax-wise. Of the seven states without a state personal income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming), five rank in the top-10 states per capita in state sales tax collections.
While Alaska has neither a state sales tax nor a state income tax, the state was on track to run a $2.4 billion deficit in fiscal year 2018, but that was reduced to just $700 million. The bad news is that for the first time ever, Alaska dipped into the Permanent Fund after running a $2.9 billion deficit in fiscal year 2017, or a loss of $3,900 for every man, woman and child.
As economists say, “There is no such thing as a free lunch.” The same is true about taxes. Some states are better than others when it comes to taxes, and others are worse. One way or the other the state government must be financed.
We will agree to disagree regarding what services each state should provide to their constituents. The more services a state makes available to the population, the greater the tax burden on at least some within the state.