These 6 States Tax You the Least
Anywhere you go in the U.S., you'll still have to pay taxes. But choosing low-tax states to live in can free you from your tax burden a lot faster than in other parts of the country.
The nonprofit Tax Foundation created Tax Freedom Day as a way of easily comparing the relative amount of taxes that people pay to federal, state, and local revenue agencies. You can do the same simply by taking the total you pay in tax and dividing it by your income, telling you what percentage of the year you spend paying your fair share of taxes.
For the U.S. overall, Tax Freedom Day won't come until this Thursday, April 18, and as we saw yesterday, some states will have to wait quite a while longer before they can declare independence from taxes. But in several states, Tax Freedom Day has already come and gone. Let's look at the six least-taxed states in the U.S., along with a brief explanation of what makes their taxes so much lower than the rest of the country.
6. South Dakota, April 4
South Dakota makes the list for a couple of key reasons: It doesn't have an individual income tax, and it doesn't charge businesses on their corporate income, either. The state gets its income from property and sales taxes, but a state sales tax of 4% with local taxes of about 1.8% still doesn't raise the total burden too far. Property taxes average less than $1,150 per person.
4 (tie). New Mexico, April 3
Where New Mexico stands out is in low property taxes, with an average of just $633 each year. By comparison, a 4.9% top income-tax rate and a 5.125% sales tax actually bring in a fairly substantial amount of tax, with the state's per-person sales and excise tax liability among the top quarter of states across the nation. Corporate income-tax rates are also fairly high at 7.6%, although the rate is low enough to have enticed chipmaker Intel to move to the area in the early 1980s and gradually expand its production facilities over time.
4 (tie). South Carolina, April 3
South Carolina's tax rates don't seem all that attractive, with a 7% maximum individual income-tax rate and a 6% sales tax. But low property taxes of just over $1,000 on average help keep total taxes down, and a relatively small business presence leads to very low corporate-tax revenue.
3. Tennessee, April 2
Tennessee's claim to tax fame is that its 6% income tax applies only to interest and dividend income, leaving wages untouched. Property taxes of less than $800 are also extremely low, although a sales tax of 7% helps the state raise needed revenue. A flat corporate-tax rate was probably one incentive that attracted shipping giant FedEx to locate its headquarters in Memphis.
1 (tie). Mississippi, March 29
Mississippi earns high honors on the list with its emphasis on low income and property taxes. The state boasts a top income-tax rate of 5% and property taxes averaging about $850 per person. Mississippi earns much of its revenue from a 7% sales tax, but a low corporate income tax also helps keep the overall burden on the light side.
1 (tie). Louisiana, March 29
Louisiana climbs to the top spot by keeping property taxes below $750 and collecting just a 4% sales tax, although local options add nearly 5 percentage points to that figure and make the state one of the highest-collecting sales-tax states. Although extensive activity from energy producers Chesapeake Energy , Encana , and Plains Exploration in the Haynesville-Bossier shale play could boost incomes and lead to higher taxes, much of Louisiana's sales tax revenue comes from out-of-state tourists visiting the state, leaving the actual amount borne by residents even lower. A 6% income tax isn't enough to push Louisiana out of the top spot.
Living isn't just about taxes
As we noted yesterday , It's important to remember that the Tax Foundation's calculations are all based on aggregate measures, and they won't necessarily reflect your personal Tax Freedom Day. But as a general rule, choosing where to live can make a big impact on your total tax liability, and while taxes aren't necessarily the most important factor in making that choice, they definitely deserve at least some consideration.
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Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends FedEx and Intel. The Motley Fool owns shares of Intel and has options positions on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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