Although a little late this year, due largely to the federal government’s 17-day shutdown in 2013, tax season is here. And, according to a new report, what you owe in taxes could be largely determined by where you live.
The report, released by the Office of Revenue Analysis of the government of the District of Columbia, reviewed the estimated property, sales, auto and income taxes for a hypothetical family at various income levels in 2012 in the largest city within each state. City tax burdens vary widely. A family of three earning $75,000 in Cheyenne, Wyoming, paid just $3,475, or 4.6% of its income, in state and local taxes. In Bridgeport, Connecticut, a family of three earning $75,000 paid $16,333, or 21.8% of its income -- a total that does not even include federal taxes.
Not surprisingly, tax rates influence overall tax burdens significantly. This is especially true for property taxes. Seven of the cities with the highest tax burdens also had among the 10-highest property tax rates, according to the Office of Revenue Analysis. Homeowners in Columbus, Ohio, which had the fifth-highest tax burden in the nation, paid an effective rate of $3.57 for every $100 in home value, the highest such rate in the U.S.
Lori Metcalf, fiscal analyst at the Office of Revenue Analysis, noted in an interview with 24/7 Wall St. that property taxes tended to comprise a higher share of state and local tax burdens. Because of this, “the trend that you see in the property tax should be reflected in the overall burden.”
Another tax that is often important in determining overall tax burden is the income tax. This is especially true for cities with the lowest tax burdens, seven of which are located in states that do not have an income tax. Only one of the five cities with the lowest tax burdens, Billings, Montana, is not located in a state that has no income tax.
Yet the relationship between income taxes and higher tax burdens is not as straightforward. To highlight this, Metcalf noted that higher incomes families usually live in higher-value homes. “This means that when you pay income taxes you’ll have a larger deduction because you’ll have a larger property tax based on a more expensive home and a larger mortgage interest deduction,” Metcalf explained. As a result of this deduction, homeowners’ income tax burdens are often reduced, obscuring the relationship between income taxes and overall tax burdens.
Several factors not reviewed by the Office of Revenue Analysis, whose study focused primarily on the characteristics of tax systems, may play a role in determining tax burdens. One such potential factor is unemployment. In many cities with low tax burdens, the unemployment rate was also very low. Sioux Falls, South Dakota, and Billings, Montana, had among the lowest unemployment rates in the nation in 2012. At the other end of the spectrum, Detroit, Michigan and Providence, Rhode Island had both hefty tax burdens and high unemployment.
A number of the cities with the lowest tax burdens were located in states that are considerably less densely populated, such as Alaska, Wyoming, and South Dakota. Even some of the cities themselves are in less densely populated metro areas. Birmingham, Alabama, had one of the lowest tax burdens in the U.S. and was located in the the least densely populated metro area of any reviewed. By comparison, many of the cities with high tax burdens are located in more densely populated parts of the country, such as the Northeast.
While this falls outside the scope of the report, it is possible that the reason areas with low population density have lower tax burdens is because the cost of running these cities is less. Local governments with fewer residents can spend less on government services. As a result, the government does not have to make as much in taxes.
Several low tax burden cities were also located in states that had a relative abundance of fossil fuels, including oil, natural gas, and coal. Houston, Texas, is located in the nation’s top state for oil and natural gas production. Cheyenne is the largest city in Wyoming, which accounts for a large portion of the nation’s coal output. A 2012 study by the National Conference of State Legislators found that Alaska, Montana, and Wyoming, all of which have cities with low tax burdens, relied on taxing oil and gas activity for much of their revenue.
Based on the Office of Revenue Analysis’ report: “Tax Rates and Tax Burdens in the District of Columbia — A Nationwide Comparison,” 24/7 Wall St. reviewed the cities where a hypothetical family of three in different income brackets had the highest and the lowest combined tax burdens. To calculate tax burden, the report identified four different types of taxes: income, property, automobile, and sales. The report examined tax systems in the largest city in each state, as well as in Washington, D.C. All estimates are for the 2012 fiscal year. Median housing value and median income data used by the report to determine property value are for metro areas. When two cities were located within the same metro area, county level data was used. 24/7 Wall St. also reviewed income figures for these areas from the U.S. Census Bureau, as well as area unemployment rates as of 2012 from the Bureau of Labor Statistics.
These are the cities with the highest (and lowest) taxes
Cities Paying the Highest Taxes
10. Wilmington, Del.
> Taxes for family earning $25,000: $2,296 (2nd lowest)
> Taxes for family earning $150,000: $20,332 (9th highest)
> Unemployment rate: 8.6%
Delaware is one of only five states in the U.S. that does not impose a sales tax. The state, including Wilmington, however, makes up for the lack of sales tax in other ways, such as property taxes. A hypothetical family of three earning $150,000 paid $14,701 in property taxes in 2012, more than most cities reviewed. The high property tax burden in Wilmington is likely the result of high property values, rather than taxes, in the city as of 2012. A family of three earning $150,000 that year was assumed to live in a home valued at $831,784, more expensive than in all but three other large cities. In fact, local properties were taxed $1.77 per $100 of property value, on par with much of the country.
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9. Detroit, Mich.
> Taxes for family earning $25,000: $3,421 (18th highest)
> Taxes for family earning $150,000: $19,145 (12th highest)
> Unemployment rate: 10.5%
Detroit taxpayers faced a particularly high income tax burden. A hypothetical family of three earning just $25,000 in 2012 paid $446 in state and local income taxes, or 1.8% of its income, more than residents of all but a few other cities. Likely causing this high tax burden on lower-income families is the flat income tax rates both the state of Michigan and Detroit have, while a majority states have increasing tax rates for higher income levels. Additionally, few cities had higher property taxes than Detroit, where the effective tax rate was almost 3%. Property tax burdens would likely be higher if area homes were more valuable. However, Detroit's home were among the least valuable in the nation.
8. Louisville, Ky.
> Taxes for family earning $25,000: $3,118 (23rd lowest)
> Taxes for family earning $150,000: $20,524 (8th highest)
> Unemployment rate: 8.3%
Kentucky uses a graduated income tax system, where residents earning higher incomes paid higher incomes taxes. Local tax rates, however, did not rise with income. Income tax burdens on a hypothetical families earning $25,000 annually were among the highest compared with other large American cities. Property tax burdens were also among the highest in the nation for families in most tax brackets that year. On the other hand, state gas taxes were relatively low, at just 16.4 cents per gallon, less than in the vast majority of cities considered. Tax revenue should also increase if the city’s population continues to grow. Louisville's population more than doubled -- growing by more than 136% -- in the 10 years prior to 2012.
7. Portland, Maine
> Taxes for family earning $25,000: $2,788 (12th lowest)
> Taxes for family earning $150,000: $22,463 (5th highest)
> Unemployment rate: 5.9%
Taxes in Portland are actually quite favorable to lower-income residents. A family of three earning $25,000 had no income tax burden and paid just $568 in the state sales taxes. At the other end of the spectrum, however, wealthier families faced especially high tax burdens. A hypothetical family earning $150,000 spent $22,463, or 15%, of their income on state and local taxes. In 2011, Governor Paul LePage lowered the state's’ highest income tax rate and eliminated state income taxes for many low-income Mainers. Maine indexes both its tax brackets and tax exemption for inflation in order to account for price changes. However, higher than average property and gas tax burdens drive up tax burdens for Portland residents. Despite the recent tax reforms, the tax burdens of Portland residents remained relatively high due to high tax burdens on real estate and cars.
6. Providence, R.I.
> Taxes for family earning $25,000: $3,381 (21st highest)
> Taxes for family earning $150,000: $21,294 (7th highest)
> Unemployment rate: 10.3%
Providence's unemployment rate was 10.3% in 2012, third worst out of all cities reviewed. Families of three earning lower incomes can receive a State Earned Income Tax Credit. For those families earning $25,000 per year, the income tax burden in Providence was negative. Providence families paid more in automobile taxes and fees than their counterparts in any other large city reviewed. Rhode Island residents were taxed more than 30 cents by the state per gallon of gas in 2012, ninth-highest of any city.
5. Columbus, Ohio
> Taxes for family earning $25,000: $2,953 (17th lowest)
> Taxes for family earning $150,000: $22,333 (6th highest)
> Unemployment rate: 6.1%
A family of three earning $25,000 a year in Columbus faced only an 11.8% tax burden, lower than more than half of all cities reviewed. However, tax burdens for families with higher earnings were among the highest in the nation. This is due in large part to the city’s real estate taxes. Although the housing values in the city were not especially high, lower than the average for cities reviewed, residents faced especially high property taxes. At 3.57%, Columbus had the highest effective property tax rate of any city.
4. Baltimore, Md.
> Taxes for family earning $25,000: $2,950 (16th lowest)
> Taxes for family earning $150,000: $24,747 (4th highest)
> Unemployment rate: 7.2%
Baltimore area residents are fairly well-off compared with most of the country -- median household income was nearly $67,000 in 2012, among the nation's highest. Baltimore's property tax burden is especially high. Families of three earning $150,000 paid $13,772 in property taxes in 2012. Families earning $25,000 had no income tax burden, but those earning $150,000 paid more than 5% of their income in state and local income taxes alone, the sixth-highest percentage of any city reviewed.
3. Milwaukee, Wisc.
> Taxes for family earning $25,000: $3,245 (26th highest)
> Taxes for family earning $150,000: $26,296 (2nd highest)
> Unemployment rate: 7.4%
Like a number of other cities with high tax load, Milwaukee residents faced especially high property tax burdens. The effective property tax rate in the city was 3%, higher than all but a few regions reviewed. Also driving up taxes were the especially high income tax burdens in the city. The state used a graduated income tax system, meaning tax rates are higher for families that earn more, although Milwaukee had no local income taxes.In 2013, the state reformed its tax code, lowering the highest rate as well as the number of overall tax brackets. Wisconsin Governor Scott Walker recently pushed the state assembly to cut both property taxes and and the income tax rate for the state’s lowest tax bracket.
2. Philadelphia, Pa.
> Taxes for family earning $25,000: $3,794 (7th highest)
> Taxes for family earning $150,000: $25,317 (3rd highest)
> Unemployment rate: 8.6%
Philadelphia’s poorer families were subject to a much higher tax burden than those in most other large cities. A family of three earning $25,000 in 2012 paid $788 in income taxes that year, more than all but one other large city. The city’s property tax burden was also considerably high for most income levels that year. A family whose earnings fell into the $100,000 tax bracket, for example, paid more than $11,806 in property taxes in 2012, second-most among large cities. After a new property tax valuation system was implemented and some residents’ tax assessments more than tripled, the city introduced a “gentrification relief program” at the end of 2013. Fuel was also heavily taxed in 2012, with gasoline costing an additional 31 cents per gallon due to state taxes, which were among the highest in the U.S.
1. Bridgeport, Conn.
> Taxes for family earning $25,000: $4,001 (4th highest)
> Taxes for family earning $150,000: $33,208 (the highest)
> Unemployment rate: 7.8%
No large U.S. city had a higher tax burden than Bridgeport, where a family of three earning $150,000 a year paid more than 22% of its income in state and local taxes. However, the metro area, which includes affluent Fairfield county, is wealthier than much of the U.S. and was used to calculate home values and property burdens by the Office of Revenue Analysis. More than 20% of households had an annual income of at least $200,000, more than any other metro area reviewed. The city’s high tax burden was due in large part to property taxes, as the area had both high home values and high effective property tax rates. Also propelling the city to the top of the list were Connecticut’s relatively high income tax burden of 5.2% on families earning $150,000 per year as well a high tax burden for car owners.
Cities Paying the Least in Taxes
10. Houston, Texas
> Taxes for family earning $25,000: $3,368 (22nd highest)
> Taxes for family earning $150,000: $11,737 (8th lowest)
> Unemployment rate: 6.8%
Houston residents save on their taxes in part because there is no state income tax in Texas. Additionally, residents benefit from a lower tax burden related to car ownership than most other major cities. However, Houston residents pay a high state sales tax rate of 6.3%, one of the higher rates in the nation, as well as an additional 2% local sales tax rate on top of that. A sales tax is often considered regressive, meaning lower income residents pay a larger share of their income under the tax. In Houston, a hypothetical family of three earning $25,000 a year paid $1,382 in sales taxes, more than in all but three comparable cities. A comparable family earning six times as much paid $3,848 in sales taxes.
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9. Birmingham, Ala.
> Taxes for family earning $25,000: $3,686 (10th highest)
> Taxes for family earning $150,000: $11,860 (10th lowest)
> Unemployment rate: 6.4%
Families at most levels of income faced lower property tax burdens than in nearly every other comparable city. A hypothetical family of three earning $50,000 a year, for example, paid just $899 in property taxes in 2012. Families of three designated in the lowest tax bracket earning $25,000, however, paid considerably more in property taxes -- $1,780 -- than families with similar incomes in other cities. The Office for Revenue Analysis estimated a “property tax rent equivalent” in order to determine the impact of property taxes on low income families, who are more likely to rent. While taxes burdens were low across the board, city’s sales tax may be an exception. Families at every level of income faced one of the highest sales tax burdens in the U.S. in 2012. Social security tax and Medicare tax deductions were available in Alabama, which may have helped offset the somewhat regressive tax code in Birmingham and contribute to the overall low tax rates.
8. Honolulu, Hawaii
> Taxes for family earning $25,000: $4,232 (the highest)
> Taxes for family earning $150,000: $11,840 (9th lowest)
> Unemployment rate: 5.2%
Although Honolulu had the highest property values of any city reviewed, property tax burdens in the city were actually lower than in most comparable regions. Honolulu’s effective property tax rate was just 0.35%. Only Oklahoma City, Oklahoma, and Boise, Idaho, had lower effective rates. The city’s total sales tax rate was just 4.5%, lower than in most other places considered. Income tax burden was also relatively low in Honolulu. But while residents faced fairly low tax burdens, living in Hawaii is associated with a higher cost of living. As of 2011, Hawaii had the highest prices of any state in the U.S., according to the Bureau of Economic Analysis. Due to Hawaii’s location, the state relies on imported petroleum to generate much of its electricity, resulting in higher energy prices.
7. Seattle, Wash.
> Taxes for family earning $25,000: $3,247 (25th highest)
> Taxes for family earning $150,000: $9,901 (5th lowest)
> Unemployment rate: 7.4%
Like many of the other cities with low taxes, Seattle is located in a state with no income tax. Microsoft founder Bill Gates, a Washington resident, has in the past supported an income tax on the wealthiest residents in the state. While Washington lacks an income tax, its 6.5% state sales tax rate was among the highest in the U.S. in 2012. On top of the state sales tax, Seattle taxpayers paid an additional 3% in local sales taxes for a total of 9.5%, the second highest rate of any city reviewed. Despite this, Seattle families faced lower sales tax burdens than residents in many other cities, possibly due to the exemptions made for sales tax on food, medication, and other goods.
6. Jacksonville, Fla.
> Taxes for family earning $25,000: $3,209 (25th lowest)
> Taxes for family earning $150,000: $10,049 (6th lowest)
> Unemployment rate: 8.3%
With the exception of the $25,000 tax bracket, families at every income level in Jacksonville paid below-average property taxes in 2012. A hypothetical family of three earning $50,000 paid less than $1,900 in property taxes that year. Jacksonville residents were also eligible for an up-to $50,000 homestead exemption on real estate taxes in 2012. The city was of only a few to offer such a deduction.Like the majority of large cities with the lowest taxes, Jacksonville is located in a state with no income tax. But while Florida’s state gas tax of less than 15 cents a gallon was one of the lowest in the country, Jacksonville is one of only five cities considered with a local gasoline tax, charging about 14 additional cents on the gallon. Combined, the gas tax in the city was 28.8 cents per gallon in 2012, among the highest.
5. Sioux Falls, S.D.
> Taxes for family earning $25,000: $2,772 (10th lowest)
> Taxes for family earning $150,000: $9,425 (3rd lowest)
> Unemployment rate: 4.1%
The low tax burden in Sioux Falls is partly due to the absence of a state income tax. However, city also had low tax burdens in other categories measured. Families in the area with higher incomes had lower tax burdens than families with lower incomes. This was due to the state’s tax structure, which was criticized by the Institute on Taxation & Economic Policy, a think tank that supports a progressive tax code, for being too reliant on low-income residents. However, even Sioux Falls’ lowest income residents faced a relatively low tax burden.
4. Anchorage, Alaska
> Taxes for family earning $25,000: $2,366 (4th lowest)
> Taxes for family earning $150,000: $9,790 (4th lowest)
> Unemployment rate: 6.0%
Automobile tax burdens in Anchorage were consistently low across all levels of income. Like most American cities, Anchorage did not have a local gasoline tax in 2012, and the state's gasoline tax of 8 cents per gallon that year was the lowest in the nation. The city also had no excise or personal property tax that it charged to car owners. Sales tax burdens were also considerably lower than in other large cities -- families in every tax bracket paid less than $200 in sales taxes in 2012. The median income of city residents was more than $71,000 in 2012, one of the highest nationwide. Alaska, however, taxed none of this income because it is one of few states without any income tax.
3. Billings, MT
> Taxes for family earning $25,000: $2,347 (3rd lowest)
> Taxes for family earning $150,000: $10,668 (7th lowest)
> Unemployment rate: 4.4%
Billings families faced some of the lowest sales and property tax burdens in the nation. Montana did not have a general sales tax in 2012. Helping to keep property taxes low, Billings levied real estate taxes on only a small portion of a home’s value, and residents also paid a relatively low effective property tax rate. Billings had one of the nation’s lowest jobless rates as of December as well. Just 4.4% of people in the workforce were unemployed in 2012, and the State has benefitted from the nearby Bakken Shale oil boom. Montana taxes oil and gas production, which can alleviate the tax loads residents face.
2. Las Vegas, Nev.
> Taxes for family earning $25,000: $3,260 (24th highest)
> Taxes for family earning $150,000: $8,314 (2nd lowest)
> Unemployment rate: 11.2%
Unlike most cities with low tax burdens, Las Vegas had an exceptionally high unemployment rate of 11.2% in 2012, nearly the worst compared with other large cities. The median income was also lower than $50,000 that year, less than median incomes in most urban areas. Overall, property taxes were low in 2012. A family earning $150,000 paid slightly more than $5,000 that year in property taxes, one of the lowest amounts nationwide.
1. Cheyenne, Wyo.
> Taxes for family earning $25,000: $2,476 (5th lowest)
> Taxes for family earning $150,000: $6,307 (the lowest)
> Unemployment rate: 6.1%
Cheyenne had the lowest tax burden of any state in the nation, and not only because Wyoming had no state income tax. The total sales tax rate of just 6.0% in Cheyenne, which was lower than in most comparable cities, contributed to the the low sales tax burden in the city. Wyoming residents also paid just 14 cents in state taxes per gallon on gas, one of the lowest rates in the U.S. and a major reason why tax burdens on car ownership were towards the low-end. Additionally, Cheyenne’s effective property tax rate of 0.67% was among the lowest in the nation. Low tax rates on families in the city and the state may be tied to Wyoming’s energy industry. The state is the nation’s largest producer of coal, as well as a sizable producer of oil and natural gas, and taxes from these industries help the state fill its coffers.