When we analyzed The Best and Worst States for Taxes, we found that some states collected a lot more in state taxes than others. We researched into the reasons for the discrepancy in tax burdens and found the following factors contributed to the amount of taxes in each state:
- Cost of Living – In our analysis, we found a 32% positive correlation between the cost of living and the tax burden in each state. Why is this? If your state has a high cost of living, state workers will need to be paid more in order to maintain a typical standard of living in the area. In addition, goods and services purchased by the government will also cost more, which leads to higher taxes for its residence. Therefore if you live in an area with a higher cost of living, not only are paying more for your own expenses, but also the expenses of your local government.
- Severance Taxes – If your state has natural resources that companies are harvesting (such as oil and gas), then companies usually pay the state for utilizing those resources through a severance tax. The more that your state collects in severance taxes, the less you have to pay in personal taxes. According to a U.S .Census Report, in 2010 between 10.5 and 74.3 percent of total state tax revenue came from severance taxes in the following states: Alaska, Montana, New Mexico, North Dakota, Oklahoma, and Wyoming. However, some states have no severance tax and therefore do not impose any cost to harvesting natural resources. For instance, the Pennsylvania Budget and Policy Center estimated that the state of Pennsylvania may have lost an estimated $300 million due to the absence of a severance tax.
- Education Costs – If your state spends more money on schools, then the result will be higher taxes. Some of the higher education costs come from a higher cost of living (and therefore higher teacher wages). This means that if your state spends more on education costs, it may not necessarily be going towards improved education. The website Governing has a report on how each state spends its education costs.
- Fragmentation of Public Services – Certain states, such as New Jersey, have a large number of towns with their own police department, fire department, city hall, and school district. When government services are more fragmented and less centralized, a higher cost of running the government occurs.
- Tourism – States that have more tourism are able to tax visitors through sales tax (in addition to being able to tax the tourism businesses through commercial taxes). This lessens the tax bill for its residents.
- Corruption – If the government in your state has any level of corruption in its operations, this can increase the taxes in your area. The state and local governments might be embezzling funds, misusing funds, or awarding contracts to companies at uncompetitive rates at the benefit of close friends or campaign contributors. Some examples include:
- Orville Hodge, the Illinois Auditor of Public Accounts from 1953 to 1956, embezzled $6 million (or about $55 million in today’s dollars) of state funds during his term in office and spent the money on two private jets, several properties, and a stockpile of cars.
- The Buffalo Billion project in New York state is currently under investigation for allegedly ignoring lower cost bids to complete work in favor of bids by frequent contributors to the governor’s campaign.
- There’s an entire book and website dedicated solely to the corruption of the New Jersey state government.