The Most Tax-Burdened States

The Most Tax-Burdened States

The Golden State? More like Taxifornia.

As the pain of April 15 fades, most Americans are bluntly aware that taxes matter. Too many politicians and bureaucrats, unfortunately, ignore this. They have forgotten that taxes change the incentives for people to work hard, save, invest and be entrepreneurial, the bedrock of a prosperous society. As the nation struggles with a sluggish recovery and deficits, it’s worth noting the tax differences across the states.

Our recent study, Taxifornia, is unique in its approach. Unlike several other excellent studies on this topic, ours separates two distinct aspects of tax policy: (1) burden and (2) structure. In other words, the study examines how many resources a government consumes from the economy and how, exactly, the state extracts those resources. The premise is that both the tax burden and manner of imposition influence behavior and economic performance.

We calculate the total burden of government by comparing total state and local spending as a share of the state economy (gross state product). We believe that government spending is a more accurate measure of the burden of government than alternative measures such as current tax receipts. The main reason is borrowing. If governments use debt (deferred taxes) to finance current spending, then measures of revenues will underestimate the burden of government. The nature of the reallocation from the private sector to the government sector remains the same.

In addition, we incorporate local government spending as well as state-level spending in order to avoid rewarding states that decentralize their programs to local governments yet still extract resources from their citizens.

South Dakota had the lowest burden of government (11.6% of the state’s economy). Other low-burden states include Delaware and Texas. Alaska had the largest burden of government with 20.2% of the state’s economy consumed by government spending. However, Alaska is a relatively unique case because of its energy-related dividend and savings, the nature of which is at least debatable. The other states with large burdens of government were South Carolina, California, New York and New Mexico.

The second component of the study looked at the structure or design of five major taxes: personal income taxes, corporate income taxes, capital-based taxes, sales taxes and property taxes. In four of the five categories (property taxes excluded) multiple measures were used to assess the design of the tax.

Delaware ranked first overall for its structure of taxes with a score of 7.7 out of a possible 10.0. Other high ranking states included South Dakota, Nevada and Alabama. New Jersey ranked last for its tax design (score of 2.8). Maine, Vermont, and Rhode Island also ranked low.

When burden and structure are combined to calculate an overall score, South Dakota achieves the highest rank with a score of 8.8 (out of possible 10). Delaware, Texas, and Louisiana also rank highly.

California (score of 3.1) along with South Carolina, and New York are the lowest ranked states, combining a relatively large burden of government with a poorly structured tax system. This double-whammy strongly discourages residents from working hard, saving and investing, which again are the basis for strong and prosperous economies.

It shouldn’t be surprising, then, to learn that both California and South Carolina are facing historically high unemployment with shockingly high underemployment. Both are signs of a struggling economy, in many ways explained by the economic incentives embedded in the tax system.

The results of the study suggest two broad sets of reforms that would promote economic prosperity. The first is a shift away from damaging and costly personal and corporate income taxes towards consumption (sales) taxes. Such a shift could be accomplished without reducing revenues while creating a more efficient and prosperous economy.

The second reform relates to the burden of government. Far too many states impose heavy burdens on their citizens without providing commensurate amounts or quality of services. California, which imposes the fourth-heaviest burden of government, fails to provide the fourth-best education, infrastructure, public safety, and so on. The Golden State should follow examples from around the country, and beyond, where services are delivered at lower costs with equal or better results.

All states, even the top performers, have room to improve. The current economic downturn provides an opportunity to recognize once again that taxes matter. All states should make permanent reductions in the burden of government (taxes) while reforming both their tax structure and the manner in which they deliver services.

Overall Tax Burden By State

1 South Dakota 8.8
2 Delaware 8.6
3 Texas 7.7
4 Louisiana 7.7
5 Nevada 7.6
6 New Hampshire 7.2
7 Virginia 7.0
8 North Carolina 6.9
9 North Dakota 6.8
10 Colorado 6.6
11 Connecticut 6.5
12 Oklahoma 6.4
13 Missouri 6.4
14 Wyoming 6.2
15 Illinois 6.1
16 Maryland 5.8
17 Montana 5.8
18 Georgia 5.8
19 Utah 5.8
20 Indiana 5.8
21 Tennessee 5.7
22 Massachusetts 5.6
23 Idaho 5.6
24 Kansas 5.5
25 Arizona 5.5
26 Arkansas 5.4
27 Alabama 5.4
28 West Virginia 5.3
29 Minnesota 5.2
30 Kentucky 5.2
31 Oregon 5.1
32 Iowa 5.0
33 Florida 5.0
34 Pennsylvania 4.9
35 Hawaii 4.8
36 Mississippi 4.6
37 Wisconsin 4.4
38 Ohio 4.3
39 Michigan 4.3
40 Washington 4.3
41 New Mexico 4.2
42 Nebraska 4.2
43 Rhode Island 3.9
44 New Jersey 3.7
45 Maine 3.5
46 Alaska 3.3
47 Vermont 3.3
48 New York 3.1
49 South Carolina 3.1
50 California 3.1

Source: Pacific Research Institute

Composite scores derived by equally weighting the state’s burden of government (the total amount of local and state government spending as a percentage of the state’s economy) and the design of the state’s tax system.

Jason Clemens is the director of research and Robert Murphy is a senior fellow at the Pacific Research Institute ( They are co-authors of the recent tax study Taxifornia, available on the PRI website.

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Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.