Single filers earning $75,000 a year will pay nearly $6,000 in state income taxes in Oregon, the most of any U.S. state, according to Tax Foundation data provided to CNBC Make It.
On the other end of the spectrum, seven states — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas and Wyoming — don't levy any income taxes at all.
Like most states, Oregon uses a progressive or marginal income tax, which collects at an increasing rate the more income you earn. While the highest marginal rate in Oregon is 9.9%, it only applies to income above a $125,000 threshold, so any earnings below that amount are taxed at a lower rate.
Of the 10 states with the highest tax burdens for a single tax filer earning $75,000, eight have marginal tax rates, while two, Illinois and Idaho, have flat taxes of 5% and 5.8%, respectively. (Their effective tax rates below are a bit lower due to state-specific tax exemptions.)
A flat tax means every resident pays the same rate, regardless of income. Additionally, every dollar is taxed, unlike some marginal tax states where low earners are exempt from paying taxes.
Here's a look at the 10 states where people earning $75,000 owe the most in state income taxes, based on Tax Foundation calculations. These calculations use effective tax rates, which represent the actual percentage you pay on all taxable income.
- Oregon (7.75% effective tax rate): $5,814
- Hawaii (6.89% effective tax rate): $5,165
- Montana (5.27% effective tax rate): $3,950
- Minnesota (4.97% effective tax rate): $3,724
- Georgia (4.9% effective tax rate): $3,674
- West Virginia (4.83% effective tax rate): $3,620
- Delaware (4.81% effective tax rate): $3,609
- Illinois (4.79% effective tax rate): $3,592
- Maine (4.77% effective tax rate): $3,578
- Idaho (4.73% effective tax rate): $3,547
As mentioned above, with marginal tax rates, you only incur higher rates on income past a certain threshold. That's why effective tax rates are a better measure of a taxpayer's overall bill, according to the Tax Foundation.
The reason why Oregon has the highest effective tax rate for people earning $75,000 is because it levies a relatively high rate starting at a low threshold. Every dollar above $10,200 is taxed 8.75% in Oregon, while many other states tax income under $75,000 around 5%.
The effective tax rate in Oregon is somewhat lowered by the state's standard deduction and a personal exemption credit worth nearly $3,000, but the overall tax burden is still the highest of all states.
Hawaii and Montana have the second- and third-highest tax burdens because both states have marginal rates close to 7% for residents earning $20,000 or more. In contrast, a low-tax state like Maryland only taxes 4.75% on earnings between $3,001 and $100,000.
Other relatively high-tax states like California and New York aren't in the top 10 because they have more gradual tax rate increases for those earning less than $75,000. Californians only pay a marginal tax rate of 4% on earnings between $23,943 and 37,788. In New York, earnings between $13,901 and $80,650 incur a 5.5% marginal tax.
But in case you're wondering, California eventually has the highest state tax rate in the country, with 13.30% charged on any income over $1 million.
Correction: Due to a calculation error, an earlier version of this story overstated the effective tax rate for Mississippi. The story has been updated with a revised list.
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Now, let's delve into the concepts discussed in the article about state income taxes in the United States:
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Progressive or Marginal Income Tax:
- Most states, including Oregon, use a progressive or marginal income tax system.
- The tax rate increases with the rise in income.
- Oregon, for example, has a highest marginal rate of 9.9%, but it applies only to income above $125,000.
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Flat Taxes:
- Seven states, namely Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming, do not impose any income taxes.
- States like Illinois and Idaho have flat taxes (5% and 5.8%, respectively), where every resident pays the same rate, irrespective of income.
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Effective Tax Rates:
- The article emphasizes the use of effective tax rates as a better measure of a taxpayer's overall bill.
- Effective tax rates represent the actual percentage paid on all taxable income, providing a more accurate assessment.
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Top 10 States with Highest Tax Burdens for $75,000 Earners:
- Oregon has the highest effective tax rate (7.75%) for individuals earning $75,000, owing $5,814 in state income taxes.
- Other states in the top 10 include Hawaii, Montana, Minnesota, Georgia, West Virginia, Delaware, Illinois, Maine, and Idaho.
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Factors Influencing Effective Tax Rates:
- Oregon's high effective tax rate is attributed to a relatively high tax rate that starts at a low income threshold ($10,200).
- State-specific exemptions, such as standard deductions and personal exemption credits, can impact the effective tax rate.
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Comparison with Other States:
- States like California and New York, although high-tax states, aren't in the top 10 due to more gradual tax rate increases for those earning less than $75,000.
- California eventually has the highest state tax rate (13.30%) on income over $1 million.
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Calculation Error Correction:
- The article acknowledges a calculation error in the effective tax rate for Mississippi and provides a revised list.
In conclusion, the article provides valuable insights into the variations in state income taxes, considering marginal and effective tax rates, flat taxes, and specific factors influencing tax burdens for individuals earning $75,000 in different states.
