In a new report that will intrigue taxpayers and policy wonks alike, the Tax Foundation ranked states by their state and local tax burdens – which includes taxes collected from nonresidents, called tax exporting.
Pay attention because there’s a pop quiz at the end of this article.
According to State-Local Tax Burden Rankings FY 2012, taxpayers that year (the most recent statistics available) paid 78 percent of the taxes collected in the state where they lived. The remaining 22 percent of taxes was collected from nonresidents. How? Through property taxes on vacation homes, purchases by tourists, and natural resource extraction, such as oil.
“There’s an ongoing debate over how much is enough when it comes to taxes, but it isn’t always informed by accurate data,” Tax Foundation economist Nicole Kaeding said in a prepared statement. “Our study gives taxpayers a comprehensive look at where tax burdens are felt across the states, so that they can have an informed discussion on the size and reach of state and local taxes.”
Take Alaska, for example. It has the lightest state-local tax burden at just 6.5 percent of total state income, and it offers the best example of tax exporting, the report states. That’s because Alaska collects about 80 percent of its total state and local taxes from nonresidents – and 67 percent of that was from the state’s severance tax on oil extraction.
Other examples include top-tourism destinations like Florida (ranked 34th) and Nevada (43rd), and states whose residents work in neighboring states. So, when a metropolitan area has workers from nearby states, a big portion of wages in that state are earned by commuters.
Take New York, New Jersey, and Connecticut, for example. Who hasn’t heard of people in these states who work in one of the others and commute? New Yorkers faced the highest burden, with 12.7 percent of income in the state going to state and local taxes. Connecticut has the second-highest burden at 12.6 percent, followed by New Jersey at 12.2 percent.
The report seeks to ensure that readers know the difference between tax burdens and tax collections. The latter are a tally of tax payments made to state and local governments. As such, they measure the “legal incidence,” such as when states tell service stations they must collect taxes on gas purchases.
Estimates of tax burdens, on the other hand, “allocate taxes to states that are economically affected by them” or the “economic incidence” – such as service station owners hiking gas prices to shift the tax burden to consumers.
And when that tax burden shifts from state residents to nonresidents, it’s called tax exporting.
The report’s authors use this example for how they determined tax burdens compared to tax collections: If Connecticut residents work in New York City and pay income tax to the city and New York state, the Census Bureau counts it as New York tax collections. But the Tax Foundation’s analysis counts the payments as part of the tax burden on Connecticut residents.
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.