Tax Burden

What is Tax Burden?

The term tax burden refers to the total amount of taxes paid by individuals, households, or businesses as a share of their income or economic activity. It encompasses all taxes imposed by federal, state, and local governments, including income, property, sales, excise, and other levies. The tax burden is a key measure for understanding how much of a taxpayer’s resources are devoted to funding government services and obligations. Unlike tax rates, which reflect the percentage applied to taxable income or transactions, the tax burden measures the actual impact of all taxes relative to the taxpayer’s ability to pay, often expressed as a percentage of income or gross product. This concept is central to evaluating the fairness, efficiency, and competitiveness of a tax system.

How Tax Burden Varies by State and Income Level

Tax burden by state can differ significantly due to variations in tax structures, rates, and the mix of taxes used by each jurisdiction. States with high property taxes, broad-based sales taxes, or progressive income taxes may impose a higher overall burden on residents. Conversely, states that rely more on nonresident taxes (such as tourism or severance taxes) or have lower rates may have a lighter burden.

Income level also plays a crucial role. Lower-income households often spend a larger share of their income on consumption, making them more sensitive to sales and excise taxes. Higher-income households, on the other hand, may pay a greater share of income taxes, especially in states with progressive tax systems. The ranking of states by tax burden is typically based on the aggregate share of state and local taxes paid as a percentage of state income, which can reveal both the absolute and relative impact of taxes across the country.

For example, according to recent data, New York, Connecticut, and Hawaii have some of the highest state-local tax burdens, while Alaska, Wyoming, and Tennessee are among the lowest. The income tax by state ranked also shows wide disparities, with some states imposing no income tax and others levying high top marginal rates.

Factors That Influence a State’s Tax Burden

Several factors contribute to the variation in tax burden across states:

• Tax Structure and Policy Choices: States differ in their reliance on income, sales, property, and excise taxes. Some states forgo certain taxes entirely, such as income or sales taxes, shifting the burden to other sources.
• Economic Base and Demographics: States with higher incomes, more valuable property, or significant tourism or natural resources may collect more revenue with lower rates, or export part of their tax burden to nonresidents.
• Taxable Services and Sales Tax Situs: The scope of taxable services and the rules for Sales Tax Situs (the location where a sale is taxed) can affect both the amount and distribution of sales tax revenue.
• State and Local Tax Issues: Local governments may impose additional taxes, and the interaction between state and local tax systems can create complexity and variation in the overall burden.
• State and Local Tax Deduction: The federal State and Local Tax deduction  can offset some of the burden for itemizing taxpayers, but recent federal caps have limited this benefit, especially in high-tax states.
• Tax Controversies and Compliance: Disputes over tax liability, changes in tax law, and compliance costs can also influence the effective burden on taxpayers.

How Tax Burden Affects Businesses and Individuals

The tax burden has direct and indirect effects on both businesses and individuals:

• For Individuals: A higher tax burden reduces disposable income, potentially affecting consumption, savings, and investment decisions. The distribution of the burden, whether it falls more heavily on income, property, or sales, can influence household behavior and perceptions of fairness.
• For Businesses: Taxes affect profitability, investment, and location decisions. High corporate or property taxes may discourage business expansion or relocation, while favorable tax treatment of capital investment (such as full expensing) can spur growth. State and Local Tax issues, including the treatment of taxable services and the rules for Sales Tax Situs, can create compliance challenges and affect competitiveness.
• Economic Growth: The overall tax burden can influence a state’s economic climate. States with lower, more neutral, and simpler tax systems often attract more business activity and population growth, while high or complex tax burdens may deter investment and migration.

FAQ

What is included in a state’s tax burden?
A state’s tax burden includes all state and local taxes paid by residents, such as income, property, sales, excise, and other taxes. It is typically measured as a percentage of total state income and may also account for taxes paid to other states or exported to nonresidents through tourism or business activity.

How does the tax burden affect economic growth?
A high tax burden can discourage investment, reduce disposable income, and slow economic growth. Conversely, a lower and more neutral tax burden can attract businesses and residents, foster job creation, and support a more dynamic economy. The structure and predictability of taxes are as important as the overall level.

Which states have the lowest and highest tax burdens?
As of the latest data, New York, Connecticut, and Hawaii have the highest state-local tax burdens, while Alaska, Wyoming, and Tennessee have the lowest. These rankings reflect differences in tax rates, structures, and the ability to export taxes to nonresidents.

How can taxpayers reduce their overall tax burden?
Taxpayers can reduce their burden by taking advantage of available deductions and credits, such as the State and Local Tax deduction, maximizing retirement contributions, and making tax-efficient investment decisions. Relocating to a state with a lower tax burden or optimizing business structures can also help minimize taxes owed.

Why does the tax burden vary between states?
The tax burden varies due to differences in tax policy, economic base, demographics, and the mix of taxes used. States may choose to rely more on certain taxes, export taxes to nonresidents, or provide more or fewer public services, all of which affect the overall burden on residents.

Conclusion

Understanding the tax burden is essential for evaluating the impact of state and local tax systems on individuals, businesses, and the broader economy. By examining how the tax burden by state is determined, what factors influence it, and how it affects economic decisions, taxpayers and policymakers can make more informed choices and address key state and local tax issues. For those facing complex tax situations or tax controversies, consulting with experienced advisors is recommended to navigate the evolving landscape of state and local taxation.

How BT Can Help

For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact DiAndria Green, partner in charge of Bennett Thrasher’s State and Local Tax (SALT) practice, or call us at 770.396.2200.