Sales Tax Rates By State Will Surprise You
Taxes are complicated even for tax attorneys and accountants, who have to be very smart and remember a lot of details to do their jobs. To make matters worse, there are several different tax systems at various levels, and tax laws change on a seemingly constant basis.
Unfortunately, living in a society means that we are all subject to these tax laws, and we need to have at least a basic understanding of the tax code and structure in order to live and keep from spending more than we need to on taxes.
Taxes might be simpler if the government's only goal in raising taxes was to collect as much money as possible. Instead of simply trying for larger amounts of money, various governments are also trying to maintain a sense of fairness across citizens, efficiency in collecting and distributing the money, and enforceability in collecting the taxes.
The problem with having so many competing goals is that no one can agree on which goal is most important, so in the final balance, simplicity is often forgotten. A state might also be more influenced by one political party while a city within that state might be influenced by completely different principles.
Sales Tax: State Rates
Sales taxes are easy to understand and they are transparent, in that it is easy to see what is being charged and why. When you are in a certain state, you can know that if you buy something you will have a certain amount of additional tax. Because of that, some people will cross state lines to make certain purchases to avoid the higher sales tax in their own jurisdiction. Most states have a state tax, and 38 states allow a local sales tax, meaning that the combined rate could be much larger than expected.
Of the states that have combined state and local sales tax, the five highest combined rates are in Oklahoma, Alabama, Louisiana, Tennessee, and Arkansas. The combined rates in all these states is more than 9%, which means that they all have a higher combined rate than California, which has the single highest state sales tax rate at 7.25%.
Not All the States Have It
The most surprising thing about state taxes is that not every state has a sales tax. In the United States, 45 states and the District of Columbia collect sales tax, meaning that there are 5 states that do not. Alaska, Delaware, Montana, New Hampshire, and Oregon do not collect sales tax. However, Alaska does allow local jurisdictions to charge a sales tax.
The highest state tax rate is California at 7.25%, and four states tie for second place with 7%: Indiana, Mississippi, Rhode Island, and Tennessee. The lowest state sales tax is in Colorado, where it is only 2.9%, and five states tie for second lowest with 4%: Wyoming, Alabama, Georgia, Hawaii, and New York.
Sales Tax: Local Rates
Oklahoma, New York, Colorado, Louisiana, and Alabama have the highest average local sales tax rates in the U.S, ranging from a sales tax of 4.48% all the way up to 5.25%. That being said, from 2019 to 2020 Illinois increased its local sales tax rate the most - because of their increase of local sales tax rates in the city of Evanston and in Marion County, bringing them up to the sixth place of highest average local sales tax rates. Nevada and Iowa also went up the list a bit, but only for very small increases in local sales tax rates.
Some states actually had an improvement in their ranking, but this was only comparative advantage. These states did not decrease their local sales tax rates, they just stayed the same or did not increase their local sales tax rate as much as other states. Six states actually increased their local sales tax rates and still improved their rankings: Arkansas, Missouri, Nebraska, North Dakota, Texas, and Washington.
New Jersey has a special deal for local retailers who live in designated “Urban Enterprise Zones,” which allows them to collect and remit only half of the local sales tax -- 3.3125% instead of the 6.625%. They do this in order to allow these local retailers to keep a competitive advantage against Delaware, which is a neighboring state who does not have a sales tax.
Sales Tax: Excise Taxes
Excise taxes are indirect taxes paid on certain products, such as alcohol, cigarettes, and gasoline, or activities like gambling or truck highway usage. Federal, state, and local governments all have the power to levy excise taxes, and subsequently, the use of these taxes is not uniform throughout the United States.
Sometimes the manufacturer pays an excise tax directly, and sometimes the consumer pays it as part of the mark up on the price. When you have a sales tax and an excise tax, you can end up paying a tax on a tax. You can't avoid paying excise taxes most of the time, but you can choose not to purchase products that have an excise tax.
Federal Taxes - What Does the Government Do With All That Tax Money?
While all information is available to anyone who asks, it may not seem obvious how the government spends tax money after collecting it. We can see that there are roads and schools paid for and run by the government, but not every use of tax money is obvious. Here are the 10 biggest ways the government spends your tax dollars:
The Military and National Defense
This is a significant part of the nation's budget, about 15%. This includes the salaries, training, and healthcare of service personnel, equipment, facilities, and weapons. the U.S. military has 5 branches: the Army, the Navy, the Air Force, the Marines, and the Space Force.
Veterans' Benefits
They make up about 5% of the federal budget.
Health Care
It is another significant portion of the nation's budget. In fact, about the same amount of your tax money goes towards health care as a defense. Almost half of the health care budget funds Medicaid, which is basically insurance for poor people who cannot afford health insurance on their own. The rest goes towards other programs, such as consumer health programs.
Paying off Debt
The U.S. government is about $20 trillion in debt, and part of your taxes goes to help pay for the interest on U.S. debt.
Income Security
It is about as big a portion as national defense. This includes both retirement and disability benefits for federal employees, job training programs, and the Temporary Assistance to Needy Families program.
Education
Even though schools are mainly a state responsibility, about 5% of the federal budget goes toward education.
Social Security
This is the single largest federal expenditure at about 24%.
Medicare
It is federal health insurance for people 65 and over and makes up about 15% of the federal budget.
Foreign Aid
There are often public announcements when countries provide foreign aid to each other, and it seems like a lot, but the real amount of foreign aid we provide is only about 1%.
Other
The last approximately 5% is for different items like space travel, crop subsidies, national parks, federal highways, and more.
Different Kinds of Taxes
The easiest way to learn about taxes is by breaking them down into different categories. Different states and countries have different kinds of categories, but most of them have the same general kinds of taxes. The three broad types of taxes include taxes on income, taxes on real property, and taxes on goods and services.
Taxes on Income
Income tax is the tax the government collects on the money you earn. Unlike other taxes, the amount of income tax you owe depends on how much you earn. Some tax systems have what is called a flat tax, where everyone pays the same tax, say 40%, no matter how much they earn. The United States federal income tax uses a progressive system, meaning that the more you earn, the more taxes you owe.
Most states also collect income tax, except for Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Instead of collecting income tax on their residents, those states make up the tax income by having higher sales taxes, excise taxes, and property taxes.
Taxes on Real Property
Property taxes are the taxes you pay on your home, a piece of land, or commercial real estate. Property taxes vary by state, and they are used to help fund schools, maintain roads, process and maintain drinking water, and other important local functions. When purchasing a piece of real estate, it is always important to find out how much the property taxes are, because sometimes the taxes will make the house too expensive to maintain. Many people get into trouble because they cannot make all the payments for upkeep and taxes and end up losing their homes.
Taxes on Goods and Services - Sales Tax
This is a sales tax, and it can be applied to anything you buy, whether it is a product or a service. Also called a consumption tax, the sales tax is set at the state level, and it varies from state to state. There aren't many ways to get around a sales tax, and it can be difficult to keep track of how much to pay. For instance, some counties and cities charge an extra sales tax for money spent at a restaurant.
Estate Taxes
Most people would agree that it seems unfair that after charging someone taxes for an entire lifetime it is unfair to charge yet more taxes in death. Depending on the state, there may no longer be an estate tax, but if there is, the state will collect taxes depending on how much the decedent was worth at the time of death. This not only seems unfair but can make it difficult for the loved ones who remain behind who may be depending on those assets. That is why it is wise to engage in estate planning early on to make sure your heirs get what they deserve.
Be Smart about Your Money. The Taxry Store Will Help.
Saving Money On State Taxes
Once you learn enough tax saving tips, you can start using them in your regular life and plan ahead in some matters so that you can really see a difference.
Saving Money on Sales Tax
Instead of hiring someone to vacuum your carpet or cut your lawn, you can get your own carpet cleaner or lawnmower and perform the service yourself. You only pay the taxes on the initial outlay, not the repeated services.
Rent-to-own services mark the price up to outrageous levels. Instead of renting to own, either uses a cheap used model and save up for the one you want or find another way to get what you need.
Forever stamps will always be good for first-class postage. Instead of buying new stamps that are valued at the current rate, purchase forever stamps that will still be good no matter how much the price of first-class postage rises.
Instead of paying a babysitter, you can trade off babysitting with trusted friends and relatives. You will probably feel better knowing that you are leaving your children with trusted friends and you will save a lot of money on babysitting costs.
Saving Money on State Taxes
One of the best ways to save money on your state taxes is to take advantage of state tax credits. Learn what kind of credits are offered by your state so you can be prepared to take advantage of them at the end of the year. Some offer credits to renters, for educational donations, and for many other reasons. Every state is different, but you won't be able to claim the credit if you don't know about it and if you don't save your documentation.
Move to a state with a lower state tax rate. This is not a good idea for everyone. If you are spending a lot in state taxes, such as upwards of $30,000, then this could be a good option for you. If you, however, only had to pay $4,000 in state taxes, it is probably not worth the hassle of finding a new job and home in a new state, just for cheaper state taxes.
Saving Money on Federal Taxes
Make sure you get your tax deductions. The standard deduction for 2023 is $13,850 and the head of the household is $20,800, but the amount can change every year. Some people itemize their deductions, but it doesn't usually pay for most people. You would have to be able to itemize more than the amount of the standard deduction to make it worth it
Tax credits reduce the amount of tax you owe. Tax credits are offered for items like child and dependent care, retirement plan savings, and the earned income tax credit
Create a retirement fund or contribute more to your current retirement fund. The tax authorities will not tax money that is directly put into a retirement fund. Contributing more money to your retirement fund will save it from being taxed, but it will also help you save and prepare for retirement
Other Ways to Save Money
Make gifts instead of buying expensive gifts. Everyone appreciates the personal touch that comes from homemade cookies and fudge
Go to dental schools or beauty schools for services. There are professional supervisors who will make sure the job is done well, but you will pay a fraction of the regular price
Stop impulse buying. Don't buy things you really don't need
Dryer sheets are expensive, and they work just as well if you cut them in half
Conclusion
The idea of paying taxes and understanding how taxes work may seem a bit mind-boggling, whether you are fresh out of your parents' house and paying taxes yourself for the first time, or even if you are in your 40s and have been paying taxes for your entire adult life. There are many people and organizations that offer their services to handle your taxes for you, but it is still a good idea to understand the basics for yourself.
While you cannot change the local, state, or federal tax rates, there are things you can do in order to pay less. For instance, if you typically buy cigarettes or tobacco and live in a place with excise taxes, just over the border from a city or state that does not have such excise taxes, you could either try to kick the habit of smoking or chewing tobacco or you could drive over to the nearby place that does not charge excise taxes. This may not always be worth it, for instance, if gas ends up costing more than you would pay on the excise taxes anyway, but it is a strategy many people take advantage of.
Sales tax rates will be different depending on what state you are in. If you are traveling or even planning a move to another state soon, then you can use a tax tracker to keep track of what sales tax rates are in different states and how they have changed since the last year.