Tax Burden
Various studies using differing methodologies have attempted to measure tax burden by state or by city, with widely varying results. Most of these studies have combined business and individual/household taxes, with the results not being indicative of either the business tax burden or the household tax burden.
One approach to comparing household tax burdens across geographic areas is to select a hypothetical household based on household composition, income, and other factors. The tax burden for this household is calculated using the actual tax code in each state. Such studies typically limit the analysis to major taxes paid directly by households and often select just one hypothetical household, typically of upper-middle income. Because the property tax varies by place within a state, these studies usually pick one city in each state to compare. Since these studies actually work through the tax code of each state, they potentially result in an accurate portrayal of geographic variations in tax burden for the selected household, but should not be generalized to other households.
A study conducted annually by the District of Columbia is an example of the hypothetical household approach to comparing tax burden. It calculates the tax bill for a family that consists of two wage-earning spouses and one school-age child at five widely different income levels ranging from $25,000 to $150,000. Among the specific assumptions is that the household owns its home except at the lowest income and that wage and salary income is split 70-30 percent between two adults in the household, with the rest of the income divided 50-50.
The District of Columbia study calculates the tax burden in each of four tax categories: individual income tax, residential property tax, general sales and use tax, and automobile taxes (including gasoline tax, registration fees, excise tax, and personal property tax). Taxes are calculated for the largest city in each state and for the District of Columbia.
Various organizations report a measure of business tax burden, but the results are highly inconsistent. The most detailed study with the strongest methodology is produced by Ernst & Young under contract to the Council on State Taxation. They present an estimate of the taxes businesses pay in each of eight categories. To compare states, an effective tax rate is calculated as the taxes paid by businesses divided by private-sector gross domestic product by state.
For the household tax burden, the Government of the District of Columbia, Tax Rates and Tax Burdens in the District of Columbia: A Nationwide Comparison http://cfo.dc.gov/node/215912. For the business tax burden, the Council on State Taxation and Ernst & Young, Total State and Local Business Taxes, http://www.cost.org/StateTaxLibrary.aspx?id=17768. Gross domestic product by state is estimated by the U. S. Department of Commerce, Bureau of Economic Analysis http://www.bea.gov/regional/index.htm.
The authors of the household tax burden study advise users not to compare the hypothetical tax burdens across years since “any number of small changes in state and/or local tax policy or in the assumptions of the study can result in misleading information under such comparisons.” Results are not shown at the $25,000 income level for the income tax (because the income tax burden at this income is minimal in most states) or for the property tax (since a household at this income is assumed not to own their home).
In the business tax burden study, many of the tax components are estimated by state. As detailed as this study is, the authors caution that their results do not provide enough information to fully evaluate a state’s competitiveness. Two states with an identical overall business tax burden may have very different tax systems. One may more heavily tax “base” economic activities, which consist of companies that sell most of their goods and services to customers located outside the state. Base activities drive the economic growth of any state.
Some of the inputs to the calculation of gross domestic product by state are estimated. These estimates are subject to revision.
Household Tax Burden in Phoenix as a Percentage of the Median of 51 Cities, State and Local Government Taxes in 2013
Visualization Notes:
The total household tax burden in Phoenix in 2013 ranged from near the median city at the $25,000 income level to 17 percent below the median at higher income levels. The sales tax burden in Phoenix was 44-to-46 percent above the median at each income level. In contrast, the personal income tax burden in Phoenix was at least 40 percent less than the median at each of the four highest income levels. The property tax burden was 14-to-18 percent less than the median at each of the income levels.
Business Tax Burden as a Percentage of Private-Sector GDP in Arizona, Percentage Difference from the National Average, State and Local Government Taxes in Fiscal Year 2013
Visualization Notes:
The overall business tax burden in Arizona in fiscal year 2013 was 8 percent higher than the national average. The two primary sources of revenue — the sales tax and the property tax — were substantially above the national average, with the sales tax burden 73 percent higher than average. All other business tax burdens were below average, by 21 percent to 63 percent. Among the furthest below average was the individual income tax, which is paid by owners of small businesses.
Data Source
For the household tax burden, the Government of the District of Columbia, Tax Rates and Tax Burdens in the District of Columbia: A Nationwide Comparison http://cfo.dc.gov/node/215912. For the business tax burden, the Council on State Taxation and Ernst & Young, Total State and Local Business Taxes, http://www.cost.org/StateTaxLibrary.aspx?id=17768. Gross domestic product by state is estimated by the U. S. Department of Commerce, Bureau of Economic Analysis http://www.bea.gov/regional/index.htm.
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