In light of the new Republican tax bill, the current tax system has once again come under review. Always a divisive issue, there has been much debate over the optimal tax policy – one that promotes a healthy economy while limiting the deficit and providing citizens with necessary public services.
To see how much control the government wields over the economy, economists often look at the ratio of taxes collected compared to gross domestic product (GDP). A high tax-to-GDP ratio indicates the government wields more control over economic resources while a low tax-to-GDP ratio indicates the private sector wields more control. The ratio can also be used to compare the tax burden from year-to-year since collected taxes will rise and fall with GDP.
While much of the current debate has centered around federal tax policy, researchers at ConsumersAdvocate.org decided to investigate tax policy at the state level. They found that the tax-to-GDP ratio varied greatly across states – with a low of roughly 2% to a high of nearly 10%.
Methodology
Tax data is from the Census Bureau’s State Government Tax Tables for 2016. Each state’s 2016 GDP was collected from the Bureau of Economic Analysis. “Taxes as percent of GDP” was calculated by dividing “Total Tax Revenue” by “Total GDP” for each state. Tax figures include state tax receipts only (federal and local taxes were not considered).
The Most Taxed States
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5. Mississippi
Tax-To-GDP Ratio: 7.1%
2016 GDP: $108.5B
2016 Tax Revenue: $7.7B
Largest Tax Revenue Source: Sales and gross receipts taxes
Though residents of Mississippi do have one of the heavier tax burdens in the U.S., the state does offer some relief to its older inhabitants as most retirement and pension income is not taxed.
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4. Minnesota
Tax-To-GDP Ratio: 7.4%
2016 GDP: $339.1B
2016 Tax Revenue: $25.2B
Largest Tax Revenue Source: Income Taxes
Though most states collect some form of personal income tax, Minnesota has the third highest state income tax rate in the country, coming in behind only California and Oregon.
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3. Arkansas
Tax-To-GDP Ratio: 7.8%
2016 GDP: $121.4B
2016 Tax Revenue: $9.5B
Largest Tax Revenue Source: Sales and gross receipts taxes
Despite a low property tax rate, Arkansas still has a high state tax-to-GDP ratio. This is mostly thanks to its high sales tax rate, the 10th highest in the nation.
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2. Hawaii
Tax-To-GDP Ratio: 8.2%
2016 GDP: $84.7B
2016 Tax Revenue: $6.9B
Largest Tax Revenue Source: Sales and gross receipts taxes
Though Hawaii has one of the heaviest state tax burdens in the U.S., the state is very friendly to property owners. The state doesn’t collect property taxes and even once local property taxes are taken into account, the state still has the lowest effective property tax rate in the country.
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1. Vermont
Tax-To-GDP Ratio: 9.9%
2016 GDP: $31.1B
2016 Tax Revenue: $3.1B
Largest Tax Revenue Source: Property Taxes
Vermont has the highest state tax-to-GDP ratio in the country. It’s no surprise then that it has one of the highest property tax rates in the country in addition to the sixth highest personal income tax rate.
The Least Taxed States
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5. Louisiana
Tax-To-GDP Ratio: 3.9%
2016 GDP: $237B
2016 Tax Revenue: $9.3B
Largest Tax Revenue Source: Sales and gross receipts taxes
Most states with a low tax-to-GDP ratio don’t collect either income, property, or sales tax. Louisiana still collects each of these, but their individual rates are low.
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4. South Dakota
Tax-To-GDP Ratio: 3.6%
2016 GDP: $48.4B
2016 Tax Revenue: $1.7B
Largest Tax Revenue Source: Sales and gross receipts taxes
It’s no surprise that South Dakota is one of the lowest taxed states in the country since residents neither pay state personal income tax nor state property taxes.
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3. New Hampshire
Tax-To-GDP Ratio: 3.4%
2016 GDP: $77.2B
2016 Tax Revenue: $2.6B
Largest Tax Revenue Source: Sales and gross receipts taxes
New Hampshire keeps it’s tax-to-GDP ratio low by not taxing personal income from wages (they still tax income from interest and dividends) and foregoing a general sales tax. However, they do collect the majority of their tax revenue through selective sales tax on products such as tobacco and gasoline.
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2. Texas
Tax-To-GDP Ratio: 3.3%
2016 GDP: $1,599.3B
2016 Tax Revenue: $52.1B
Largest Tax Revenue Source: Sales and gross receipts taxes
The state of Texas imposes neither a personal income tax nor a personal property tax – though local tax authorities, such as counties and school districts, do collect property taxes to raise revenue at the local level.
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1. Alaska
Tax-To-GDP Ratio: 2.1%
2016 GDP: $50.4B
2016 Tax Revenue: $1B
Largest Tax Revenue Source: Other
Alaska is the only state to impose neither a personal income tax nor a general sales tax. To fund state activities, Alaska instead relies heavily on revenue generated from its rich natural resources.
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