By Haddon Libby
Most of us choose California as our home because of the wonderful lifestyle that the region affords us. We all know that California is not the lowest taxed state, but it is far from the highest taxed state unless you earn more than $553,200 a year.
If you believe that the rich should pay a higher percentage of their income in taxes than the poor, California is the place to live as we have the most equitable taxing approach in the United States. According to the Institute for Taxation and Economic Policy, the top 1% in California pay 12.4% of their income in taxes while the poorest pay 10.5%. Looking at these numbers in a different way, California has the highest tax rate in the United States for those in the top 1%. For those in the middle, the tax rate is slightly below average at 8.9%. While the cost of everything may be higher in California, the tax burden on the middle-class is lower and helps ever so slightly in offsetting additional costs.
For the poorest amongst us, California is an average place to struggle in 24th with a tax burden of 10.5%. Most of the taxes paid are sales taxes.
To better understand how all of this impacts you, let’s figure out which economic group are you in.
If you earn more than $553,200 annually, you are in the top 1% of income earners. The top 5% earn at least $226,800 per year. To be included in the top 20%, you need to earn at least $103,600.
The upper middle-class earn incomes of $59,900 to $103,600 per year. The middle-class earn $36,800 to $59,900 while the lower middle-class can earn as little as $20,800. To be considered poor and in the bottom 20%, income is less than $20,800. These numbers exclude the elderly, dependents and those with negative incomes.
The least fair state is Washington. This state taxes the poor at an astoundingly high 17.8%. Hawaii is the second roughest at 15% followed by Illinois (14.4%) and Pennsylvania (13.8%). Other notable states include Arizona (13%), Texas (13%), New York (11.4%) and Florida (12.7%).
Which states tax the poor at the lowest rate? Delaware at 5.5% followed by Alaska (7%) and Utah (7.5%). Delaware also serves as one of the most tax-friendly states for corporations.
California sticks it to the rich at 12.4% with New York coming in as the 2nd at 11.3% followed by Vermont at 10.4%. Other notably more expensive places include Minnesota at 10.2%, New Jersey (9.8%) and Hawaii (8.9%).
Tax-obsessed, location-fluid, one-percenters are advised to move to Nevada for its razor-thin 1.9% tax rate. Florida comes in 2nd at 2.3% followed by Alaska and South Dakota at 2.5%. Other notables include Texas (3.1%), Arizona (5.9%) and Illinois (7.4%).
Which states stick it to the poor?
Hands down, Washington is the harshest state on the poor as this group of Americans pay 17.8% of every dollar earned in taxes versus 3% for the one-percenters for a gap of 14.8. Florida comes in second with a 10.4% gap followed by Texas (9.9%), South Dakota (8.7%) and Nevada (8.3%). California has negative 1.9% rate meaning that the affluent pay more on every dollar than the poor.
For those in the middle (income between $20,800 and $103,599), New York is the costliest state at 12.5% followed closely by Illinois at 12.2%.
The middle-class pay the lowest percentage of income in taxes in Alaska at 4.3%. Delaware comes in second at 5.8% followed by Montana (6.7%) and Wyoming (6.9%). Looked at another way, the middle-class in California pay 4.6% more in taxes on every dollar earned than the lowest cost state of Alaska. Meanwhile, our middle-class neighbors to the east in Arizona pay 0.4% more.
When all things are considered, most Californians pay a fair tax rate in comparison with most other states. While our cost of living may be higher, so is the quality of life for most of us who call California home.
Haddon Libby is the Managing Partner of Winslow Drake Investment Management. Winslow Drake operates to the Fiduciary Standard of Care in everything that we do, a level of care that less than 1 in 20 investment advisory firms’ follow. To understand how this level of care can benefit you, email Haddon at Hlibby@WinslowDrake.com or call 760.449.6349. For more information, please visit www.WinslowDrake.com.