SCRIPPS HOWARD NEWS SERVICE SPECIAL REPORT

SPECIAL REPORT

SCRIPPS HOWARD NEWS SERVICE

taxing times

SPRING 2011

SCRIPPS HOWARD NEWS SERVICE

About the Taxing Times special report
Once a year in April, Americans act as one and file tax returns to their state and federal governments. We share a grumble about the IRS, wonder briefly where all the money goes, and head back to work. But if death and taxes are the only things certain for everybody, taxes are certainly not equal for everybody. How do your taxes compare with those of people in other states or even other countries? Are Americans taxed too much? The answers to those questions, reporter Tom Hargrove discovered, depend largely on where you live. For example, residents of some states pay up to six times more than people with the same incomes in other states. Connecticut has the highest state taxes per capita, and most other higher-tax states are found in the Northeast and mid-Atlantic. The lower-tax states tend to be in the South and Southwest. The Tax Foundation estimates that the states with the lowest taxes are Mississippi, South Carolina, Tennessee and Alabama. Not surprisingly, the lower-tax states also tend to spend less on their residents and provide fewer services, or they make up the revenue by taxing businesses or other interests. Compared with the rest of the industrialized world, tax rates in the United States are actually on the lower end of the global scale, even though taxes account for 24 percent of our total economy. Denmark leads the world in payments to government, with taxes making up 48 percent of the gross domestic product. One big difference with other countries is that taxes in the United States are heavy on income rather than on spending. No matter where they are, however, governments figure out how to pay for themselves by taking money from the rest of us.

Sincerely, Peter Copeland

Editor & General Manager Scripps Howard News Service

“You are one of $50 million Americans who must fill out an income tax return by March 15th,” a 1945 Treasury Department poster says. The IRS expected to receive more than 140 million individual tax returns this year.
SHNS photo courtesy National Archives

CONTRIBUTORS
Reporter Thomas Hargrove Editorial Writer Dale McFeatters Lead Editor Carol Guensburg Editors Peter Copeland Bob Jones John Lindsay David Nielsen Photo Editor Sheila Person Multimedia Editor Jason Bartz

CONTENTS
Taxes unify Americans, but vary by state State and local taxes per ... household person
PAGE 4 PAGE 6 PAGE 7 PAGE 12 PAGE 15 PAGE 16 PAGE 18 PAGE 20

Families weigh what they pay and receive U.S. taxes trail rates of many developed countries Comparison of 2009 tax rates Making news across America EDITORIAL: America taxed less than others but feeling it more
On the cover: Uncle Sam image provided by National Archives

CONTACTS

202-408-1484 or stories@shns.com. Our website www.shns.com
Scripps Howard News Service is part of the E.W. Scripps Co.

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SHNS photo by Nathan Morgan / Redding Record Searchlight

Three hours of waving, standing and "making them smile just a little bit" is part of Taylor McElroy's job at a Liberty Tax Service outlet in Redding, Calif. Manager John Sheridan said his firm has been advertising more in preparation for helping customers with their tax returns.

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taxing times

Taxes unify Americans, but vary by state

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By thomas hargrove Scripps Howard News Service

very spring, millions of Americans rush to the post office to file their taxes before the April deadline. From Bangor to Brownsville, paying taxes unites us. It also divides us.
For example, a married couple with three children earning $50,000 will pay about $10,348 a year in state and local income, property, sales and automobile taxes if they live in Bridgeport, Conn., according to a study the District of Columbia city government released in September 2010. But if that family lived in Cheyenne, Wyo., it would pay only about $2,186, thanks to modest property taxes and no state income tax. "We are a very conservative state, very frugal in our spending. It's always been that way," said Wyoming State Revenue Director Ed Schmidt. His state, the nation's top coal producer, levies mineral-production taxes
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People can pay five and even six times more in state and local taxes than other folks in similar circumstances making similar incomes, according to recent studies of relative tax burdens. "Taxes vary by a pretty significant amount in America," concluded Mark Robyn, a staff economist at the Tax Foundation, a conservative study group based in Washington, D.C. "The highly taxed states tend to be in the Northeast and in the mid-Atlantic region. They have more government services, bigger government, and so they raise more revenue to support that government," Robyn said. "The South and Southwest tend to be lower-taxed."

SCRIPPS HOWARD NEWS SERVICE SPECIAL REPORT

taxing times
that help hold down other taxes, he suggested. "Most folks in Wyoming say they like things just the way they are." Although methods of calculating tax burdens vary enormously — as do the conclusions they draw — most tax experts agree that residents in Connecticut lead the nation in shelling out to the taxman. The small state historically has served as a bedroom community for New York City's high-income work force. "Part of our high tax structure is connected to our high incomes," said Arthur Wright, professor emeritus of economics at the University of Connecticut. "But states like Massachusetts and New York also look like they have high taxes. If you are surrounded by high-tax neighbors, there's a temptation to add to the general tax burden." The Tax Foundation estimates that the 10 states with the lowest per-capita state and local tax burdens are, in order from lowest: Mississippi, South Carolina, Tennessee, Alabama, Alaska, New Mexico, West Virginia, Louisiana, South Dakota and Kentucky. Three of these states — Alaska, South Dakota and Tennessee — have no state income taxes. Most have property taxes well below the national average. The states with the highest tax rankings are, from highest: Connecticut, New Jersey, New York, Mas-

State and local taxes per household
The District of Columbia Office of Revenue Analysis study tallies several types of state and local taxes to gauge 2009 cost per household.

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taxing times
State and local taxes per person
The nonprofit Tax Foundation combined state and local taxes to estimate 2009 cost per person.

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SHNS photo by Brandon Dill / Special to the Commercial Appeal

Wesley Jones brandishes a sign during a rally of conservative groups last April in Memphis, Tenn.

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taxing times
sachusetts, Maryland, California, Minnesota, Rhode Island, Illinois and Wisconsin. All of these states have hefty property tax rates and housing markets with home values well above average. All have state sales and income taxes, as well. That high-tax states have greater social services has long been documented. A 2004 joint study by the Lewin Group and the Nelson A. Rockefeller Institute of Government found that states of "less fiscal capacity spent less per capita on social welfare than states with higher per capita incomes." Recent state budget shortfalls have prompted Maine to propose cuts in state workers who investigate child abuse in foster homes; Minnesota to consider closing state-funded nursing homes; and New Jersey to weigh cuts in Supplementary Security Income payments to elderly and disabled residents. Wright in January published a plan to eliminate dozens of sales-tax exemptions to help close Connecticut's $3.7 billion budget shortfall, a proposal he said he'd never make if neighboring states had significantly lower taxes. In fact, the recent recession forced 32 states to hike taxes in 2009 and 2010. Arizona voters approved increasing their sales-tax rate from 5.6 percent to 6.6 percent over three years, expected to generate $918 million. Washington state added $223 million in business and occupation taxes, and Oregon raised $54 million by limiting business energy credits. "During times of recession, the demand for government services goes up while revenues go down," said Mandy Rafool, a senior analyst for the National Conference of State Legislators. "Since states have to balance their budgets, they have to figure new ways to close their budget gaps." The states enacted about $4 billion in new taxes last year and more than $28 billion in additional levies in 2009, at the height of the recession. The recent round of tax increases probably exacerbated the tax disparities between states. New York

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taxing times
and California, for example, are high-taxing states that made significant increases in their general tax burdens. Low-taxing states like Wyoming and Alaska generally held the line on taxes. "You really are chained to your neighbors in terms of tax burdens," Wright said. "People are going to move out of state if you put taxes high above what they are in a neighboring state." Economists and tax experts agree that state lawmakers usually are careful to avoid large disparities with their neighbors when setting tax rates. But such disparities do occur. One of the biggest disparities is between California and neighboring Nevada. The two are divided by a mountain range and America's most arid desert. According to the D.C. study, a family of five earning $50,000 in Las Vegas would pay $3,257 in state and local taxes. If they crossed the Mojave Desert and bought a home in Los Angeles, their tax burden would

Mark Robyn, staff economist at the Tax Foundation in Washington, D.C.
SHNS photo by Thomas Hargrove

jump 62 percent to $5,278. Between 2000 and 2010, Nevada's population grew from 2 million to 2.7 million — a robust 35 percent

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taxing times
— even though the recession devastated its gambling industry. During the same period, California grew from 33.9 million to 37.3 million, or 10 percent, barely ahead of the national average. "That's one of the big debates right now — just how much do people react to differentials in tax rates," said Robyn of the Tax Foundation. "Some people want to live in a high-tax state because they benefit from all the services that these governments provide. Others want to live in a low-tax state." Although the causes of population migration are complex, historically, states with low tax rates tend to grow faster than states with high-tax burdens. Collectively, the 10 lowest-taxed states' population grew from 41.9 million in 2000 to 48.8 million in 2010, a growth rate of 16.4 percent. The 10 states with the highest tax burdens grew from 90.2 million to 95.7 million during the last decade, a growth rate of only 6.1 percent. "Taxes definitely play a role, but it's hard to prove by how much," Robyn said. "There are so many considerations into where people want to live and raise a family." The recession, which technically ended in June 2009, has had another effect on taxes. Regardless of the many increases enacted by cash-starved states, the general tax burden has been going down. The Tax Foundation estimates that individual Americans paid 33 percent of their income to federal, state and local taxes in 2000. But unemployment rates of nearly 10 percent, dramatic declines in consumer buying and a series of federal tax cuts during the successive Bush and Obama administrations dropped the general tax burden to just 27 percent by 2010. "We've seen the tax burden change a lot in the last few years because incomes were more volatile and tax collections themselves were a lot more volatile," Robyn concluded. "People have been spending less and earning a little bit less."

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taxing times

With taxes, families weigh what they pay and receive

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12 SPRING 2011

By thomas hargrove Scripps Howard News Service

hef Jessica Raia-Long is grateful she lives in Florida, where taxes are generally low and state income taxes are nonexistent. She knows what life is like elsewhere in America.

"Originally I was a Connecticut girl, born in Hartford. But my family didn't stay there. The taxes were just outrageous. I don't think we could afford it today," said Raia-Long, 39, who has lived in Tampa since 2001. A thousand miles to the north, along the Chesapeake Bay in Maryland, work-at-home medical transcriptionist Holly Zegalia also thinks about taxes. "If we could sell our house, we'd move out of Maryland. It's outrageous what we are paying," Zegalia said of her $2,440 property levy in the rural community of St. Leonard, on the bay's western shore. "We've been living in this house almost nine years. And in the 10 years that it's been built — we bought it right after it

SHNS photo courtesy of Scott Eason / WFTS

Jessica Raia-Long plays kickball with sons Gabriel, 5, and Zachary, 8 (near fence) at home in Tampa, Fla. A chef, Long recently sold a restaurant and now runs a catering service.

SCRIPPS HOWARD NEWS SERVICE SPECIAL REPORT

taxing times

SHNS photo by Kristin Volk

Steve and Holly Zegalia say they’d like to move to North Carolina to escape higher taxes in Maryland.

was built — the property taxes on this house have more than doubled." The two women — both married, each with two children and a mortgage — were invited to speak about the taxes they pay. Raia-Long recently sold the restaurant she operated for many years to run an upscale catering service out of a rented kitchen at a Franciscan convent nearby. She is considering moving with her husband, Michael Long, 38, employed at the Medtronic medical-equipment company, and their 5- and 8-year-old children. But she worries whether they can sell their home — a four-bedroom ranch located two minutes from downtown Tampa — or rent it at a price that will cover expenses. Raia-Long learned firsthand about state income taxes during her student days at Auburn University, when she got a part-time job and her first paycheck in Alabama. She recalled looking at the withholding statement:

"I said, 'What the heck is this?' " Zegalia is a self-described "wife, mom, full-time medical transcriptionist, knitter, spinner and blogger" who gives online advice to other parents at IlikeItFrantic.com. She and her husband of seven years — Steven Zegalia, a scientist at the National Oceanic and Atmospheric Administration — are considering selling their modest two-story home. They would happily relocate their 1- and 3-year-old children to a new state. One of the biggest differences between the two families is how much they must pay in state and local taxes. Experts generally rate Florida as enjoying one of the nation's lowest tax burdens, while Maryland frequently ranks near the high end in state and local levies. Connecticut, which Raia-Long said she gladly left, often is rated as America's most heavily taxed state. Both women cast critical eyes on the level of government services they get for their money.
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taxing times
"We're not getting back what we're putting in. Our Robyn, a staff economist at the Tax Foundation in existing roads are in disrepair," said Holly Zegalia. "PerWashington, D.C. "It's ignoring some pretty common sonally, I'd rather get that money and spend it the way sense (to believe) that people do not think about those I see fit." things." Although she pays less in taxes, Raia-Long is also Although there have been a few conflicting studies, unhappy with government services in Florida. scholars generally agree that taxes — especially income "Public transportation is certainly an improvetaxes — influence interstate migration. "Individuals ment that we need to have. My kids don't go to public move from states with high income taxes to states with school. They go to parochial schools. Should I be paying this (school) tax?" “I think our taxes Raia-Long said. "I don't are probably reawant to see our taxes go sonable. They’re up for a lot of government not 42 percent. I services." don’t want to see Both women said them (taxes) ever they have considered taxes get up there. That’s when deciding whether to move out of state. frightening to me.” "We know there are — Jessica Raia-Long, other states out there that About what residents have lower tax brackets; of some European nations that's why we've looked pay in taxes at moving," Zegalia said. SHNS photo courtesy of Scott Eason / WFTS "We would move to North Carolina. The rates overall down there are so much low income taxes," Quinnipiac University economist cheaper." Mark Gius concluded in a 2009 report in the Annals of States with low tax rates for many years have been Regional Science. gaining population much faster than those with higher Raia-Long counts her blessings. She has lived in rates. In the last decade, Florida's population grew by Germany, where the general tax burden — at about nearly 18 percent while the much-more heavily taxed 37 percent of its gross domestic product — is at signifipopulation in Maryland grew by 9 percent. cantly higher than the United States'24 percent, accordOf course, taxes are just one reason people move to ing to the Organization for Economic Cooperation and sunny Florida. Economists have debated for many years Development. just how much tax burdens influence population migra"I think our taxes are probably reasonable. They're tion throughout the United States. not 42 percent," Raia-Long said of what residents of "Economists all agree that individuals respond to several European nations pay. "I don't want to see them taxes. High-income millionaires are choosing to go (taxes) ever get up there. That's frightening to me. To from New York to Florida, for example," said Mark take a $1,000 paycheck and only get $600! Wow."

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taxing times

U.S. taxes trail rates of many other developed countries
By thomas hargrove Scripps Howard News Service

mericans pay much less in taxes than most other people in the industrialized world. Surprised? According to the latest estimates from the Organization for Economic Cooperation and Development — a Paris-based consortium that tracks financial conditions in 34 nations — the United States pays 24 percent of its total economy (as measured by gross domestic product) to taxes collected by all levels of government. That’s a bargain compared to most developed nations. Australians pay 27 percent; the Japanese pony up 28 percent; Canadians, 31 percent; British, 34 percent; Germans, 37 percent; French, 42 percent; and Swedes, 46 percent. Danes lead the world by forking over 48 percent to their government. Economic experts agree that America holds a tremendous international advantage because it has the world’s largest national economy and also enjoys one of the world’s most modest tax burdens. Among nations tracked by the OECD, only Turkey, Chile and Mexico generally have lower tax rates, slightly below what Americans pay.

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“The lighter tax burden on individual Americans is certainly a benefit not only to us but also to the rest of the world,” Mickey Kantor, commerce secretary in President Bill Clinton’s administration, said in an interview. “It means we can consume more and invest more. And we certainly have more foreign investments outside the United States than do other nations.” Kantor, who also was Clinton’s U.S. trade representative from 1993 to 1997, said Americans pay less in taxes but also have a much smaller “social net” of government benefits — such as free health care, government-operated pensions and individual retirement accounts and free college tuition — than most European nations. Yet Americans can be forgiven if they think their taxes are burdensome. The United States leads most of the world in aggressive taxation on income, both personal and corporate, as the primary means of raising government revenue. “We are the only major country that does not have a broad-based value-added tax. And, in many ways, that means we have a most unfortunate system of taxation,” said Gary Hufbauer of the Peterson Institute for International Economics, a research organization in Washington, D.C.
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taxing times
The value-added tax, often called VAT, is a consumption tax on the estimated market value added to a product or material at each stage of its manufacture or distribution. It is much simpler and broader than U.S. sales taxes, paid only by a product’s final consumer or buyer. The tax can dramatically increase the cost of goods. The leastexpensive version of Apple’s iPad costs $499 plus sales tax in the United States. The digital device costs $621 in Japan, $693 in Britain, $712 in Spain and $742 in Germany and France. “Obviously, we pay a lot of taxes on products, especially luxury products. Things like alcohol, cigarettes or beauty products,” said public-relations executive Ulrika “Ulli” Wippel, 36, from her home in Uppsala, Sweden. “The tax might be 12 percent on groceries, but 25 percent on some of those other products.” Since taxes are already counted in the list prices of goods, people in Sweden rarely notice they are being heavily taxed. Sweden’s consumption taxes raise almost as much revenue as its general income tax, which is lower than the federal income tax in the United States. “We never talked about the taxes we’d pay,” said Ulrika Wippel’s American-born husband, Jim

Tax rates for developed countries in 2009

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1 — 2008 is latest available

Organization for Economic Cooperation and Development

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taxing times
Wippel. “I think there is a misconception on income tage.” taxes here, that it is so much higher than it is. When I Perhaps that’s why a growing number of econogo back to the States and tell them what I actually pay mists, both liberal and conservative, are calling for a cut in income tax, jaws drop. Everyone thinks we are payin the current rate of corporate income taxes, something ing 40 or 50 percent, but it is so not true.” President Barack Obama endorsed in this year’s State of The OECD estimates Swedes pay an average of the Union address to Congress. 25 percent of their income to a federal income tax, al“American corporations are being taxed more than though the rate is progressively smaller those in other developed nations,” for low-income earners. Kantor said. “That hurts our compaThe United States relies on pernies by making them less competitive.” sonal income taxes to provide 36 perAmerica also faces another tax cent of all tax revenue, according to challenge, because its reliance on inthe latest OECD estimates. American come taxes has made the nation more businesses pony up another 12 percent vulnerable to startling revenue reducin levies on their incomes. Most other tions that have created trillion-dollar nations collect no more than a third deficits at the federal level and billion— and often much less — of their revdollar shortfalls for most state governenues from a general levy on income. ments. Personal income taxes — filed by The OECD finding that taxes repnearly 139 million Americans in 2010 resented 24 percent of America’s gross SHNS photo courtesy The Peterson Institute for International Economics — are probably the most invasive kind domestic product in 2009 was actually Gary Hufbauer, an analyst of levy, because people must tally their down from nearly 28 percent of GDP at the Peterson Institute for earnings, calculate often-complicated in 2007, before the recession struck. International Economics, says the United States exemptions and then estimate what Canada, Britain, France and most has “a most unfortunate share must be given to the federal govother developed countries reported less system of taxation.” ernment and to the 41 states that also than a 2-percentage-point drop in tax tax income. revenues as a percentage of the econo“The United States has a system of taxation by conmy during the recession. fession,” quipped former U.S. Supreme Court Justice “I suspect that a large part of the difference is in the Hugo Black during a complex tax ruling in 1953. way the U.S. collects taxes,” said University of CaliforThe VAT and other levies on consumption are the nia, San Diego, economist Valerie Ramey. primary method of raising revenue in most of the naAn OECD study has found that the United States tions monitored by the OECD. Experts agree it’s a less has one of the world’s most progressive tax systems, she invasive tax than direct levies against income. And forsaid. eign governments are using their reliance on the VAT to “As a confirming example, California has one of the influence international trade. most progressive income-tax systems in the country. In “They are imposing those value-added taxes on particular, it taxes capital gains as normal income,” Raour imports and exempting them on their exports,” mey said. “As a result, its tax revenues decline more durHufbauer said. “It has the effect of making their proding recessions and rise more during booms than other ucts more attractive. U.S. firms don’t have that advanstates.”
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Americans taxed less than others but feeling it more
answer in his “Taxing Times” project. It hinges on a critical difference between how Americans and Western Europeans are taxed. The United States relies on a peculiarly aggressive and intrusive form of taxation, the self-reported personal and corporate income tax, for the bulk of its government revenues. Families and individuals provide 36 percent of all tax revenue and businesses supply 12 percent, according to the OECD. Western European countries rely for revenue on the value-added tax, an unobtrusive but omnipresent consumption tax. It’s imposed on the value added at each stage of manufacturing or distribution. The final purchaser ultimately pays the VAT, which can range from quite modest on foodstuffs to 25 percent or more on luxury goods. As with a sales tax, consumers grow used to it. In some ways, a VAT makes sense for the United States; for one thing, it’s less vulnerable to the startling revenue fluctuations that have made a shamble of so many state budgets. As in Europe, it would allow for substantially lower income taxes. Indeed, the U.S. is the only major country without a VAT. The fact remains that in the current climate, Americans, who are broadly opposed to every other kind of tax, won’t sit still for a VAT.
DaLe mcFeatters Scripps Howard News Service

Editorial

s much as Americans and their politicians gripe about taxes, the U.S. tax burden of about 24 percent is one of the lowest in the developed world. Compared to the other 33 nations tracked by the Organization for Economic Cooperation and Development, the American taxpayer gets off lightly. The Canadians pay about 31 percent; the Brits, 34 percent; Germans, 37 percent; French, 42 percent; Swedes, 46 percent; and, topping everybody, are the Danes at 48 percent. Only Turkey, Chile and Mexico have lower tax burdens than the U.S. There are political and cultural reasons for this disparity. Western Europeans demand and expect a high level of government services and social benefits — free health care, cut-rate childcare, free higher education, generous government-funded pensions, heavily subsidized public transportation — and are generally uncomplaining about paying for it. The United States, by contrast, has a noisy and politically influential tax protest movement in the Tea Party. Its legislators resist any suggestion of tax increases to make up for the government’s yawning deficits and balked at even a modest increase on the wealthiest 2 percent of taxpayers. Why the disparity in attitudes? Thomas Hargrove of Scripps Howard News Service poses a likely

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