CT Effective State & Local Tax Rates Continue To Climb: Report

CONNECTICUT — Think it's only the prices at the pumps reaching deeply into your pockets? Wait until April 18: A new report shows Connecticut residents have the second-highest overall effective state and local tax rate in the country.

Every year, the average U.S. household pays over $10,000 in federal income taxes, an obligation calculated to be paid across a relatively level playing field. The discrepancies appear when local taxes are tossed into the mix, and the swing there can be pretty wide.

Inasmuch as every state is spending millions to get you to move there, it's not surprising there is a lot of smoke being swirled around local tax rates. You're probably well aware that Texas residents don't pay income tax, but did you know they spend 1.8 percent of their income on real estate taxes, one of the highest rates in the country? Washington's residents don't pay income tax either, but they still end up spending over 8 percent of their annual income on sales and excise taxes.

Personal finance website WalletHub compared state and local tax rates in the 50 states and the District of Columbia against national medians, factoring in local real estate, vehicle property, income, and sales and excise taxes. The money gurus plan was to calculate relative income-tax obligations by applying the effective income-tax rates in each state and locality to the average American’s income, and blow away some of the smoke.

When all that smoke cleared, Connecticut wasn't ______. The Nutmeg State has the second-highest overall effective state and local tax rate, just ahead of Illinois and behind New York. It has the 4th highest real estate taxes, and the fifth-bleakest vehicle property tax. The state was in the middle of the pack when it comes to income tax, and has comparatively low sales and excise taxes.

How much of an impact, long- or short-term, will Connecticut's low marks for high taxes have on the state's allure to new residents? Experts are of mixed minds.

Doron Narotzki, an associate professor of accounting at the University of Akron, believes that "high state and local taxes are not necessarily a problem if used efficiently and may actually attract new residents and stimulate growth."

Michael Ettlinger, the director of the Carsey School of Public Policy at the University of New Hampshire, agrees.

"Even provisions designed specifically to attract people mostly benefit people who would have come to the state anyway for the myriad other reasons people move. If only one in a hundred of the people who benefit from a tax break have their behavior influenced by it, then the foregone revenue is 99% wasted relative to its purpose," Ettlinger said.

Joseph Martin, a professor of practice at the Truman School of Government & Public Affairs at the University of Missouri, said that how much the local tax rate matters may hinge on the age of the mover.

"Rates of taxation most often come into play with retirees, since they are usually on a fixed income," Martin said. For this reason, local governments often provide property tax relief for eligible elderly residents, sometimes to the tune of no tax at all.

*Assumes “Median U.S. Household” has an annual income of $63,218 (mean third quintile U.S. income); owns a home valued at $217,500 (median U.S. home value); owns a car valued at $25,295 (the highest-selling car of 2021); and spends annually an amount equal to the spending of a household earning the median U.S. income.

**National Average of State and Local Tax Rates = 10.80 percent

***Assumes “Median State Household” has an annual income equal to the mean third quintile income of the state; owns a home at a value equal to the median of the state; owns a car valued at $25,295 (the highest-selling car of 2021); and spends annually an amount equal to the spending of a household earning the median state income.