Billings Ranks #6 for Lowest Tax Burden

By Michael B. Sauter, Alexander E.M. Hess, and Samuel Weigley | 24/7 Wall St - Mon, Feb 25, 2013 5:24 PM EST

Tax season is here and, according to a recent report, American families in the nation's largest cities will be shelling out 15% or more of their income, and that doesn't even include federal taxes.

The report, released by the Office of Revenue Analysis of the Government of Washington, D.C., reviewed the estimated property, sales, auto and income taxes a family paid in 2011 in the largest city in each state. The differences were stark. A family of three earning $75,000 in Cheyenne, Wy., paid just $2,808, or 3.7% of its income. In Bridgeport, Conn., that same family would have paid $16,105, or 21.5% of its income. Again, this is excluding federal taxes.

One of the biggest factors in how much a family can expect to pay is the state and local tax rates affecting their city. In Bridgeport, Conn., the effective property tax rate, or how much people pay per $100 of property, is among the highest of the large cities reviewed, and property values are higher, meaning a family earning $100,000 per year can expect to spend $11,299 in property taxes alone.

According to Edward Wyatt, fiscal analyst for the Office of Revenue Analysis, while tax rates are certainly a factor in the tax burden on families, it is more the existence of certain kinds of taxes that determines whether families pay through the nose or barely at all come mid-April.

Personal income tax is one of the key factors. Seven states have no income tax, and six of the 10 cities with the lowest tax burdens are in these states. Two more cities in the bottom 10 -- Memphis, N.H., and Manchester, Tenn. -- only tax nonwage income, such as dividends and interest. None of the cities with high tax burdens are in income tax-exempt states.

The cities with the highest tax burdens tend to be much larger ones, like New York, Philadelphia and Los Angeles, while the low tax burden cities are smaller and in more rural areas, including Fargo, Anchorage and Cheyenne. Wyatt suggested this may have to do with the cost of running these larger cities, as they have to spend less per capita on programs like social services.

Another interesting trend was that cities with higher tax burdens tended to have higher unemployment, while lower-taxed cities tended to have among the lowest unemployment. While this is often a product of the state economy, in some cases, the city's rate is much higher than the state. Bridgeport, the city with the highest tax burden among the 51 cities studied, also had the highest unemployment rate, at 11.7% in December. The state of Connecticut's rate that month was just 8.6%.

Based on the local government report: Tax Rates and Tax Burdens in the District of Columbia -- A Nationwide Comparison, 24/7 Wall St. reviewed the cities where a family of three in different income brackets would spend the largest and smallest percentages of their income on state and local taxes. In order to reflect the respective rank in all income levels measured by the report, we considered all of them for the purposes of the ranking. As a result, the cities with highest taxes on our list had the highest combined scores and the cities with the lowest taxes had the lowest scores. The report covers the largest city in each state, as well as Washington, D.C. All estimates are for the 2011 fiscal year. 24/7 Wall St. also reviewed data for these cities from the U.S. Census Bureau, including the occupational breakdown of the city's workforce, and income, poverty and home value data, all for 2011. From the Bureau of Labor Statistics, we reviewed the unemployment rates for these cities as of December 2012.

Cities with the Lowest Tax Burdens

10. Las Vegas, Nev.

Taxes for family earning $25,000: $3,027 (24th highest)
Taxes for family earning $150,000: $6,305 (3rd lowest)
Unemployment rate: 10.2% (9th highest)

Las Vegas had no state or local income tax in 2011, which saved a hypothetical family of three earning $25,000 a year $266 over the average city, and a family earning $150,000 per year an estimated $6,835. Also, the city's effective residential property tax rate was just $1.15 per $100 of assessed value, a rate lower than most of the cities reviewed. Although the city had an especially high 7.75% sales tax, it also had one of the nation's lowest sales tax burdens. Among the reasons why, in Nevada only 37.4% of goods are taxed at sale, and food and other consumer goods are exempted. Currently state and local sales tax payments are also tax deductible in Nevada.

9. Manchester, N.H.

Taxes for family earning $25,000: $2,357 (4th lowest)
Taxes for family earning $150,000: $6,582 (7th lowest)
Unemployment rate: 6.0% (16th lowest)

Manchester was one of just five cities reviewed with no state or local sales tax. Additionally, neither the city nor state had an income tax on personal wages, with state income taxes limited to sources such as interest and dividend payments, inheritance and business profits. However, the city is heavily dependent on property taxes, which its website describes as "the principal tax of the City." In 2011, for a hypothetical family of three, Manchester's property tax burden was among the highest for all cities observed at all levels of income. Property taxes also comprised the majority of any family's state and local tax burden: A Manchester family earning $75,000 would have paid $5,134 in state and local taxes in 2011. Of this, $4,645 would have been property taxes.

8. Sioux Falls, S.D.

Taxes for family earning $25,000: $2,565 (7th lowest)
Taxes for family earning $150,000: $7,127 (8th lowest)
Unemployment rate: 4.2% (4th lowest)

Sioux Falls residents benefit from lower than average taxes. Helping to significantly alleviate the total tax burden, Sioux Falls is one of just a few cities where residents are not required to pay any income taxes. In addition, auto taxes are among the lowest of all cities. The one downside for taxpayers is the sales tax burden, which is among the top third of all cities measured. The unemployment rate of 4.2% as of December 2012 was the fourth lowest of all cities measures. The surplus in the city's 2013 budget is expected to be about $1.7 million.

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7. Memphis, Tenn.

Taxes for family earning $25,000: $2,941 (23rd lowest)
Taxes for family earning $150,000: $6,450 (5th lowest)
Unemployment rate: 9.8% (11th highest)

Memphis charged no city-level personal income tax in 2011. Neither did the state of Tennessee, where only income from dividends or interest payments, as well as corporate income, are taxed. However, residents did pay a total of 9.25 cents per dollar in sales taxes, higher than all but three other cities. All of these cities have higher incomes than Memphis, where more than 27% of the population lives below the poverty level, compared with 15.9% nationwide. Partly because of sales taxes, a hypothetical family earning $25,000 paid 11.8% of its income in state and local taxes, while a family earning $150,000 paid just 4.3%.

6. Billings, Mont.

Taxes for family earning $25,000: $2,223 (the lowest)
Taxes for family earning $150,000: $11,036 (14th lowest)
Unemployment rate: 4.1% (3rd lowest)

In 2011, residents of Billings did not have to pay any sales tax, either to the city or their state. Sales taxes cost a family of three earning $25,000 a year $728 and a family earning $150,000 a year $2,194. Additionally, Montana is a low income tax state. At all income levels, Billings had a lower income tax burden than all observed cities where such a tax was in effect. However, not all taxes in Billings were low; gas taxes were more than four cents per gallon higher than the nationwide average in 2011. The state also provides oil and gas companies with a controversial tax holiday, which allows production at new wells to be taxed at a rate of less than 1% during their first 12 to 18 months of operations.

5. Jacksonville, Fla.

Taxes for family earning $25,000: $2,956 (26th lowest)
Taxes for family earning $150,000: $6,429 (4th lowest)
Unemployment rate: 7.7% (21st highest)

As residents of Florida, individuals and families living in Jacksonville pay neither a state nor local income tax. Partly because of this, the tax burden for wealthier families remained low in 2011. A typical family of three with two sources of income, earning $150,000 per year, would have paid 4.3% of its income on state and local taxes -- less than all but four other cities. However, a family earning just $25,000 per year would have had to pay 11.8% of its annual income in taxes. Florida's 6% sales tax accounts for the majority of the state's tax revenue.

4. Fargo, N.D.

Taxes for family earning $25,000: $2,228 (2nd lowest)
Taxes for family earning $150,000: $7,908 (10th lowest)
Unemployment rate: 3.2% (the lowest)

Fargo has a very low tax burden compared to most large cities, especially for families who make little money. For a family of three making just $25,000, the tax burden was just $2,280 in 2011, the second lowest of all cities. Although both the city and the state do not collect as much in total tax revenue from households, the 3.2% unemployment rate means that more people are likely to own homes, spend more money when shopping, and purchase cars, driving up tax payments in those categories. In addition, North Dakota collects revenue through various oil and gas taxes, such as the oil gross production tax, the gas gross production tax and the oil extraction tax.

3. Houston, Tex.

Taxes for family earning $25,000: $2,709 (14th lowest)
Taxes for family earning $150,000: $6,571 (6th lowest)
Unemployment rate: 6.1% (17th lowest)

Houston is one of just eight cities in which a family of three earning $150,000 a year paid less than 5% of its annual income in taxes in 2011. One major reason is the absence of any state income or local income tax, which cost a similar family an average of $6,835 in the cities where income taxes are levied. However, residents did pay one of the nation's highest sales taxes, at 8.25%. This cost a family earning $150,000 in Houston almost $2,500 in sales taxes -- higher than in two-thirds of cities surveyed. Additionally, the city had one of the nation's highest property tax rates, at $2.53 per $100 of assessed property value.

2. Anchorage, Alaska

Taxes for family earning $25,000: $2,236 (3rd lowest)
Taxes for family earning $150,000: $5,095 (2nd lowest)
Unemployment rate: 5.2% (tied for 10th lowest)

Anchorage has a tax rate lower than all but one major city in the United States. The low taxes are even better given that the city's median household income of $72,813 in 2011 was higher than all other cities. Anchorage's one weak spot is its property tax burden, which is generally among the top quarter of all cities measured. The city is just one of a handful where residents are not required to pay any sales taxes. In addition, the auto tax burden is among the lowest of all cities. This week, the Anchorage Chamber of Commerce will host a debate on the pros and cons of changing the state's oil tax law.

1. Cheyenne, Wyo.

Taxes for family earning $25,000: $2,424 (5th lowest)
Taxes for family earning $150,000: $4,702 (2nd lowest)
Unemployment rate: 5.2% (tied for 10th lowest)
No city measured has a lower burden on families than Cheyenne. A family of three earning $25,000 would have had a 9.7% tax burden in 2011, the fifth lowest of all cities. The tax burden becomes even lighter as someone moves up the income ladder. A family of three earning $150,000 had a tax burden of just 3.1%, lower than any other city. For a family of three making $75,000 to $150,000, the city has the second lowest property tax burden behind Birmingham, Alabama.