We recently compiled a report on the 15 States with the Highest Tax Burden in the US and in this article we will look at the state with the highest tax burden.
States with the Highest Tax Burden
The top marginal federal income tax rate remains unchanged from 2023 at 37%, as per the IRS. The other six federal tax rates are 10%, 12%, 22%, 24%, 32%, and 35%. The income tax is the major contributor to tax burdens in the US and also adds to the economic growth of the states. In the fiscal year 2024, the US federal government has collected $3.28 trillion in total taxes so far. Personal income taxes contributed 51% to the total taxes, accounting for $1.70 trillion, followed by social security and medicare taxes share of 34% at $1.13 trillion, as of July 5.
The minimum income tax rate is 10% in 2024, to be fulfilled by individuals with incomes of $11,600 or less. While, the maximum individual income tax rate of 37% applies to incomes ranging from $609,350 to $731,200 for individuals and married couples filing jointly, respectively. The state income tax returns are usually due at the same time as federal income tax returns on April 15. Whereas, some states may have different deadlines.
States with the highest tax burden also tend to have a higher state sales tax. The states with the highest tax burden have a higher sales tax rate than a 5.10% average state sales tax rate, as of 2024. Whereas, states with the lowest tax burden in the US have a lower sales tax rate than the average rate of 5.10%. South Dakota made a sales tax cut in 2023 which is expected to expire after 2026. New Mexico is another state that lowered its sales tax rate from 5.12% to 5% in July 2022.
On March 11, Reuters reported that the US government’s proposed budget by President Joe Biden would raise tax receipts by $4.95 trillion over 10 years, including tax increases of over $2.7 trillion on businesses and $2 trillion on wealthy individuals and estates. In addition, the IRS is also expanding its free tax filing program, Direct File, across the country in 2025. After a successful pilot, the IRS is implementing Direct File permanently and inviting all the states to offer a free filing option to their residents. In 2024, around 140,000 users successfully filed returns via Direct File across 12 states, saving approximately $5.6 million in tax preparation fees. On June 18, the IRS announced that Oregon will be the first new state to join the IRS Direct File in filing season 2025.
America’s Leading Tax Services Provider
H&R Block, Inc. (NYSE:HRB) is one of the top tax services providers in the US. The company assists individuals and firms with income tax return preparation. H&R Block, Inc. (NYSE:HRB) prepares around 12 million tax returns annually in the US, 6 million of which are online. H&R Block, Inc. (NYSE:HRB) offers tax services programs running from basic to premium and business. The basic tax service program is priced at $35 and the premium and business option can be availed at $99. In case the customers are unhappy with the service, H&R Block, Inc. (NYSE:HRB) claims to refund the full purchase price. In addition, if an error occurs from H&R Block, Inc.’s software, the company will reimburse the customer with penalties and interest up to a maximum of $10,000. H&R Block, Inc. (NYSE:HRB) offers free tax filing services to taxpayers who have W-2 income, parents who want to claim the Child Tax Credit, as well as students and first-time filers. The company also offers free returns to military service members through Military OneSource.
H&R Block, Inc. (NYSE:HRB) is trading at its all-time high with a day’s trading range of $55.18 – $56.63, as of July 3. The stock has soared since it reported its third quarter 2024 earnings on May 8. H&R Block, Inc. (NYSE:HRB) posted earnings per share of $4.94, surpassing the estimates by $0.33. The revenue increased by 4% year over year to $2.2 billion in Q3 2024, beating consensus estimates by $47.37 million. In Q3 2024, H&R Block, Inc. (NYSE:HRB) revenue increased by 4%, EBITDA grew 6% and EPS grew 18% over the previous quarter. The company benefited from DIY volume growth and ongoing disciplined expense management, especially the DIY growth significantly outpaced the DIY category. Through April 30, paid volumes soared 6% and the majority of the files came from TurboTax. In addition, the company is working on AI assistance and making notable ground. Here are some of the comments from the Q3 2024 earnings call:
“Our Gen AI-powered AI tax assist performed well. As we’ve shared, this innovation was launched for the first time this year. Feedback indicated that the tool was easy to use and helpful in the tax prep process and clients found value-added. Importantly, we saw greater conversion among new clients who leveraged AI tax assist. Both AI tax assist and human help were included at no additional charge in all of our DIY paid online SKUs which we believe is a competitive differentiator. As a result, we exceeded our operational metrics with human help and believe this combination provides clients with the confidence they need in DIY. We also continue to see more DIY clients accessing human help with Tax Pro Review which grew more than 15%, continuing its multiyear trend of double-digit annual growth.”
H&R Block, Inc. (NYSE:HRB) growth is backed by strong development in its core business. H&R Block, Inc. (NYSE:HRB) is trading at 13 times its forward earnings, a 14% discount to its sector. We think HRB is undervalued at current levels given analysts expect earnings to grow by 13% this year. Moreover, H&R Block, Inc. (NYSE:HRB) has a decent dividend profile, with 8 years of dividend growth and a sustainable payout ratio of 26.7%. As of July 3, HRB has a forward dividend yield of 2.29%.
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Our Methodology
To compile our list of the 15 states with the highest tax burden in the US, we gathered tax rates data from the Tax Foundation. We have considered the top personal income tax, sales tax, and property tax rates for each state, as of 2024. We have calculated each state’s tax burden by adding all the taxes and finding the total taxes paid against the average individual income of the state. We have ranked states in ascending order of their tax burden. The data for average individual income for each state was taken from Forbes.
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The State with the Highest Tax Burden in the US
1. California
State Tax Burden: 22.40%
Income Tax: 14.40%
Sales Tax: 7.25%
Property Tax: 0.75%
California has the highest top individual income tax rate of 14.40%, while the lowest income tax rate is 1%. There are nine state income tax brackets in California. The state implies a progressive tax structure, which means the more you earn, the higher your tax rate is. The 1% income tax is imposed on income ranging from $0 to $10,412. Other tax brackets include tax rates of 2%, 4%, 6%, 8%, 9.30%, 10.30%, 11.30%, and 12.30%. The 12.30% individual income tax rate is applicable on income equal to $698,272 or more. For married couples filing jointly, the highest tax rate of 12.30% is imposed on income equal to $1,396,542 or more.
The standard deductions in California for 2023 tax returns are $5,363 for individual or married couples filing separately and $10,726 for married couples filing jointly. California has a state sales tax of 7.25%. Many cities and counties also levy a local sales tax, which can increase the total sales tax rate up to 10.75%. With a total tax burden of 22.40%, California has the highest tax burden in the US in 2024.
Curious to learn about other states that ranked high on our list? Check out our report on the 15 States with the Highest Tax Burden in the US.
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