Tax rankings are a popular way of comparing tax burdens among states, but the results can be misleading. A recent report by Forbes Magazine that Washington ranked eighth-highest in personal taxes per capita is an example of how apples sometimes get compared to oranges.
The Forbes comparison purports to only count personal taxes paid by state residents, but erred by mistakenly counting Washington’s Business and Occupation Tax as a personal tax while excluding corporate income and other business taxes paid in other states. That error occurred because the Census Bureau classifies the B&O tax as a sales tax, and the Forbes analysts failed to notice that. Excluding the B&O tax as it should have done would have dropped Washington’s ranking substantially. In addition, because the ranking only compares certain state taxes and leaves out local taxes, the Forbes ranking fails to take into account some unique aspects of Washington’s tax system.
Washington has a state school property tax levy that flows into the state general fund only to be redistributed to local schools. In other states, all property taxes for schools remain at the local level. The ranking also assumes that only individuals pay sales and property taxes, when in fact businesses pay a substantial share. The only accurate way to compare tax burdens is by comparing both state and local taxes among states. By that measure, Washington ranks 19th-highest per capita and 35th-highest in taxes as a percentage of personal income, http://www.taxfoundation.org/files/sr163.pdf. Economists generally prefer measuring as a percentage of personal income because it takes into account economic activity and demand for services. Rankings have become a popular staple among certain national publications, but they can be misleading. The most recent Forbes ranking is one of those. After being contacted by the Department, Forbes subsequently published a tax ranking based on the Tax Foundation’s analysis.