What Hits Your Wallet Harder, Income Tax or Sales Tax?

Well that's a loaded question up there in the headline. Honestly the best answer for an individual is found by consulting your tax professional. Everybody has a slightly different tax profile depending on a variety of variables in our excessively complex tax-code. Since most of us are stuck paying Federal Income Tax, the question really falls into the realm of state taxes. Locally in Washington State we do not levy an income tax on our residents. We do levy a rather stout at times sales tax on a broad range of taxable products. Our southern neighbor, Oregon does not have a sales tax but they do have a blistering income tax that pounds away at even the poorest of Oregon residents. 

The general rule of thumb is that an income tax is heavily burdensome on high income earners and a sales tax punishes the poor. The reason this is often cited is that poor people tend to avoid income tax as most income taxes have a base deduction that keeps the poor from paying a lot of tax. Someone earning $25,000 a year might only pay a couple hundred dollars in tax because their adjusted gross income could be as low as $5000 if they have a family and other tax subsidies. 

Sales tax seems burdensome to the poor as they have to pay it on all their purchases for which they struggle to earn enough money. Of course some of life's essentials are exempt from sales tax in particular, food products. But it is true that the poor feel the hit of a sales tax more than they do an income tax as again most truly poor residents will end up paying very little in income tax, even in Oregon where they start charging 8.75% at the adjusted gross income of just $9450 a YEAR! Ouch that's brutal.

So in general a retiree with a strong pension or a large 401k distribution will definitely fare better in Washington State than neighboring Oregon. Many SW Washington residents shop in Oregon to avoid sales tax and in so doing are double dipping the system a bit. Bear in mind Washington's sales tax is also a use tax and technically Washingtonians are expected to report purchases out of state and pay the appropriate tax minus any local taxes. This is difficult for the state to enforce however other than items that require registration such as vehicles or firearms. Items shipped into the state from Oregon will also be subject tot he sale tax so yeas, you have to get in the car and drive ;)

If you are retired or soon to be so and are considering the Pacific Northwest, be sure to consult your tax professional for advice on whether the Sales Tax or the Income Tax is the bigger bite out of your wallet.