Inside Wealth

The Five Highest Tax States for the Highest Earners

California Has Highest State Tax Rate

When people talk tax rates, they usually talk federal income taxes.

But state tax rates, along with local taxes and sales taxes, can be just as significant when it comes to family finances.

A new study from the Institute on Taxation and Finance tallied up state and local income taxes, along with property, sales and excise taxes as a share of residents' household income.

It found that for the top one percent of earners, California is the most expensive state when it comes to state and local taxes. The top one percent of earners in California spend 8.8 percent of their income on state and local taxes (and that's before the tax hike in 2012).

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The rest of the top five are Hawaii and Vermont, both of which take eight percent of high-earners' income, followed by New Jersey and Oregon, which take seven percent.

Much of this is a function of income-tax rates. But local taxes also play a role. Vermont's top marginal income-tax rate of 8.95 percent is slightly less than New York's top tax rate, but its other taxes push its total higher than New York's.

The Institute on Taxation & Economic Policy says that, nationwide, the top one percent pays 5.6 percent of their income in state and local taxes. But it said that the bottom 20 percent pays a much larger share – around 11 percent. While many states have progressive income taxes, the bite taken out of lower-earning households from sales taxes and local taxes is far greater.

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"The main finding of this report is that virtually every state's tax system is fundamentally unfair, taking a much greater share of income from middle- and low-income families than from wealthy families," the report said. "The absence of a graduated personal income tax and the over reliance on consumption taxes exacerbate this problem in many states."

Of course, the top earners pay the bulk of the taxes in most states with income taxes. In California and New York, the One Percent pay more than 40 percent of income taxes. And some say high-tax states are actually losing money because they're driving out the wealthy.

But the Institute on Taxation's report said that as more states consider eliminating or phasing out income taxes, more of the burden will fall on lower earners.