Would You Move to One of These States to Avoid Taxes?

By Andrea Cannon on 6 January 2017 1 comment

Some states have no state income tax — but at what expense?

If you're thinking of moving to one of the seven states with no income tax, consider that you may not actually be saving much money in the end, due to higher sales taxes, higher property taxes, and other additional costs. After all, these states can't just forego taxes altogether as a source of revenue; they simply make up the money somewhere else.

So how do you assess how much you're really saving, if anything at all?

The States With No Income Taxes

Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming have no state income tax. Residents of New Hampshire and Tennessee are also spared from state income tax, but have to pay taxes on dividends and income from investments. Other states (such as Kansas, Louisiana, Michigan, Nebraska, Ohio, and Wisconsin) have considered forgoing state income tax, as well, because it tends to result in economic and population growth throughout the state.

These states argue that cutting the state income tax can help to create jobs and prevent workers from leaving the state.

How Much Are You Really Saving?

For this example, let's compare living and working in California to Washington. Let's say your personal income is $60,000 per year. California's marginal income tax rate at this income is 9.3%, while Washington’s is 0%. The effective rate at this income is 4.47%, which will result in $2,680 in state taxes.

California and Washington have similar costs of living, depending on where you live. For instance, Los Angeles and Seattle have very similar costs of living, while San Francisco’s cost of living is 24% higher than Seattle’s. On the other hand, California's sales tax rate is 7.5%–10%, while Washington’s sales tax ranges from 7%–9.9%, depending on where you live.

Consider how much you’d be saving after you factor in your moving costs. According to the American Moving & Storage Association, the average move costs $3,868–$5,415 for the average two or three bedroom home from California to Washington. However, this depends on your personal move and how much you are able to save. In fact, Worldwide ERC estimates the average moving cost from one state to another to be closer to $12,935.

No Income Tax Usually Means Higher Sales Taxes

By forgoing a state income tax, the state needs to make up for their budget in other ways. For instance, the sales tax on your clothing, food, gasoline, and other purchases may be higher in the new state. There are also other fees to consider, such as property taxes, tuition costs, and cost of living expenses, which should be factored into your state-by-state comparisons.

For example, Tennessee has the highest average state and local sales tax rate in the country, which the Tax Foundation estimates at around 9.45%. Nevada also has above-average sales taxes. Texas and Florida also have above-average sales tax and effective property tax rates. Meanwhile, Washington has the highest gasoline prices due to a high gasoline tax of around $0.37 per gallon.

And Higher Property Taxes

It’s also important to consider the property tax rate in the state-by-state comparison, which is 1% of assessed property value in California and 1.025% in Washington, as well as the vehicle tax rate, which is 7.5% in California and 6.8% in Washington.

Property tax can make a big difference, depending on where you live and how much your home is worth — and how long you've owned it. For instance, Warren Buffett pays property taxes of $14,410 (at a 2.9% tax rate) on his $500,000 home in Nebraska and only $2,264 (at a 0.056% tax rate) on his $4M home in California. (California's Proposition 13 essentially "locked in" Buffett's property tax rate at 1970s levels.)

And a Bunch of Other Fees and Taxes

Along with potentially higher sales taxes and property taxes, each state can also employ its own unique fees and taxes. New Hampshire has some of the highest effective property taxes in the country, as well as the highest average in-state tuition. By contrast, Wyoming and Alaska derive high tax revenues from coal mining and oil drilling operations. In fact, nearly 70% of Alaska's income comes from nontax revenue. Nevada receives taxes and fees on gambling, which totals nearly $1B each year, as well as a modified business tax rate of 1.17%.

While South Dakota has a below average sales tax rate, the state charges a range of other fees and taxes to make up for it, including a cigarette excise tax, bank franchise and alcoholic beverage taxes, high motor fuel tax, and licensing fees on coin-operated laundries. Texas charges more than 60 separate taxes, fees, and assessmentsto make up for the lack of income taxes.

Before You Go, Compare All Expenses

According to the Center for Regional Economic Competitiveness, Alaska, Florida, New Hampshire, South Dakota, and Washington all have above average cost of living. Each state is unique in its taxation systems, so it’s important to research your new state’s tax code and alternative revenue streams before factoring in what you would save in state income taxes. Make sure to also use a cost of living comparison tool for a better idea of how much you will save overall (if anything at all) by making the big move.

How to Reduce Your Income Tax Without Moving

Before you decide to move to a state with no income taxes, consider the alternatives. You can contribute more to your 401K, donate more, and take advantage of tax deductions. There are various ways to save money on your taxes each year, so speak with your tax pro to ensure you are taking advantage of every possible deduction.

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Guest

We live in NH- no sales tax, no income tax. But my husband works in MA, because even though that state takes a chunk of his pay for state income taxes, he still makes more than he could with the lower wages in NH. Also, NH has a hefty small business tax of some sort where when you gross $50k for the year, you owe NH 8.5% of your net income. It means sometimes my husband turns away side work towards the end of the year, as much of the 'profit' he might earn on a job that takes him over the line will be eaten up when the tax is triggered. But NH is a far more affordable place to live, over all, than our neighbor to the south, MA, so we migrated up here when we bought our first home and have yet to regret it. And yes, I've looked, and at the current moment, sending our kids out of state for college is sometimes cheaper than in-state tuition, which is a real downer.