How States Get You

This past weekend, my wife and I were doing our taxes and watching the NCAA tournament.  I am really beginning to warm to Ted Cruz idea to abolish the IRS and go to a flat tax.  Doing them on a postcard is really appealing to me.

My wife and I spend a lot of time setting up a system to store documents.  We spend a lot of time sifting through them to put the right numbers in the right place.  Then, we pay an accountant money to actually tell us how much we owe.  The other reason we pay the accountant is that in case we get audited, we have someone to help us through the audit.  Of course, then we will pay more.

When we were in Texas, we looked around.  We saw a lot of building.  People are moving there because there is a lot of economic opportunity.  As my friends from Texas say, the state is full of capitalists.  Texas has a 0% income tax.  They incentivize work.  But, Texas has really high property taxes.  You can figure on paying over 2% of the value of your home in taxes.  It doesn’t sound like a lot, but as home values increase it can start to bite.  In my home state of Illinois, property taxes are horrible and only getting worse.  In California, they freeze the property tax you pay.  It never goes up but that state has other problems.  Of course, if you are a high income earner, Texas is pretty great because you trade off the property taxes for no ding on your income.

I have always been interested in demographics and why people do what they do.  With the rise of the information economy, jobs often become less about where you are.  Many people, including me, can work from anywhere.  This has given rise to companies like Deskpass and Nextspace which help people be flexible, and give them a network to lean on.

It’s interesting to me how states setup their taxing scheme to attract the residents they want to attract.

For example, Hawaii has really low property taxes.  But, they have a very high income tax, and low sales tax.  It seems like Hawaii’s plan incentivizes people that live on a fixed social security type income.

There are all kinds of websites that compile all kinds of information.  Here is one that compiles best places for retirees.  Here are the top 10.

Income taxes may or may not be material to you.   As a self-employed person, I always look for low personal income tax rates.  I love California’s climate but it would take a lot to get me to move there full time because their income taxes are so horrible.  It turns out, California is in really bad fiscal shape as well.  $175 billion in the hole.  New accounting standards force states to bring their retirement liabilities on balance sheet.  Better transparency helps people make decisions.

There are some states that have 0% income tax like Texas, Tennessee and Nevada.  But, they tax you on other things like dividends and interest.  Or, they tax you on assets like cars, boats and other material goods.  Different states have different levels of deductions.  For example, in Illinois our state tax is relatively low, 3.75%.  But, you are taxed on the first dollar you make.  In North Carolina, you get a pretty large exemption: $15,000 for a couple.  North Carolina’s tax rate is 5.75%.  All of the southern states have tax rates between 5-7%, but they are balanced by personal deductions. In order to figure out where you will have the most money, you have to do the math.

45 states collect sales taxes.  That’s a biggie because no matter where you live, you will consume.  In Chicago, the county and city also collect sales taxes.  We have the highest in the nation, 10.25%.  Of the top ten locales I listed above, here are their sales tax rates:

  • Florida 6.65%
  • Wyoming 5.47%
  • South Dakota 5.83%
  • South Carolina 7.13%
  • Colorado 4.54%
  • Idaho 6.01%
  • Texas 8.05%
  • Montana None
  • Nevada  7.94%
  • Virginia 5.63%

Of course, it’s more than just the numbers.  There are so many variables to deciding where to live.  For most people it comes down to family, or what they like to do.  Hard to go mountain climbing or ski in Florida.  But, it’s awfully hard to deep sea fish or avoid snow in Colorado.

Chicago has really high gas taxes.  But, since I don’t use my car a lot I barely notice them.  It would be different if I lived in the suburbs.  My wife and I drive all across the country and we notice the price of gas.  It is definitely cheaper in some areas than others.  We also noticed that when we were in Texas, we were in our car a lot.  If we didn’t live in the city, it’s highly likely that we would have 2 cars, and use them.

My wife and I are in pretty good health, so access to health care is less of a concern.  But, if you are older, it’s a big concern.  In places like Florida where there are a lot of old people, doctors are setup for Medicare.  It seems like Florida residents are always going to to the doctor and doctors see a lot of patients because it’s the only way they can make money.  Not sure if I needed a lot of health care that I would go to Florida.  Maybe the best play is to go where there are less older people.

Access to quality public schools has always been a big driver of where people live.  In many places, public schools have never been that good and families simply budgeted for private schooling.  As innovation hits the education sector, and families see the public school system crumble under it’s bureaucratic weight, I would be willing to bet access to a great public school system will be less of a driver of where people live-and access to education innovation will be more of a driver.

Of course, access to economic opportunity is a huge driver in where people live.  California sucks for a lot of reasons, but the state has pretty good economic opportunity in Silicon Valley and LA.  South Dakota is cheap, but the economic opportunity is less than other areas of the country.  It’s also very cold in the winter, and hot in the summer!  But SD is a geographically beautiful state.

I just find all this interesting, because taxes influence behavior.  If you want less of something, you tax it.  Taxes are used by governments to set political agendas too.

As the baby boomers get older, and the millennials grow into their prime income bearing years, it will be interesting to see if states adjust their tax schemes to attract certain kinds of individuals.  Both will have different sets of wants and needs.  But, they are very large cohorts and cannot be ignored.

 

 

 

  • I think these tax probably have some influence on a macro scale, but I can’t really see it incentivizing anything on a personal scale for a large class of people. I cant see the folks in Hawaii saying “I was considering getting a better job and making more money….but… that darn income tax will get me”.

    Incentives work on people who have choices they can make, and at the low end of the economic spectrum, there aren’t many choices to make. Often then live in the same town they were born in because thats the way it is.

    High net worth infividuals on the other end are full of choices, and such percentages really do affect whether they buy their vacation home in Texas or Colorado. Or which private school..er.. education innovation, they send their kids too.

    That said, HNW folks do drive a lot of consequences that the rest of the country has to live with, so I’m sure there is some effect from these tax schemes, but it’s not as straightforward as your economics teacher will tell you.