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Following the signing of the Constitution, Benjamin Franklin famously said, “Nothing in life is certain—except death and taxes.” Or, for fans of 90’s pop culture, maybe you’ll remember this line at the very end of Meet Joe Black.
Aside from Tax Day, most of us will pay little attention to taxes during the rest of the year, save for the occasional indignant comment here and there. If you’re like many Americans, this year’s Tax Day was even more of a burden than previous years. After stellar capital gains and/or a solid crypto game in 2021, and the swift tax punishment that came with it, you may be thinking more about how to reduce your tax burden.
Methodology: The Big Three
Although many companies are holding their breath about whether a full return-to-work is feasible, some have already determined remote or hybrid agreements. If you’re one of those fortunate enough to be flexible, the state you choose to reside in can either reduce—or further burden—your tax liability.
For the sake of this article, we’re going to explore the big three taxes: income, property, and sales. Tax law is notoriously complicated, so I took some liberties to generalize (found here).
Of course, not everyone owns a house, thus incurring a real estate tax burden. However, that tax is factored into the rent your landlord charges, so you are still paying it indirectly through local cost of living adjustments.
It’s also important to consider the real costs based on your circumstances as looks can be deceiving.
As an example, my well-intentioned in-laws in New Hampshire swear with a fervent New England pride that their state has the best tax environment. And in most situations, they would be correct. NH has zero sales or income taxes. But as retirees who don’t receive a taxable income and rarely make large purchases, their largest tax burden is incurred as homeowners. And NH has one of the highest property taxes at a whopping ~2.2%.
Opportunity vs. Location: A False Dichotomy?
Some may contend that location-based opportunity triumphs over increased tax burdens. I propose that it’s a bit more nuanced.
Let’s take Washington versus California for example, two states generally regarded as having high-income generating opportunities.
Residents of California can expect to pay $12,500 more annually—or 14% higher taxes—as a percent of income compared to Washingtonians, thanks largely in part to the state’s zero percent state income tax. In essence, while earning $50k more in California may outweigh the tax-savings of living in Washington, remote and hybrid work changes the game.
That all said, let’s move on to my calculations in this article:
- Property tax was based off median home prices per state (from Zillow, Mar. 2022) and state averages for real estate taxes.
- Income tax rate was based on the median household income from the U.S. Census Bureau (inflation adjusted) with rates from “The Tax Foundation.”
- Sales tax was based on U.S. Bureau of Labor Statistics household spending averages with the addition of gas and personal property taxes. Note: the average person spends about $25k a year on taxable goods and services but this can go up significantly if you make large purchases such as a car.
Now, let’s first look at the worst tax states in America to evaluate whether taxes effect where people live, or if opportunity triumphs.
It comes as little surprise that when looking at tax as a percentage of income, California and states in the Northeast are the most expensive places to live as indicated by the dark red.
These percentages are calculated using median values for income, housing, and spending.
California: Beauty and Opportunity Come at a Price
With a median household income of $86,000, residents of the Golden State can expect to pay a whopping 25% of their annual income in state taxes alone. Ouch!
Despite having relatively low real estate taxes, at an average of 0.65%, the absurd median home price of $758k means you’ll pay $9,500 annually in property taxes.
Don’t expect relief for sales tax either: it is the 8th highest for sales tax at a combined state and local rate of 8.82%. Compound these pesky taxes with the highest state income tax in the country, and there’s no mystery why someone earning, spending, and living, on average means, can expect to pay $22,000 in net state taxes annually.
One quick caveat for California, existing homeowners are protected by a 2% annual limit on the homes assessed taxable value unless a change in ownership occurs. This could be one reason California has the longest average tenure for homeownership.
Click here to find states that offer a reprieve from high taxes and may be a potential relocation option.
New York and Massachusetts: Will the Migration Trends Continue?
Reventure Consulting has shared extensively that the Northeast has seen significant outward migration since the start of the pandemic. The reasons why can be debated—but did the high tax rates and cost of living contribute to the ultimate decision of whether to return?
New York City and Boston are the major economic and population centers for the Northeast, driving averages for the regions.
Here’s a tax breakdown by category for a few Northeast states, for comparison:
|Property||Income||Sales||Med. Home Value||Med. HH Income|
New York median home values and income are clearly weighted lower by Upstate, but you can see the spillover effects NYC has on Connecticut and New Jersey. New Hampshire is the winner here but that comes at the cost of lower income for the region and fewer job opportunities. Also, don’t expect any relief from New England states like Vermont, Maine, or Rhode Island as they have well above average property and income taxes.
Best Tax States – Surprising or Revealing?
If someone were to quiz you on the tax friendliest state using the Big Three calculation, your first reaction may be Texas—but you would be wrong. Some of these tax friendly states I’m about to explore may get unfairly crossed off your list of places to relocate. All things considered, these states offer serious advantages that are worth a second look.
Here are 9 states that have zero state income tax and surprise, surprise, they represent the top 6 overall tax friendliest states.
The Last Frontier
If you can brave the wilderness, the number one tax state is easily Alaska due to zero income tax, very low sales tax, and an average property tax at 1.19%. Plus, Alaska provides an oil royalty to residents of about $1,600 per person. At an average household size of 2.8 people and an annual tax burden of $4,460, Alaskan residents can get PAID $20 to live there!
Volunteers and Sunshine
It’s no secret that Tennessee (The Volunteer State) and Florida are hot right now, and at numbers 3 and 4 on our list it’s no wonder why. Aside from having the highest sales tax in the country at 9.55%, Tennessee is a great tax state with low property taxes of 0.72%. Likewise, Florida is booming and comes in just under the national average for property taxes at 0.89% and moderate sales tax of 7%.
Is there a downside? When it comes to finding career opportunities, yes. Did you know that Florida only has one Fortune 100 company headquartered in the state? For a “tax friendly” state, it’s a bit shocking—but when you look at the workforce and average resident age of 42, it explains why some companies may be reluctant to relocate.
There’s no shortage of volunteer opportunities though. Nashville is a top 15 city for job growth and joins Chattanooga in the top 20 cities for wage growth since the pandemic. So maybe Tennessee is the right combination of tax freedom and opportunity for your situation?
What about Texas?
Hear me out. I have a soft spot for Texas as a native of the state, and much of my family still in the area. And I’m sure many of you are wondering where Texas was on this list since it lacks an income tax.
Well, due to its high property taxes (~1.8%), rising home values, and 8.2% sales tax, Texas is 10th on the list for taxes as a percentage of income, and 19th for net taxes paid.
Opportunities may be plentiful, but it could be a wash given the increasingly high cost of housing.
Concluding Thoughts: The Good, the Bad, and the Mediocre
Let’s take it back to my in-laws in New Hampshire. Given their lack of income and low spending habits, states like South Carolina and Alabama, while higher overall and specifically on income taxes, offer very low property taxes, with affordable housing. Again, circumstances absolutely play a role (and get even more complicated with business taxes; another article for another time!).
In stark contrast, my wife and I are both in are 30s. We’re in our peak earning years, so state income tax weighs heavily on our decision-making process on where to relocate. We also have modest spending habits and have already made some large purchases we don’t forecast again for the near future. Given our situation, and minus a house, a state with no income tax is our best option.
In sum, zero-income tax states with modest property taxes are at the top of the list, California is probably even worse than you thought, and Texas is just…mediocre (please don’t take offense, fellow Texans).
Stay tuned for a follow-on article profiling the best states for hybrid or remote work!
US Census Bureau ACS Survey 2020