Some day you’ll be all grown up, by present day standards this occurs some time after your 40th birthday, and you’re going to have to start thinking about where to live the rest of your life, geographically speaking. If, like some of us, you aren’t a carefree trust fund baby who never has to think about the price of retail goods, there’s a good chance you’ll want to take local tax rates into account when planning where you’re going to live. In case you didn’t know it, there are vastly different tax burdens in the United States, depending upon which state you’re talking about.
Where many people go wrong is using the presence or absence of state taxes as the ultimate litmus test for lower cost of living. By that standard, states like Texas and Florida, with zero taxes, would appear to be a no brainer. Unfortunately, the truth isn’t quite that simple. The reality is this. With some leeway granted for local ideology, all state governments run themselves fundamentally the same – except for California, apparently, which continually teeters on the brink of bankruptcy. The point is that all governments need money to operate. The traditional method of raising money is to institute a state income tax. If there is no state income tax, the money must be found through different means.
That’s just the simple truth. No state income tax means you can expect to pay more in your sales tax rate, property taxes, or for other fees attached to state services. For example, Florida has no state income tax but have you looked at the property tax rates lately? Or administrative fees? Here’s a concrete example. In Missouri, a state with a middle-of-the-pack rate of about 4.25%, it costs around $50 to license a car for the first time. Try to do the same thing in Florida and you’re liable to be scrounging sofa cushions for the $400 bill!
Is this evil and rotten? Not really. It’s simply the reality of life in these United States. Governments need money to function. As to the question of whether or not the federal or any of the state governments should be functioning at the present overly intrusive level, that’s a different discussion for a different day. The point is you shouldn’t use the existence of an income alone to determine a state’s financial suitability. You need to do more research and get an accurate idea of what it actually costs to live there. For your planning purposes, the nine states without income tax are Texas, Florida, Alaska, Nevada, South Dakota,
Washington, and Wyoming. New Hampshire and Tennessee only tax interest and dividends.
Do you ever plan on buying stuff? If so, you should pay attention to states with high sales tax rates and maybe think long and hard before moving there. The highest rates of around 7% are found in California, Mississippi, Indiana, New Jersey, Rhode Island, and Tennessee. But did you know there are presently five states which do not charge a sales tax? These are Alaska, Delaware, Montana, New Hampshire, and Oregon. Now we’re getting somewhere. Did you also notice the single state on the list with no income tax or sales tax? That’s right. Alaska! There’s no doubt in our minds that everyone would up and move to the “North to the Future” state – except it’s really cold and sometimes moose and grizzlies chase you through the streets. Still, if you don’t mind that, it could be an option. By the way, you can learn more than you ever wanted to know about the breakdown of taxes by state here.
But the cost of living doesn’t stop there.
You’re not going to get out of paying federal fuel taxes but are you also aware that most states charge them as well? In addition to your fed donation, that gallon of gas you just dumped into your perpetually starving SUV was also loaded with state pilfering like sales taxes, gross receipt taxes, oil inspection fees, underground tank storage fees, environmental fees, and the ever popular just because we freakin’ wanted to fee. Okay, we made up the last one.
More and more states are beginning to realize that a great way to raise money is to ratchet up the rate and number of excise taxes imposed on tobacco products, especially cigarettes. Think about it. Nicotine addicts will pay ANYTHING to get their fix. Federal and state governments like to pretend like they’re raising cigarette taxes to get people to stop smoking. Nothing could be further from the truth. They’re actually banking on the fact that smokers will be smokers no matter how much it costs. This is a great way to increase revenue! A point in case is the state of New York, where a single pack of smokes now costs about $5.85, factoring in all federal and states taxes. There’s a very interesting article on this topic in USA Today here.
We’d keep on going but we’re too depressed and beginning to think that our wacky Uncle Ron Paul might be onto something with his constant clamor for returning the size and scope of government to constitutional levels.
The Young Wealth Team
Flickr / Ed Yourdon