All about local taxation

In a prior blog Post on Insights, What State has the Lowest Cost of Living? – TownScoreReport, states were ranked based on total state-levied taxation. These rankings included all taxes and fees levied by the state and its agencies, such as income taxes, sales taxes, state-levied property taxes, excise taxes, property transfer taxes, estate taxes, and the numerous types of fees collected by states, for probate, car registrations and so forth. States were compared based on both (1) state-levied taxes and fees as a total dollar amount for the median-income household and (2) state-levied taxes and fees as a percent of the median household income, or “burden.”

That Post highlights the fact that, besides house prices, state-level taxation is the biggest driver of cost-of-living differences across states. However, even house prices themselves are not as big of a driver of differences in cost-of-living across states as one might think. So, if you are searching for the best places to live in the US, you must consider your location-based expenses, namely, state and local-levied taxes and fees because these make up the lion’s share of your annual expenditures.

First, even though house prices vary state by state, that expenditure item is largely under one’s control. Second, your home is a one-time purchase, so the impact of house prices on your wallet is immunized relative to inflation. In fact, your mortgage payment declines in real terms with inflation, so owning a home offers an inflation hedge. While all of this is good news, there is one aspect of your location-based expenditures that is impacted by inflation: the taxes associated with your location. Both your local and state taxes and fees have a huge impact on your total housing expenses, and the longer you own your home, the bigger the absolute and relative impact these taxes and fees have.

Upon closing, your housing expenses are roughly 1/3 mortgage payment, slightly more than 1/3 state-levied taxes and fees, and slightly less than 1/3 local taxes and fees. This means that your total housing expense is 2/3 taxes and fees, and only 1/3 mortgage, and again, that’s at the time of closing. Over time, your mortgage payment comprises a smaller amount of total expenditure, because this is fixed, whereas your taxes and fees rise over time. And unlike the price of the house you bought, which is largely under your control–since you chose it over other houses, your location-based taxes and fees, meaning all state and local taxes, are largely out of your control. You cannot fight city hall. Or the statehouse.

How local taxes impact your total expenditures does vary state by state and town by town, and this analysis is addressed elsewhere on TownScoreReport.com.

How do states compare in terms of the amount of state taxes and fees residents pay?

Below we show selected pairings of states. In the first table, we show how much the median household pays in one state, such as California, Connecticut, Illinois, Massachusetts, New Jersey, and New York and compare it to the amount paid in other states, such as Colorado, Florida, Georgia, Idaho, Nevada, New Hampshire, North Carolina, South Carolina, Tennessee, Texas and Vermont. The comparisons are based on the median household income in each state.

How Much More the Median Household Pays in all State-Levied Taxes and Fees

Source: Pality.

Next, we calculate how much the median household would save—or not save– from moving out of one state and into another, taking its income and assets along with it. For example, in the above tables, we show how much more the median household pays in Illinois versus how much the median household pays in Tennessee. In the tables below, we show how much the median household in Illinois would save annually if it picked up and moved to Texas. In this way, we can assess if you would really save money by moving from one of these “outbound” states to another, “inbound” state.

Some savings are not savings at all. Our analysis suggests that the median household would spend more by moving from Connecticut to Georgia, New York to Vermont, or from Illinois to North Carolina and from New Jersey to North Carolina. The differential would not be significant, for example, moving from Connecticut to Tennessee or Illinois to Georgia. The table reinforces what people are already observing and acting upon, namely that a California resident may save considerably from moving to Nevada, a Connecticut resident to Florida, an Illinois resident to Tennessee, a Massachusetts resident to New Hampshire, a New Jersey resident to Florida, and a New York resident to Georgia. The cost of living related to state-levied taxes and fees is available on State Score Reports for all 50 states on www.TownScoreReport.com.

Source: Pality. Copyright Pality 2024.

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