A state might have no income tax, but it might make up for that through other taxes.
If you’re thinking about moving to a new location, it’s reasonable to seek out spots that might cost you less. Thus many people turn to states with no income tax. However, there’s more to the picture than income taxes.
Remember, after all, that most states levy taxes not only on your income, but also on purchases (via sales taxes) and on property such as your home (via property taxes). There are also often excise taxes on tobacco, utilities, motor vehicles, alcohol, and gifts, among other things. Thus, though a state might have no income tax, it might make up for that through other taxes. After all, each state needs to bring in considerable revenue in order to keep things running.
Check out the table below. It lists the seven states with no income tax and shows a few other taxes and their overall cost of living. The cost-of-living numbers come from the Missouri Economic Research and Information Center, which used data from Council for Community & Economic Research. Cost-of-living numbers reflect the overall cost of typical household expenses, such as housing, utilities, food, transportation, and health care. Numbers above 100 reflect above-average costs, while those below 100 reflect a lower-than-average cost of living.
|States with No Income Tax||Cost of Living||Mean Property Tax Rate||State and Local SalesTax Rate||State and Local Cellphone Tax Rate||State Gasoline Tax Rate|
Source: The Tax Foundation, Council for Community & Economic Research.
It’s all relative
The table above is revealing. Of the seven states with no income tax, only three had a below-average cost of living. And their taxes on property, gas, and other things varied widely. Clearly, it’s critical to assess the big picture.
It’s good to read up on states that interest you in order to get more details not only on their taxes, but on their costs of living and other factors of interest, such as job opportunities, political climate, and environmental health. As you read, you may learn more about how a state generates the funds it needs to operate. Alaska and Wyoming, for example, offset some low taxes with hefty royalties from energy companies operating there. Nevada taxes winnings from gambling and gets a lot of revenue from tourism.
Finally, be sure to focus on your own situation, instead of looking at averages. If you smoke and drink a lot, you might pay extra attention to taxes on those products. If you drive a lot and don’t smoke, gas taxes will matter much more to you than tobacco taxes. If you plan to rent, then property taxes may not be a big deal. If you want to buy a home, average home prices will be important.
Look up fresh numbers on your own, too, as some tax rates get changed from year to year, and new survey data is released frequently.
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Via The Motley Fool