“Honey, our taxes are just too high. We’re moving to Alaska,” said no one, ever.
Nevertheless, a new study from the moving assistance website HireAHelper.com found that your state tax burden could change drastically with an interstate move. According to the study, if you move from the District of Columbia to Tennessee, your collective state and local tax burden could drop by $7,760 per year – the highest differential in the study.
What happened to Alaska? Alaska is one of nine states that don’t tax earned income, along with Tennessee, Florida, Texas, Nevada, Wyoming, New Hampshire, South Dakota, and Washington. However, income taxes are only part of the state and local tax burden. Sales taxes and property taxes must be included.
Consider New Hampshire. The state levies no state income taxes or sales taxes, but the per capita property tax of $3,115 is one of the highest in the U.S., behind only New Jersey ($3,127) and the District of Columbia ($3,535). The District also has high income taxes and sales taxes, earning D.C. the highest overall tax burden.
Tennessee’s sales taxes are higher than Alaska’s, but Alaska’s property taxes are much higher than Tennessee’s – giving Tennessee the lowest tax burden title.
Alaska may still be a more desirable destination, thanks to the lowest effective tax rate in the nation of 3.94%. The study defines the effective tax rate as the percentage of the average state income devoted to state and local taxes.
By that standard, Tennessee comes in third at 4.52%, just behind Nevada’s 4.45% rate. The remaining lowest ten effective state taxes are found in Florida (4.76%), Washington (5.02%), South Dakota (5.18%), North Dakota (5.44%), Texas (5.87%), New Hampshire (6.10%), and Delaware (6.11%).
As expected, the District of Columbia has a high effective state tax – but it’s tied for second place with Connecticut at 11.4%. The winner (or loser, if you prefer) is New York with an effective 11.9% state tax. The other six states with double-digit effective tax rates are Illinois (11.2%), Massachusetts (10.3%), New Jersey (10.1%), Maine (10.1%), Oregon (10.1%), and Nebraska (10.0%). Minnesota falls just out of the double-digit club at 9.8%. Surprise: no California!
Oregon is an odd duck (pun intended). Oregon is one of the few states with no state sales tax, along with New Hampshire, Montana, and Delaware – but it has the second highest state income taxes behind the District of Columbia. High state income taxes outweigh the lack of sales taxes.
The study doesn’t consider state effects on federal taxes, which are relevant thanks to the 2017 Tax Cuts and Jobs Act (TCJA). The state and local tax (SALT) deduction on federal tax returns was capped at $10,000 by the TCJA, resulting in huge deduction losses in high-tax, high property value states. If the SALT deduction were taken into account, the effects of moving from a high-tax to a low-tax area could be amplified.
SALT likely won’t be an issue in low property tax states like Alabama, Oklahoma, Arkansas, and New Mexico – but they could affect you in the District of Columbia, New Jersey, and New Hampshire. States with intermediate-to-high taxes but high property values, like New York and California, are also affected.
Unless you’re a corporation or a professional athlete, you’re probably not going to move to a different state just to save on taxes. However, you should take taxes into account as part of your economic decision whether to move. Taxes shouldn’t drive your decision, but they could make the difference between two similar choices.
Failing to pay your taxes or a penalty you owe could negatively impact your credit score. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.