A physician colleague recently gleefully announced that he was going to retire to Florida “Because they don’t have a state income tax“. On the surface, this sounds like a great retirement plan – less income tax means more money in your pocket, right? But below the surface lurk many other taxes and in the end, you can end up paying just as much to the state government in these other taxes than you would have paid in income tax. So should a physician (or anyone else for that matter) base moving on whether or not a state has an income tax?
State income taxes
Each state in the U.S. is allowed to devise its own tax system. The type of tax that most people focus on is income tax, mainly because it is a large number that at the end of the year is glaringly prominent when filling out state tax returns. Some states have no income tax (Alaska, Florida, Nevada, South Dakota, Tennessee, and Texas). Some states only tax certain kinds of income (New Hampshire only taxes interest and dividends; Washington only taxes capital gains). Others have a flat income tax, that is a single income tax rate that applies to everyone. And others have a graduated income tax rate that increases with higher incomes. The income tax systems for the states are grouped in the map below.
But here is the thing… if a state has no income tax, it does not mean that all of the state government employees are working without pay,. It means that the state taxes stuff other than income. So, in the long run, you could actually end up paying more in total taxes by moving to a state with no income tax.
Income tax structure affects different groups of people differently.
- Flat income tax – everyone pays the same tax rate with low income and high income earners treated equally
- Graduated income tax – high income earners carry a disproportionate share of the tax burden
- Interest, dividend, and capital gains tax – investors (rather than wage-earners) carry a disproportionate share of the tax burden
- No income tax – government revenue comes from taxes on various goods and services as well as various fees and licenses
Other types of state taxes
In addition to revenue from income tax, states derive income from a myriad of other types of taxes, licenses, and fees. Some of the more common non-income taxes charged by states include:
- Sales tax. All but five states charge sales tax. States with no sales tax include Alaska, Delaware, Montana, New Hampshire, and Oregon. Some states tax all consumer goods and others do not tax items such as food. States with no income tax tend to have high sales taxes such as Tennessee (9.55%) and Washington (9.40%).
- Insurance tax. Each state is free to charge taxes on insurance premiums for any kind of insurance and they do just that. States generally have different tax rates for life insurance premiums, annuities, property insurance, fire insurance, health insurance, etc. These taxes are generally paid by the insurer so the consumer is not usually aware of them, even though the taxes are passed onto the consumer in the way of higher premiums. These tax rates can vary widely and states with no income tax often have the highest insurance premium tax rates. In areas of the country where property insurance is high because of the risk of wildfires, floods, or hurricanes, the tax on property insurance premiums can become a substantial part of the state’s budget.
- Property tax. Taxpayers in all 50 states pay taxes on property that range from a high of 1.64% (New Jersey) to a low of 0.31% (Hawaii). The tax rate only tells part of the story, however. The total property tax paid also depends on the property value. Thus, an average property tax rate in a state where property is expensive will result in a high total property tax paid by the property owner. As a result, the average property owner in Connecticut pays $8,022 per year in property taxes whereas the average property owner in West Virginia only pays $989 per year.
- Gasoline tax. The federal government and all 50 states charge a tax on gasoline. The federal gas tax is 18.3 cents per gallon on gasoline and 24.3 cents per gallon on diesel. State gas taxes range from a high of 60 cents per gallon (California) to a low of 9 cents per gallon (Alaska).
- Alcohol tax. All 50 states tax beer ranging from a high of $1.29 per gallon in Tennessee to a low of 20 cents per gallon in Wyoming. Three states do not tax wine and 17 do not tax liquor but these states still get revenue from wine and liquor sales by selling them through government-run liquor stores.
- Tobacco tax. All states charge tax on cigarettes ranging from a high of $5.35 per pack (New York) to a low of $0.37 per pack (Georgia).
- Other excise taxes. Gasoline, alcohol, and tobacco taxes are considered excise taxes. States also set different excise tax rates on soda, gambling, tires, marijuana, franchises, motor vehicles, etc. Excise taxes are often not immediately visible to consumers since these taxes are considered a part of the overhead cost of different goods or services.
- Unemployment tax. All states charge employers unemployment tax ranging from 3.95% (Illinois) to 0.45% (South Carolina).
- Gift, inheritance, and estate taxes. 17 states plus the District of Columbia charge tax on the monetary value of gifts, items inherited, or estates over a specified exemption amount. These are highly variable in both the tax rate and the exemption amount.
- Occupational tax. All states require licensing fees for certain occupations such as physicians, barbers, attorneys, plumbers, etc. These get passed to the consumer in the way of higher fees from these professions.
- Licenses and fees. Some of the more common include vehicle registration fees, government utility fees, marriage licenses, building permit fees, dog licenses, restaurant liquor license, etc. But because they are called licenses and fees, most people do not realize that they are simply taxes by another name. In many states, the total state revenue from licenses and fees is rising much faster than revenue from income tax.
- Hotel tax. Often called lodging tax or occupancy tax, this type of tax can be charged by either state governments or local governments (or both). For this reason, hotel tax rates will vary from city to city from a high of 22.7% in Columbus, Georgia to a low of 7.0% in Gillette, Wyoming.
- Corporate income tax. 44 states levy corporate income tax ranging from a high of 9.8% (Minnesota) to a low of 2.5% (North Carolina). These taxes get passed on to consumers in the form of higher prices for goods and services and so most consumers are not even aware that they are indirectly paying these taxes.
- Gross receipts taxes. These are taxes paid by corporations on their gross sales and differ slightly from corporate income tax. States that charge this type of tax include Delaware, Nevada, Ohio, Oregon, Tennessee, Texas, and Washington. Gross receipts taxes can significantly increase the cost of goods in these states. For example, when a consumer buys a beer at a restaurant in Texas, the farmer growing the barley, the brewery making the beer, the distributor, and the restaurant all have to pay gross receipt taxes at each step. The consumer ultimately pays the sum of all of these gross receipt taxes in the form of a higher cost for goods.
You can’t escape taxes by moving to another state
So, if you are thinking about moving to Florida or Texas to avoid having to pay state income taxes, forget it. Every state is going to tax you somehow. States with low or no income taxes just increase other kinds of taxes. Some of these you notice when you write a check for them, such as property taxes. Some taxes we have gotten so use to paying a little at a time, that we no longer notice them, such as sales tax and excise taxes. Other taxes are so deeply embedded in the cost of goods or services that only a few Americans even know that they pay for them, such as gross receipt taxes and taxes on insurance premiums. Non-income taxes ultimately result in a higher cost of living in states that do not have a state income tax.
If you are thinking about moving to another state, make the decision based on where your friends and family are, what activities you like to do, and what climate you prefer. If you have an extraordinarily high income, like Elon Musk, then sure, you can save a billion dollars or two in income taxes by moving to Texas. But for the rest of us, make the decision on where you enjoy life the most and forget about state income taxes.
July 26, 2024
