Americans save $2,800 when moving from California to no-tax state, but there’s more to the calculation

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Americans continue to chase affordability by moving to states with lower cost of living, and once again no-income tax states topped the chart for most in-bound migrations in 2023.

The two largest US states without income taxes — Texas and Florida — grew by the most residents last year. Texas added 473,453 residents, and 365,205 people became Floridians between July 1, 2022 and July 1, 2023, according to the US Census Bureau. Meanwhile, two states with some of the highest state income tax rates in the country lost the most residents. New York lost 101,984 residents and California lost 75,423 in 2023, suggesting state taxes play a large part in Americans’ moving decisions.

To be sure, a move from a high-tax state saves a chunk in income taxes. A California household earning the median income of $91,905 would save nearly $2,843 a year by moving from California to a no-income-tax state. But there’s more to the calculation, experts say, including property taxes, real estate prices — not to mention less-tangible quality of life measures.

In other words, it’s a value proposition, not a simple equation.

“When people compare shops, they don’t always buy the cheapest thing … they go for value. And what you value may be different from person to person,” Jared Walczak, vice president of state projects at the Tax Foundation, told Yahoo Finance.

Full coverage: Taxes 2024 — Everything you need to file your taxes on time

Property tax should be considered

Residents of every state have to pay taxes one way or another even in no-income-tax states. The governments need to fund public welfare, education, infrastructure, and other services somehow. In general, residents pay through a combination of property taxes, income taxes, and sales taxes.

“You need money to build a road to drive on,” Edvin Givargis, a state and local tax partner at Andersen, a global tax service firm, explained to Yahoo Finance. “So if your state has a road, the governors didn’t pay for it out of their own pocket. [The money] came from taxes.”

That means in places like Texas and Florida, residents typically pay higher property taxes to make up the revenue.

For instance, Texas homeowners pay an average effective property rate of 1.60%, compared to the national average of 0.99%; California homeowners pay an average effective property tax rate of 0.71%, but face a state income tax rate ranging from 1% to 12.3%. For some Texas homeowners, the savings from the absence of state taxes can be eaten up by higher property taxes, which is more than double California’s.

One tax expert emphasized two additional factors to consider about property taxes. The first is property values, which vary widely from state to state; and the second is how states assess property. For example, California limits annual assessment increases to 2% until a property is sold, but a state like Texas taxes properties at fair market value.

“[It is] the hidden secrets of the red states: the hidden tax that you end up paying, and it’s usually with the [rising] property tax,” said Givargis, referring to Republican-led states that tend to favor low-tax policies.

Differing tax treatment matters most when property values are rising. When property prices stay flat, residents don’t see much of a difference in both states with assessment caps like California and states that mark fair market value like Texas. However, when home prices rise, Texas property owners will likely pay a lot more in taxes.

In a comparative scenario with two separate households living in their states’ median-priced home and making $60,000, the California family would pay nearly $2,600 more when property values stay stagnant, but less when property value climbs.

For instance, the California family would pay an annual state income tax of $2,341 and property tax of $5,635 on their median priced home of $793,700 at the 0.71% rate in 2023. The Texas family would pay no state income taxes and a property tax of $5,385 on their median priced home of $336,600 at a 1.6% rate.

But the scenario changes for the same set of residents when home prices rise faster than 2% a year. Using the average historical home price increase of 5.4%, the Texas homeowner would face an annual home value assessment increase that pushes property taxes over $9,000 in 11 years, outpacing the California homeowners’ income and property taxes.

“If you look at real estate prices, they’re going up,” Givargis said. “So you’ve saved income taxes, but homes adjust to fair market value.”

One more thing to note: California’s property tax treatment is bad for “growth households.” Young families and other first-time homebuyers are invariably stuck with higher property taxes while also paying income taxes. Assessment caps benefit longtime homeowners most.

“[California’s system] distorts property tax burdens substantially by leaving some people with extremely low property bills, but sticking others with extremely high ones,” Walczak said.

Read more: First-time home buyer programs: Everything you need to know

So, should you move to a different state?

While property and income taxes play a large role in cost of living, experts recommend that anyone considering a move look at a state’s overall value to them personally and find a balance. After all, not everyone is looking for the same thing.

“I will probably go live in Wyoming because I want to live in the mountains, but not everyone’s going to want to live in the middle of nowhere,” Walczak said.

Distant view of Sunny Isle Beach from Aventura, Miami, Florida, in a sunny day.

View of Sunny Isle Beach from Aventura, Miami, Fla. (Alex Potemkin via Getty Images)

Manhattan apartment rents are sort of the opposite example. While the Big Apple charges some of the highest prices in the world, some people are willing to pay those prices because they like what the city offers and want to be in the middle of it all.

Each state devises its tax system depending on the current needs of its economy and the political aims of its leaders. Texas, for instance, is looking to drive growth, Walczak said. The Lone Star state’s no-income-tax policy was meant to bring in population and businesses that stimulate the economy.

“If you live in Florida or Texas or another low-tax state, you really are paying less in taxes than you would in almost any other state,” Walczak said. “So someone might move to Texas because they want a higher-paying job in a lower cost of living area.”

“And that’s really just another way of saying that the tax structure has helped to enable both of those things,” Walczak said.

Where does that leave someone trying to escape a high cost of living?

Those earning average salaries should consider their personal tastes and preferences when weighing where to move, Givargis said, and not base the entire decision on state income taxes.

“If you’re making under $250,000 a year, moving states is not a big tax consideration,” Givargis said. “Now, the only times moving residency makes sense is if your net worth is in excess of $5 million to $10 million.”

Rebecca Chen is a reporter for Yahoo Finance and previously worked as an investment tax certified public accountant (CPA).

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