STATE TAXES: Predictor of Wealth Accumulation?

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Phinance
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STATE TAXES: Predictor of Wealth Accumulation?

Post by Phinance » Wed May 15, 2019 6:44 pm

What is a BH’s stance on State Taxes as a predictor of wealth accumulation? All things being equal (salary, likability of city etc..) is this a BIG predictor of wealth accumulation?

We live in Portland, OR (like it, nothing is perfect), but often get the itch to move to a city in a lower income tax and cost of living state (Austin, TX, Boise, ID, Chapel Hill, NC)?

Assumptions:
Age 36 (partner 31, will be married soon, no kids at this time but planning to have some)
High-income earner in Portland, Oregon (9.9% state income tax, no sales tax, moderate property tax, estate tax > 1M).
Do not own a home at this time, but would like to.

Cheers in advance (please keep this a purely financial commentary) :sharebeer
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JoMoney
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Re: STATE TAXES: Predictor of Wealth Accumulation?

Post by JoMoney » Wed May 15, 2019 7:06 pm

Since the high-tax, high cost of living, coastal states have the highest per capita millionaires... I'm going to guess if there is any correlation to state taxes and wealth accumulation, it's probably an inverse one.
I doubt it's the taxes that are the factor, my guess would be that the states with more wealthy people can get away with having higher taxes...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: STATE TAXES: Predictor of Wealth Accumulation?

Post by MotoTrojan » Wed May 15, 2019 7:08 pm

Generally taxes are part of cost-of-living and most companies account for that in the salaries they give. Not sure I follow the question.

If you can get a job paying you equal/more in a state with lower taxes, you'll accumulate more wealth. You can also work hard to defer as much of your current income as possible and then move to a state with no tax, enabling you to withdraw more after-tax dollars, not to mention a potentially lower cost of living. I would wager that sort of arbitrage comes out ahead of staying in the same place forever.

LongRoad
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Re: STATE TAXES: Predictor of Wealth Accumulation?

Post by LongRoad » Wed May 15, 2019 7:21 pm

All else being equal, paying more tax versus less reduces wealth precisely to the extent of the difference, as a ‘purely financial’ point.

Was this the question?

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Phinance
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Re: STATE TAXES: Predictor of Wealth Accumulation?

Post by Phinance » Wed May 15, 2019 7:32 pm

Yes, I think that makes sense. I just wanted to know if geographic arbitrage (to a lower tax, lower cost of living state) is a smart wealth accumulation strategy when you are younger (30s/40s) rather than later. The fact that no prediction exists make sense. My take home is basically, as you said, if we can make the same/higher salary at a lower income tax state, we are saving that amount of $$ (~35K) per year. Thank you.
"Our life is frittered away by detail. Simplify, simplify." -Thoreau

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Re: STATE TAXES: Predictor of Wealth Accumulation?

Post by Ron Ronnerson » Wed May 15, 2019 9:07 pm

Even though you said to hold other things besides state taxes the same, I’m not sure this is practical to do. I think you really have to consider many factors when comparing two locations. Some of the financial ones besides state taxes include property and sales taxes, job opportunities, commute, and pay and benefits. There are individual circumstances which may affect finances as well.

Also, keep in mind that income taxes can be tricky/complex due to various brackets, deductions, exemptions, credits, etc. that can come into play. For example, I make a six-figure salary in California and I’m in the 2% state tax bracket with a 0% effective state tax rate. I’m married with one kid (age 4). Many people think of California as a high-tax state but the taxes can be quite low here for some. My point is that when doing this sort of analysis, you have to focus in on your personal situation rather than just go by generalities.

Regattamom
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Re: STATE TAXES: Predictor of Wealth Accumulation?

Post by Regattamom » Wed May 15, 2019 9:09 pm

Phinance wrote:
Wed May 15, 2019 7:32 pm
Yes, I think that makes sense. I just wanted to know if geographic arbitrage (to a lower tax, lower cost of living state) is a smart wealth accumulation strategy when you are younger (30s/40s) rather than later. The fact that no prediction exists make sense. My take home is basically, as you said, if we can make the same/higher salary at a lower income tax state, we are saving that amount of $$ (~35K) per year. Thank you.
The math isn't that simple. States need revenue and if you aren't paying a state income tax, you are paying a tax somewhere else. Property tax, fuel tax, sales tax, etc.

SovereignInvestor
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Re: STATE TAXES: Predictor of Wealth Accumulation?

Post by SovereignInvestor » Wed May 15, 2019 9:28 pm

Not all states have taxes the same level per capita.


Yes like NH has no sales or income tax but property taxes are relatively higher but total taxation level is much lower than other states.

SoAnyway
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Re: STATE TAXES: Predictor of Wealth Accumulation?

Post by SoAnyway » Wed May 15, 2019 9:40 pm

Regattamom wrote:
Wed May 15, 2019 9:09 pm
Phinance wrote:
Wed May 15, 2019 7:32 pm
Yes, I think that makes sense. I just wanted to know if geographic arbitrage (to a lower tax, lower cost of living state) is a smart wealth accumulation strategy when you are younger (30s/40s) rather than later. The fact that no prediction exists make sense. My take home is basically, as you said, if we can make the same/higher salary at a lower income tax state, we are saving that amount of $$ (~35K) per year. Thank you.
The math isn't that simple. States need revenue and if you aren't paying a state income tax, you are paying a tax somewhere else. Property tax, fuel tax, sales tax, etc.
+1. OP, you have to look at the entire picture. As someone recently pointed out in another thread, SF/SV are UHCOL and high-tax, but the salary levels and career opportunities in that geography (dep. on one's field) often far outweigh the benefits of being in a LCOL/low-tax area. To get closer to (your) home, I've often wandered why folks in Portland OR with its high state income tax don't move over the border to Vancouver WA with its zero state income tax. To Regattamom's point - and since I've never lived in the Pacific NW - I just assumed it was because of a combination of QoL factors as well as how WA collects its revenue cf. to OR. Maybe that's wrong? :confused
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Re: STATE TAXES: Predictor of Wealth Accumulation?

Post by EddyB » Wed May 15, 2019 9:52 pm

Regattamom wrote:
Wed May 15, 2019 9:09 pm
Phinance wrote:
Wed May 15, 2019 7:32 pm
Yes, I think that makes sense. I just wanted to know if geographic arbitrage (to a lower tax, lower cost of living state) is a smart wealth accumulation strategy when you are younger (30s/40s) rather than later. The fact that no prediction exists make sense. My take home is basically, as you said, if we can make the same/higher salary at a lower income tax state, we are saving that amount of $$ (~35K) per year. Thank you.
The math isn't that simple. States need revenue and if you aren't paying a state income tax, you are paying a tax somewhere else. Property tax, fuel tax, sales tax, etc.
But the way the states tax can be very different, and how they affect similarly situated people can be remarkably different. E.g., reliance on sales tax tends to be much more regressive than reliance on income tax.
SoAnyway wrote:
Wed May 15, 2019 9:40 pm
1. OP, you have to look at the entire picture. As someone recently pointed out in another thread, SF/SV are UHCOL and high-tax, but the salary levels and career opportunities in that geography (dep. on one's field) often far outweigh the benefits of being in a LCOL/low-tax area. To get closer to (your) home, I've often wandered why folks in Portland OR with its high state income tax don't move over the border to Vancouver WA with its zero state income tax. To Regattamom's point - and since I've never lived in the Pacific NW - I just assumed it was because of a combination of QoL factors as well as how WA collects its revenue cf. to OR. Maybe that's wrong? :confused
There are far more jobs in Portland than in Vancouver, and WA residents who work in OR will still pay OR income taxes.

I like where I live, and philosophically I generally agree with the way my state raises its revenue, but I won't deny there are times when it hurts (partly because I don't agree as strongly with how my state spends ...).

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Re: STATE TAXES: Predictor of Wealth Accumulation?

Post by randomguy » Wed May 15, 2019 10:41 pm

JoMoney wrote:
Wed May 15, 2019 7:06 pm
Since the high-tax, high cost of living, coastal states have the highest per capita millionaires... I'm going to guess if there is any correlation to state taxes and wealth accumulation, it's probably an inverse one.
I doubt it's the taxes that are the factor, my guess would be that the states with more wealthy people can get away with having higher taxes...
http://proximityone.com/networth.htm . Note the general trend of low tax states having poor residents. If the higher networth is the result of higher taxes (more infrastructure to support businesses) or inspite of (how much richer would they be without those taxes), is pretty much a political discussion. And how much is just a result of high housing prices is another:)

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Re: STATE TAXES: Predictor of Wealth Accumulation?

Post by JoMoney » Wed May 15, 2019 10:49 pm

randomguy wrote:
Wed May 15, 2019 10:41 pm
...how much is just a result of high housing prices is another:)
That is a key point...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: STATE TAXES: Predictor of Wealth Accumulation?

Post by mighty72 » Wed May 15, 2019 11:10 pm

I recently read that SF has most billionaires for every 100k people and NY is second on the list. Coastal states also generally have higher income and capital. I talk to real estate syndicators once in a while and most of their investors are from SF, LA or NY. It could be due to lack of investment opportunities in these areas too. I think TX is an exception to the rule.

I think when you are young, you need to focus on maximizing your income. Based on my limited experience, companies in my area of work compensate for HCOL and taxes is part of it. When I graduated, a while back, I got 40% more base salary in Silicon Valley than what I was getting in TX. Also, I know people who have moved from CA to TX after working here for 10-15 years and had a good equity in the home. They were able to negotiate that they get the same salary and benefits as in CA so in effect a pay raise. I know folks who have made the reverse move and most of them didn't get compensated for COL completely.

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Re: STATE TAXES: Predictor of Wealth Accumulation?

Post by SoAnyway » Wed May 15, 2019 11:22 pm

EddyB wrote:
Wed May 15, 2019 9:52 pm
SoAnyway wrote:
Wed May 15, 2019 9:40 pm
+1. OP, you have to look at the entire picture. As someone recently pointed out in another thread, SF/SV are UHCOL and high-tax, but the salary levels and career opportunities in that geography (dep. on one's field) often far outweigh the benefits of being in a LCOL/low-tax area. To get closer to (your) home, I've often wandered why folks in Portland OR with its high state income tax don't move over the border to Vancouver WA with its zero state income tax. To Regattamom's point - and since I've never lived in the Pacific NW - I just assumed it was because of a combination of QoL factors as well as how WA collects its revenue cf. to OR. Maybe that's wrong? :confused
WA residents who work in OR will still pay OR income taxes.
Thanks, EddyB - My bad. It's been several years since I was anybody's W-2 employee, and I'd forgotten about that aspect of "state-sourced income". Until recently retired, for ten years following 15+ years of W-2 employment, I was self-employed working out of my home office. While my clients were spread across the country and I did have to account for and pay their state taxes for the days when I was "onsite" in a different state, it was rare because I charged a hefty premium + expenses for it, and my clients were more than happy to have me communicate with onsite teams via phone/email/videoconference. It worked, and was a win-win for all concerned. BTW, I'm totally with you on the tax policy front (e.g. regressive nature of sales tax) but that's OT and probably outside forum rules to discuss. SoAnyway, back to OP....

OP, I don't know your field or the nature of your work (or that of your prospective spouse), but if possible you might want to consider setting up shop doing similar type of work remotely from across the river. It's an even easier decision if the lower-earner remains a W-2 employee with good health insurance/benefits.
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Re: STATE TAXES: Predictor of Wealth Accumulation?

Post by jharkin » Thu May 16, 2019 6:53 am

MotoTrojan wrote:
Wed May 15, 2019 7:08 pm
Generally taxes are part of cost-of-living and most companies account for that in the salaries they give. Not sure I follow the question.

If you can get a job paying you equal/more in a state with lower taxes, you'll accumulate more wealth. You can also work hard to defer as much of your current income as possible and then move to a state with no tax, enabling you to withdraw more after-tax dollars, not to mention a potentially lower cost of living. I would wager that sort of arbitrage comes out ahead of staying in the same place forever.
+1

I was immediately going to say that areas with high taxes also tend to have the highest paying jobs. Those high taxes usually pay for better infrastructure, healthcare and education than low tax states offer. That infrastructure, and especially the good education that creates a lot of smart candidates, is what attracts big employers.

You also cant judge by one data point. Some states have high personal income taxes because they trade off for low property taxes. Other sates with low or no income tax have high property tax. And so on. YOu really need to look at the total tax burden vs. the quality of services rendered.

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Re: STATE TAXES: Predictor of Wealth Accumulation?

Post by JackoC » Thu May 16, 2019 8:51 am

jharkin wrote:
Thu May 16, 2019 6:53 am
MotoTrojan wrote:
Wed May 15, 2019 7:08 pm
Generally taxes are part of cost-of-living and most companies account for that in the salaries they give. Not sure I follow the question.

If you can get a job paying you equal/more in a state with lower taxes, you'll accumulate more wealth. You can also work hard to defer as much of your current income as possible and then move to a state with no tax, enabling you to withdraw more after-tax dollars, not to mention a potentially lower cost of living. I would wager that sort of arbitrage comes out ahead of staying in the same place forever.
+1

I was immediately going to say that areas with high taxes also tend to have the highest paying jobs. Those high taxes usually pay for better infrastructure, healthcare and education than low tax states offer. That infrastructure, and especially the good education that creates a lot of smart candidates, is what attracts big employers.

You also cant judge by one data point. Some states have high personal income taxes because they trade off for low property taxes. Other sates with low or no income tax have high property tax. And so on. YOu really need to look at the total tax burden vs. the quality of services rendered.
I'd go further and just say state tax level is not directly relevant to wealth accumulation prospects for a given individual in working years. What matters is what you can earn on an after tax basis and save at a given living std given the local cost of living. Whether taxes are the chicken or the egg in that equation is not that relevant from the personal finance POV. IOW if there are higher paying jobs relative to total costs (including taxes) for my skills* in part due to high taxes, or high taxes because there are high paying jobs, what difference does that make from personal POV? I can't see much.

One can speculate that high state taxes (assuming productive spending from them) will fuel faster *future* wage growth, or one can speculate that such taxes with tend to divert future economic and wage growth to states with lower taxes. You can speculate about anything, and everyone's got their opinion, but besides tending to get political, it would be focusing on just one possible reason for difference in opportunity (certainly high taxes are not *the* reason NY is the US national and a major world financial center) and so again questionable relevance to a personal decision where you aren't speculating what the employers are offering you now, and you have expertise about your field to judge individual future prospects.

But can't resist on 'infrastructure'. We just finished a transcontinental drive in a firmly riding sporty car and felt first hand the truth of rankings saying better road quality has little, if not inverse, correlation to higher state and local taxes. We already know from living in and driving daily in NJ that it has among the highest taxes and worst roads of anywhere in the US, NYS roads (let alone the City's :shock: ) are generally bad also. Going through many states cross country the ones with the best roads are not the ones with the highest taxes, though some middling tax states have good or less good roads. That's only one aspect of course of what state and local govts do, but an obvious case where 'higher taxes pay for better infrastructure' is a questionable generalization, just feeling it through your butt driving across the US. :happy Not to open a general debate about what taxes do or don't, should or shouldn't, accomplish in real life, just to re-emphasize how far removed it is from a personal decision to take a job in NY v. Boise, or whatever comparison. It's murky what state/local taxes really accomplish for a given individual, even besides knowing that's much less important to wealth accumulation than personal earnings and overall cost of living.

*And once you are retired the argument that higher state and local taxes are personally benefiting you as a well off retiree is a lot more of a stretch. OTOH living in any given place you like over many years creates inertia against moving from it. Which one might consider when making the original decision, but again at the time of the original decision that's far future speculation, and it's hard to predict, especially about the future.
Last edited by JackoC on Thu May 16, 2019 9:00 am, edited 1 time in total.

TBillT
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Re: STATE TAXES: Predictor of Wealth Accumulation?

Post by TBillT » Thu May 16, 2019 8:59 am

Noted economist and money manager (TBond king) Gary Shilling recently blogged about high state taxes in the era of TCJA.
He sees a possible population shift due to taxes coupled with the fact of future pension liabilities which may make state taxes go higher (even if the blue states change to red,there may be no hope).

http://garyshilling.blogspot.com/

TBillT
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Re: STATE TAXES: Predictor of Wealth Accumulation?

Post by TBillT » Thu May 16, 2019 9:02 am

dupe delete

runner540
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Re: STATE TAXES: Predictor of Wealth Accumulation?

Post by runner540 » Thu May 16, 2019 1:21 pm

Phinance wrote:
Wed May 15, 2019 6:44 pm
What is a BH’s stance on State Taxes as a predictor of wealth accumulation? All things being equal (salary, likability of city etc..) is this a BIG predictor of wealth accumulation?

We live in Portland, OR (like it, nothing is perfect), but often get the itch to move to a city in a lower income tax and cost of living state (Austin, TX, Boise, ID, Chapel Hill, NC)?

Assumptions:
Age 36 (partner 31, will be married soon, no kids at this time but planning to have some)
High-income earner in Portland, Oregon (9.9% state income tax, no sales tax, moderate property tax, estate tax > 1M).
Do not own a home at this time, but would like to.

Cheers in advance (please keep this a purely financial commentary) :sharebeer
Don't believe the "low tax" hype - You really need to run your specific numbers and figure out if the difference is enough to uproot your family and make other tradeoffs (weather, etc.):
Dallas:
no income tax but property taxes are 2.7%-3.0% of home value and assessments do go up fast.
Sales tax is 8.25%.

Glockenspiel
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Re: STATE TAXES: Predictor of Wealth Accumulation?

Post by Glockenspiel » Thu May 16, 2019 1:52 pm

High state tax states also have higher salaries that more than make up the difference. Why do higher tax states have the highest per capital number of millionaires? Higher tax states also have much better public education, healthcare, have higher standards of living and its population lives longer.

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Phinance
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Re: STATE TAXES: Predictor of Wealth Accumulation?

Post by Phinance » Thu May 16, 2019 1:53 pm

Super helpful, thanks to all.
"Our life is frittered away by detail. Simplify, simplify." -Thoreau

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Re: STATE TAXES: Predictor of Wealth Accumulation?

Post by Alan S. » Thu May 16, 2019 5:15 pm

If you go by actual state migration patterns, it is preferable to accumulate income in a high cost high tax state, then decumulate in in a low cost low tax state. This pattern has been going on for decades in the NE to FL migration pattern in which the vast portion of this migration takes place post retirement. This is also happening in the west as coastal retirees move east to the non coastal states. This also explains why education is funded at higher levels in the accumulation states than in the decumulation states.

These migrations have been determined using several methods, including records from moving companies. Part year tax returns also can be useful since they record the states of departure and arrival.

Therefore, better accumulation in high tax places, and longer retention of that accumulation in low tax places, leveraging both.

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