Do states with population growth charge lower taxes than states losing population?

United Van Lines releases a report every year on the prior year’s migration patterns within the United States. In early 2023, they issued their 2022 report, coinciding with U.S. Census Bureau population data released at the end of 2022.

But where it really gets interesting is how taxes affect where Americans are moving. The correlation between state tax burden and state net migration is striking.

Remember, property taxes aren’t the whole picture when it comes to residents’ tax burden. And how do migration patterns and tax burdens align with real estate appreciation? What does the data indicate about opportunities for real estate investors?

Glad you asked.

 

State Tax Burden: The Trifecta

Property taxes matter, especially to real estate investors, but for residents they make up only one of three variable taxes: property tax, income tax, and sales and excise taxes. For those of you who need brushing up on your tax terminology, excise taxes are levied on specific types of goods, such as alcohol, tobacco, gasoline, and so on.

Every year, WalletHub compiles data on all three tax types into a chart summarizing total state tax burden, for all 50 states. They break down each of the three tax types as a percentage of income in that state. Thus, property taxes don’t represent the rate at which assessments are taxed, but that average percentage of residents’ income that goes to property taxes. That distinction also takes into account variations in property values between the states.

Likewise with sales tax it’s not the tax rate, but how much each resident loses to sales and excise taxes each year.

Without further ado, here’s the 2022 map summarizing all state taxes by state:

Source: WalletHub

If you’re wondering about which state taxes are highest, beware of these top ten highest-tax states:

RankStateTotal Tax BurdenProperty Tax BurdenIncome Tax BurdenSales & Excise Tax Burden
1New York12.75%4.43%4.90%3.42%
2Hawaii12.70%2.55%3.18%6.97%
3Maine11.42%5.48%2.51%3.43%
4Vermont11.13%5.31%2.49%3.33%
5Minnesota10.20%2.93%3.74%3.53%
6New Jersey10.11%4.98%2.54%2.59%
7Connecticut10.06%4.16%3.07%2.83%
8Rhode Island9.91%4.48%2.31%3.12%
9California9.72%2.76%3.80%3.16%
10Illinois9.70%3.98%2.22%3.50%

Nearly all of those states saw their tax burden rise in 2022, by the way. At the other end of the spectrum, here’s the state tax comparison for the lowest-taxed states:

RankStateTotal Tax BurdenProperty Tax BurdenIncome Tax BurdenSales & Excise Tax Burden
41Oklahoma7.47%1.74%1.90%3.83%
42Alabama7.41%1.41%2.00%4.00%
43Montana7.39%3.45%2.66%1.28%
44South Dakota7.12%2.84%0.00%4.28%
45Florida6.64%2.77%0.00%3.87%
46New Hampshire6.41%5.11%0.14%1.16%
48Wyoming6.32%3.32%0.00%3.00%
47Delaware6.22%1.77%3.28%1.17%
49Tennessee5.75%1.71%0.06%3.98%
50Alaska5.06%3.54%0.00%1.52%

That’s a huge difference in state tax burden; New York residents pay roughly two-and-a-half times the state taxes as their counterparts in Alaska do, as a percentage of their income.

It’s worth mentioning that seven states charge no income tax at all: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Another two states (New Hampshire and Tennessee) do not charge any income taxes on earned income (wage/salary income), but do charge income taxes on investment income such as rental income, dividends, and interest.

 

States with Population Growth

According to Census Bureau data from July 1, 2021 through July 1, 2022 (released at the end of 2022), here’s how the map breaks down for states with population growth and loss, courtesy of Business Insider:

states with highest population growth

It’s not a perfect correlation with tax rates, but you can definitely see a pattern. Consider the states with the highest population growth:

states with population growth

Now look at the states with population loss:

states with population loss

How do state population changes compare to state tax burden?

The average population loss in the ten highest taxed states was -0.21% last year. The average population growth in the ten lowest taxed states was 0.95%. That’s a huge difference in state population growth, given the number range.

The average tax burden in the fastest-growing states was 7.66%. Meanwhile, the states with the worst population decline averaged a tax burden of nearly 10% (9.90%). 

But the data doesn’t end with the annual growth rate. Let’s bring in another data source for state net migration patterns, to align state migration with state tax burden and states with population growth.

 

State Net Migration Patterns

Continuing a long-term trend, internal migration shows Americans moving away from the Northeast and Upper Midwest, which tend to charge high state tax rates. Remember, the United Van Lines data reflects domestic migration, not international migration. In contrast, the Census Bureau population estimate data above includes all forms of population change, including immigration.

Take a look at the state migration rates map:

Look familiar?

Again, it doesn’t perfectly match the map of states with population growth, or the tax burden map. Look at Vermont high taxes, cold winters, but people are flocking there in droves (however many people a “drove” is). Vermont does have several points in its favor though; the people are friendly and educated, and the skiing, hiking, and beer are outstanding.

What the #%& are real estate syndications, and do they really earn 15-50% returns?

Red vs. Blue States

You simply can’t separate a conversation about taxes from politics. State tax comparison data just begs for political commentary.

First, the raw numbers. Based on which way each state swung during the 2020 presidential election, Republican states have an average state tax ranking of 31.60 out of 50 (higher rank = lower taxes). Democratic states ranked 19.36 on average, showing that in general, states do tax according to their political principles.

state tax burden by political leanings

Of the ten states with the highest state tax burden, every single one swung blue in the last election. Among the ten states with the lowest tax burden, eight of the ten voted Republican (the exceptions: Delaware and New Hampshire).

While there’s a clear trend, it’s not a perfect 1:1 correlation. The outliers demonstrate that some Democratic states maintain frugally low tax rates.

It’s worth mentioning a fundamental difference in taxation philosophy between liberals and conservatives, when it comes to the ever-slippery concept of “fairness.” As a general rule, liberals believe that better-off individuals should pay disproportionately higher tax rates. The easiest way to do that is through a highly progressive income tax bracketing system. That means that not only do higher earners pay higher dollar amounts in taxes, they also pay a higher percentage of their income.

Meanwhile, conservatives tend to favor use taxes. That means that ideally, people pay more in taxes for services they use more. For example, people who drive more should pay more money toward road infrastructure and environmental remediation, in the form of gasoline taxes, tolls, or vehicle registration fees. Therefore, an environmentally-minded person who doesn’t own a car (like, cough, myself) would pay less for road maintenance, while the person who spends two hours behind the wheel every day would pay more.

Which philosophy is right? Are use-based or wealth-based taxes more “fair?” It’s a matter of opinion. As someone who leans fiscally conservative and socially liberal, I personally favor use taxes. In particular, I like sales and excise taxes over income taxes, because ideally we want to reward good financial behavior like hustling to earn more money, and penalize behavior like high spending and consumerism. But I digress.

 

The Impact of Property Taxes

Americans paid over $577.01 billion (that’s $577,010,000,000!) in property taxes in 2019 (the most recent year available).

Property taxes are particularly relevant to real estate investors, given their direct impact on cash flow. What’s tricky about property taxes is that they vary by county, not by state. So while we can look at state averages, like WalletHub did, the data has its limits.

But even when we drill down to the local level, the property tax map tells a familiar tale:

Would your readers enjoy this interactive map comparing property taxes by county? Click here for the embed code.

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They’re particularly gnarly in the Northeast, with New England states charging high property tax rates.

And, of course, assessors love to overestimate your property’s value. More on how property taxes are calculated here.

It’s worth noting that Texas, with its high property taxes, actually has a relatively low total tax burden, because it imposes no income tax. That’s one reason why it’s not suffering from outbound migration like most of the other regions with high property taxes.

United Van Lines noted in their report that while many Americans are moving into cities, that trend is still heavily overshadowed by the ongoing migratory trend away from the Northeast and Midwest.

 

Real Estate Appreciation, State Tax Burden, and Migration

Demand drives home prices. Yet surprisingly, we didn’t see a yawning gap in home price appreciation between the states with the fastest population growth and those with the worst population decline. 

The ten states with the best population growth saw an average real estate appreciation of 11.43%. Meanwhile, states with the worst population loss saw housing appreciation at 8.95%. 

I then looked at the relationship between state tax burden and real estate appreciation to see if there was a correlation. I was surprised to find a wider appreciation gap here than based on state population change. The ten states with the lowest tax burden saw an average appreciation of 13.35%, compared to those with the highest state tax burden at 9.66%. As home price growth continues slowing (or even declining), it will be interesting to see whether taxes drive more of a gap or not.

For a breakdown of year-over-year housing appreciation across the US, check out our real estate heat map. Often it’s the cheapest real estate in the U.S. that appreciates the fastest!

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Opportunities for Investors?

Inbound migration means population growth, which is the greatest single predictor of real estate appreciation. Investors always want to keep an eye on what markets are growing quickly, because those markets usually experience demand growth that outpaces new housing supply.

It’s why we looked at population growth in our analysis of best cities for real estate investing in 2023, and didn’t just look at the cities with the highest cap rates.

State tax burdens also matter for investors, and not only because of their strong correlation with migration patterns. Lower property taxes are particularly relevant to real estate investors, because of their direct impact on cash flow.

Don’t think property tax bills make much of a difference to your cash flow? Consider that the average annual property tax bill in Alabama last year was $776. Compare that to the average property tax bill in New Jersey: $8,477. The monthly cost of that tax bill is almost as high as the annual tax bill in Alabama!

 

Final Thoughts

Low-tax, high-migration states, cities, and towns are a gold mine for real estate investors. You don’t need to invest in your own backyard; in today’s world, nothing stops you from investing in real estate long-distance, especially through turnkey property platforms like Roofstock.

And let’s be honest, tax burdens don’t tell the whole story. After all, California has relatively high tax rates but it’s hard to argue with the weather in San Diego.

But there’s a clear correlation between tax burdens and Americans’ moving patterns. If you want to invest where demand is sure to grow, look at states where taxes are low and movers are inbound, rather than fleeing.

 

What are your thoughts on the above state tax comparison data? Would you consider moving to a lower-tax state?

 

 

More Unconventional Reads:

About the Author

G. Brian Davis is a real estate investor and cofounder of SparkRental who spends 10 months of the year in South America. His mission: to help 5,000 people reach financial independence with passive income from real estate. If you want to be one of them, join Brian and Deni for a free class on How to Earn 15-50% on $5K in Real Estate Syndications.

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