It turns out Americans really do vote with their feet – especially when it comes to state tax rates.
United Van Lines releases a report every year on the prior year’s migration patterns within the U.S. In January 2020, they issued their 2019 report, and the data is fascinating.
But where it really gets interesting is how taxes affect where Americans are moving. The correlation between state tax burden and migration across states is striking.
But 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 2020 map summarizing all state taxes by state:
If you’re wondering about which state taxes are highest, beware of these top ten highest-tax states:
|Rank||State||Total Tax Burden||Property Tax Burden||Income Tax Burden||Sales & Excise Tax Burden|
At the other end of the spectrum, here’s the state tax comparison for the lowest-taxed states:
|Rank||State||Total Tax Burden||Property Tax Burden||Income Tax Burden||Sales & Excise Tax Burden|
That’s a big 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.
Migration Patterns: Where Americans Are Moving
Continuing a long-term trend, Americans are largely moving away from the Northeast and Upper Midwest, which tend to charge high state tax rates.
Take a look at the map:
It’s not a perfect match with the tax burden map, of course. Look at Vermont – high taxes, cold winters, but people are flocking there in droves (whatever a “drove” is). Vermont does have several points in its favor though; the people are friendly and educated, and the beer, hiking, and skiing are outstanding.
I cross referenced the top ten inbound migration states with their tax burden and cost of living index (lower score = lower cost of living), to see how they shake out:
|Top Inbound States||Tax Burden||Cost of Living Index|
|4. South Carolina||7.48%||95.9|
|6. Washington D.C.||N/A||N/A|
|8. South Dakota||7.86%||99.8|
|9. North Carolina||8.17%||94.9|
|10. New Mexico||8.74%||87.5|
Then I did the same for the top ten outbound states: the states Americans are fleeing. Here’s the state tax comparison among the top outbound migration states:
|Top Outbound States||Tax Burden||Cost of Living Index|
|1. New Jersey||9.88%||125.1|
|3. New York||12.28%||139.1|
|9. North Dakota||8.06%||98.8|
The numbers indicate a pattern, if an imperfect one. On average, people tend to moving away from higher-tax, more expensive states toward less expensive ones.
The average state tax burden for the inbound migration states is only 7.99%, with the highest entry on the list New Mexico at 8.74%. Meanwhile, the average state tax burden in the top outbound states was 9.51%. Of the ten states with the highest outbound migration, only two overlapped the inbound list on tax burden, with a lower tax burden than New Mexico (Michigan and North Dakota).
Further, all of the top ten outbound states are in the top half of states with high tax burdens. The top four outbound migration states are particularly telling, all within the top ten highest tax states.
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 2016 presidential election, Republican states have an average state tax burden rank of 30.57 (higher numbers in ranking mean lower taxes). States that voted Democratic have an average state tax burden rank of 17.85 – significantly higher ranking on tax burden.
Of the ten states with the highest state tax burden, all but one voted Democratic (the exception: Iowa). 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 sometimes Republican states charge hypocritically high taxes, and sometimes 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 more in taxes, but they pay a higher percentage of their income.
Conservatives, meanwhile, 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 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 $304.6 billion (that’s $304,600,000,000!) in property taxes in 2018.
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:
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. As you might imagine, the states with the most inbound migration saw dramatically higher real estate appreciation rates over the last year, averaging 6.2% year-over-year. The states with outbound migration saw much slower home price growth averaging only 2.0% – less than the inflation rate for the same period at 2.1%. In real dollars, homes in these states actually lost value on average!
I then looked at the relationship between state tax burden and real estate appreciation to see if there was a correlation. Sure enough, the states with the lowest tax burden saw an average appreciation of 3.9%, compared to those with the highest state tax burden at 2.4% (only slightly higher than the inflation rate).
In other words, real estate in low-tax states appreciated 63% faster than properties in high-tax states over the last year.
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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.
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!
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?
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About the Author
G. Brian Davis is a landlord, real estate investor, and co-founder of SparkRental. His mission: to help 5,000 people reach financial independence by replacing their 9-5 jobs with rental income. If you want to be one of them, join Brian, Deni, and guest Scott Hoefler for a free masterclass on how Scott ditched his day job in under five years.