Much has been made of the tech exodus from California to lower Texas taxes during the COVID-19 pandemic. But a new report found that the deal was not what many thought.
Although Texas does not have a state-level personal income tax, it has relatively high consumption and property taxes for residents to make up the difference. Ultimately, it has a more effective state and local tax rate for the average US household at 12.73% than California’s 8.97%, according to a new report from WalletHub.
“When people are like, ‘Oh California is more expensive than Texas,’ it’s the top income tax rate. This is for people who earn more than $1 million,” said Richard Auxier, senior policy associate at the Urban-Brookings Tax Policy Center. “If you look at the average person, the income tax burden is not going to be that big. The system was not designed that way. And Auxier points out there are often deductions and credits that help reduce income tax.
The WalletHub report calculates what the tax burden is on median incomes across the country. The report is broken down by median income in the US and median income in each state. It also assumes that the median earner owns a median-priced home, a car worth $26,220, and spends “the same amount as a US median income household,” to calculate property taxes, vehicle taxes, and sales. and tax burden.
The typical Illinois family pays the most in state and local taxes, according to the report, at 15.05% of their income. Connecticut, New York, Pennsylvania, and Kansas round out the top five states with the most effective state and local tax rates for the average resident.
Meanwhile, Alaskans pay the least in state and local taxes, percentage-wise, with 6.05% of their income going to the tax burden. Delaware, Montana, Nevada, and Wyoming are also at the bottom.
Of the nine states without a state income tax, five have state and local tax rates that are more effective on average incomes than California according to WalletHub’s calculations, including New Hampshire, South Dakota, Tennessee, Texas, and Washington.
‘Taxes are hard to get rid of’
Of course, WalletHub’s calculations aren’t perfect. There are several ways to measure the tax burden, and it will vary from person to person and household to household. WalletHub’s calculations offer one perspective, but each study omits several variables that would make a difference.
“Tax is really hard to do because it’s so personal,” Auxier said. Family size, marital status, home ownership, age, number of children—there are many factors that affect each person’s tax burden.
Property taxes are especially complicated to calculate. Not everyone has a home, to begin with. And property taxes vary, even in the same state, depending on when people buy their homes.
In fact, using US median prices, especially home prices, in each state as a WalletHub report is not misleading, said Jared Walczak, vice president of state projects at the Tax Foundation. While California’s property tax rates are low, their home values are higher than the national median figure used for the calculations. When comparing the effective rate with the figures set by the state, Walczak said California and Texas actually end up having the same tax burden: Texas at 11.8%, and California at 11.4%.
“California has very low property tax rates,” Walczak said. “But when you look at it and say the effective rate of California is half of Texas, it does not take into account that the cost of property in California is more than double that of Texas.”
Whether you have children also makes a big difference in your tax burden.
“If you earn $50,000, a single person has a higher tax burden than a married couple with three children earning $50,000,” Auxier said. “There is a lot of variation in this average.”
WalletHub’s report puts some into perspective: While many people would point to states with no state income tax as “low taxes,” it’s generally people at the top of the income spectrum who earn the most.
California, New York, and DC have programs like the Earned Income Tax Credit “that, literally, send money to low- and middle-income taxpayers,” Auxier said. “States like Texas don’t have that.”
Still, the report can provide one picture of different tax burdens.
“It’s really about thinking about it holistically, thinking about income, sales, and excise taxes together,” Walczak said. “But you have to take country-by-country differences in costs into account.”