Living in High-Tax States vs Low-Tax States

By Dan Harkey

Escape The High-Pressure, Hamster-Like Financial Treadmill.

Let's explore the financial implications of residing in a high-tax state like San Francisco/Silicon Valley, California, versus a low-tax state like Casper, Wyoming. This comparison underscores the financial empowerment and control that come with choosing a more tax-friendly location. This is a powerful way for financially successful individuals considering relocation to take charge of your financial situation and feel confident about your choices.

As a result of this comparison, it's worth noting that Casper, Wyoming, is ranked as the second-safest city in the U.S. It boasts low rates of pedestrian facilities, aggravated assault, murder, natural disasters, severe weather, fraudsters, uninsured drivers, and general safety concerns. This adds another layer of appeal to the financial benefits of living in a low-tax state, providing a sense of security and peace of mind.

With the flexibility of remote work, this financially successful couple can live in a more cost-effective location rather than being tied down to the high living costs and high regulations of a place like San Francisco/Silicon Valley, California. One could argue that personal financial successes are treated with contempt in California.

Wyoming is used as an example location because of its low taxes and low regulatory environment. However, interested movers may find similar benefits in other low-tax states.

For this comparison, I've created a fictitious family. While some details are factual, others are illustrative assumptions. These assumptions are based on research and inquiry. The family, consisting of a successful husband and wife, two kids, and a lovely home, serves as a relatable example for our financial analysis, helping to put the potential savings and lifestyle changes into perspective.

The working husband likes to deviate from the mundane responsibilities of his corporate job by pretending to live a renegade lifestyle while riding out on the roads with his Harley in the backcountry. You never know when he and his buddies may come upon a sleazy biker bar with good beer and burgers. He could put a dollar in a jukebox and play Born to Be Wild by Steppenwolf. Even better, Wasted Days and Wasted Nights. By Freddy Fender.

https://www.youtube.com/watch?v=egMWlD3fLJ8

https://www.youtube.com/watch?v=g9lkeoxJRxA

Both the husband and the wife each earn $250,000 per year. Their combined family income is $500,000 yearly before federal, state, and local taxes and living expenses. They have daycare expenses. If they live in San Francisco/Silicon Valley, California, their home would be worth at least $2 million with a $1.5 million mortgage fixed rate at 4% and a monthly payment of $7,161. They are amortized over 30 years. For Bay Area pricing, $2 million will not purchase more than a standard 1,200 to 1,500 square foot stucco 50-year-old home, usually not upgraded. Square footage purchase prices will range from $1,500 to $2,358. Finding a one or 2-car garage is a luxury.

Consider this: By relocating to Wyoming, this family could secure a comparable home under $1 million with a significantly reduced monthly house payment, leading to substantial potential savings. This comparison is designed to inspire optimism and hope in financially successful individuals considering relocation, making them feel positive about the possible financial benefits.

I estimate the difference in the prices of goods and services as 100% for the high-cost state of California and 62.5% for low-cost states such as Wyoming, including the cost of daycare. To calculate sales and use taxes paid, assume that this family spent at least $60,000 per year in CA and $40,000 per year in WY on all taxable goods and services.

Consumer cost of living comparison between SF, CA, and Casper, WY.

https://www.numbeo.com/cost-of-living/compare_cities.jsp?country1=United+States&country2=United+States&city1=San+Francisco%2C+CA&city2=Casper%2C+WY

For more complex examples or specific questions about your financial situation, it's always best to consult your accountant or CPA. They can provide the support and reassurance you need in complex tax matters.

My comparisons relate to relative pricing ratios, which will be exacerbated when we also notice that Wyoming has 0 state income tax, 4% sales tax, and only .61% property tax.  Also, these comparisons will be exacerbated when we compare the differential between home prices, family-related expenses, and the cost of goods and services.  For example, a gallon of gas ($3.50 in CA and $1.95 in WY), consumer goods (35- 50% cheaper), insurance coverage (35-40% more affordable), or cost of utilities, etc.

For a comparative tax calculation, it's essential to understand the difference between marginal and effective tax rates.  The marginal rate is the highest dollar tax rate earned. In my example, the highest dollar amount is $500,000.  The effective rate is calculated considering that all the tax deductions will be the percentage you owe the IRS. Simply put, the marginal rate is the tax rate on the last dollar of income, while the effective rate is the average rate at which your earned income is taxed. The US tax system is progressive, meaning that the more you earn, the higher the percentage of taxation you pay, from a low of 10% to a high of 37% for federal income tax. Understanding this progressive tax system will help you accurately calculate your tax obligations and make informed financial decisions.

This couple's Federal tax obligations for individual taxpayers apply to all states located in the USA:

• Income tax (federal) for married individuals filing joint tax returns for a combined income of $500,000. = $102,115.
• Social security (federal) (FICA) = $ 17,074.
• Fed-Medicare (federal) = $ 7,250.
• Additional Medicare (federal) = $ 1,905.
• Summary of Fed taxation: $102,115 (Fed income) + $17,074 (Social Security) + $9,155 (Medicare total) = $129,004 (total annual federal tax obligation).
• Excludes calculations for tax deductibility of home loan interest and property taxes, alternative minimum tax, earned income tax credits, childcare tax credits, and annual exclusions for gifts.

California State Tax obligations and cost of living expenses:

• CA-State income tax rate- income $500,000 = $33,387.
• CA sales and use tax rate of 7.25%. Local jurisdictions may add 1%, making the effective sales tax rate 8.25%. Assuming this couple spent $60,000.
• 60,000 at 8.25% annually on taxable goods, the state sales tax would be $4,950.

CA-State disability tax (SDI) Currently, the maximum is $2,458.

Summary of CA taxation: For the above W-2 employee(s), total annual state taxes with a combined income of $500,000 = $33,387 (State) + $4,950 (State sales tax) + $4,950 (SDI) + $2,458, which will total $45,745 (California combined taxes).

CA-Unemployment tax for employees paid by employer

Employees may have additional withholding for retirement or pension plans.

Employees may be pressured to make donations to charities and labor unions.

• CA-Additional wealth tax currently under consideration: California's governor wants a new surcharge on wealthy persons called the millionaire tax or wealth tax. Various socialist proposals are now under consideration. AB 1253 would tax surcharges of 1% on incomes (jointly or single) for incomes between $1 million and $2 million, 3% on incomes between $2 million and $5 million, and 3.5% for incomes greater than $5 million. This socialist scheme increases one's state tax obligation up to 16.8%. Of course, squeeze the rich of all you can get. For our couple, there would be no new wealth tax. This new tax will impact 70,000 taxpayers in the state. This bill has not yet been passed into law.
• CA property tax will be 1.25% of the purchase price of $2 million or $25,000.
• Before the successful young couple pays their living expenses, house payment, groceries, children's upkeep, and daycare, federal, state, and property tax:
• Federal taxes $129,000, California State taxes- $45,745
• CA Estimated annual family living expenses.
• House payment of $7,161.23 per month or $85,934 annually
• Utilities, insurance, homeowner association dues, and maintenance = $4,000 per month or $48,000 per year.
• Food, clothing, and entertainment = $4,000 per month or $48,000 per year
• The average cost of medical insurance for a family of four in California is $4,173 per year, divided by four family members, or $16,692 annually.
• Car payments, gas, and maintenance for two cars are $4,000 per month or $48,000 per year.
• Pension contribution of $1,000 for husband and wife or $24,000. per year
• Charitable giving 1% or $5,000 per year.
• Daycare of $2,000 per month or $24,000 per year.
• Life and disability insurance is $15,000 annually
• Savings account contingency fund $1,000 per month or $12,000 per year.
• This financially successful couple pays $326,127 in California annual living expenses. If you exclude the pension contribution of $24,000 and the yearly savings plan of $12,000, the total living cost is $297,127. These combined annual living expenses do not include federal and state tax obligations. We assume a nice lifestyle commensurate with their high income level.
• Considering all related expenses, even a family in California making $500,000 per year may be forced to live on the edge. This example shows that this family, which is financially successful and tries to live accordingly, has a net after taxes of $300,251/$326,127 in living expenses. They are upside down. They are spending $25,876 more annually than they make.
• Are there choices for remaining in California? They can make more income, cut back on expenses, cut their pension contributions and saving portion, accumulate credit card debt to finance the difference, or move out of state. In certain respects, some financially successful families in California are forced into renting their lifestyles.
• One of C. Northcote's laws, which he wrote about in his 1957 book Parkinson's Law, was that expenses will always rise to the level of income.
• The above figures are estimates. Consult your accountant for help in your circumstance. Consult your psychologist if you experience severe frustration when you get the answers. Please consult your local moving company when you refuse to take it any longer. Outbound movers are very busy, so you'll need to schedule one.

Wyoming State tax obligations and cost of living expenses.

• Ranks 48^th out of 50 states for shallow tax obligations.
• Zero state income tax.

WY state sales tax is 4%.  Certain counties may add up to 2% extra, but Wyoming has the ninth-lowest effective rate. Assume they spent $40,000 on taxable items at 6%, or $2,400.

WY-Property taxes average effective rate of .61% or over 1%. In this example, the house is $1 million X .61=$6,100 per year.

Wyoming does not use a state withholding form because there is no personal income tax.

WY-Unemployment SUI rates range from .18% to 8.72% for the employee.

The employer pays 1.22% to 2.35% in 2020 for contributions to the State unemployment fund.

No State Disability Insurance (SDI).

If they live in Wyoming before the successful young couple pays their living expenses, house payment, groceries, children's upkeep, and daycare, their total federal, state, and property tax, adding up a combination of federal, state, and property taxes will reflect their net:

• Total Fed taxes $129,004
• Wy state income tax 0
• WY property tax $6,100

WY sales tax =6% X $40,000= $2,400

Combined CA and WY federal and state taxation of $137,504 or 27.5% tax bracket.

72.5% of their earnings, or $362,496, is left after paying federal and State taxes to pay annual family-related expenses,

Plus, there is a significant amount left over for investments.

• Their tax bracket is reduced from CA 40% to WY 27.5%. Due to reduced federal and state taxes, they keep an extra 12.5% annually. This is like an increase in pay of $5,208 per month, family cash flow, or savings before you compare the living expenses between these two states.
• Wy. Estimated family expenses, except for the house payment, are calculated at an average of 62.5% of San Francisco/Silicon Valley's cost. You can look at the cost of living comparisons on the website above. Many expenses, such as daycare and gasoline, will be 50% or less.
• House payment of $3,580 per month or $42,968 annually.
• Utilities, insurance, homeowner association dues, and maintenance = $2,500 per month or $30,000 per year.
• Food, clothing, and entertainment = $2,500 per month or $30,000 per year.
• Medical insurance for a family of four is the average in Wyoming at $ per year times four family members, or $10,432 annually.
• Car payments, gas, and maintenance for two cars are $2,500 per month or $30,000 per year.
• Pension contribution: $1,000 for husband and wife or $24,000 annually. Charitable giving: 1% or $5,000 per year.
• Daycare of $600 per month or $7,200 per year
• Life and disability insurance $12,000 annually.
• Contingency fund for savings of $1,000 per month or $12,000 annually.
• Their total Wyoming annual living expenses, excluding their pension plan contribution and savings plan, are $167,600. If you include the $36,000 pension funding and savings, the total increases to $203,600, or $16,967 monthly combined expense.

The bottom-line comparison of annual cost between living in San Francisco/Silicon Valley, California, or moving to Casper, Wyoming, is that the couple would save in reduced living expenses excluding pension contribution and saving contribution (Ca $297,127—Wy $167,600 or $129,527) and savings from reduced federal and state taxation (Ca-199,749 Wy $137,504 or $62,245).

You have combined annual living expenses and savings from reduced taxation totals ($129,527 + $ 62,245 = $191,399). You are dividing total net savings by 12 = $15,949. Outgoing dollar payments decrease each month by moving out of the state. Or look at it as an increase in cash flow that you get to keep almost $15,949 PER MONTH.

Annual cash savings of $12,000 could be added to your pension fund contribution of $ 24,000, totalling $ 24,000, +$12,000 + $129,527 = $165,527 that you get to keep in your pocket. This could be invested and accumulated for early retirement if you invest $165,527. Suppose you invest $165,527 at the year's end and contribute $165,527 each year for ten years with a compounded reinvestment program. Your accumulated investments could grow to $3,099,283. Compounding your money could grow even more.

These additional savings could also finance a vacation condominium anywhere in the USA that your family desires and many first-class vacations.

As a note of interest, this couple may prefer living in Jackson Hole, Wyoming, but the cost would be higher than Casper's. Jackson Hole is a wonderfully beautiful town with popular culture. Many films have been shot there. It is also home to the Jackson Hole Economic Symposium, sponsored by the Federal Reserve of Kansas City and held annually. Jackson Hole is located within the Grand Teton National Park, one of America's most spectacular, awe-inspiring places. Jackson Hole is one of my very favorite locations in the entire country.

Consumer cost of living comparison between SF, CA, and Jackson Hole, WY

https://www.numbeo.com/cost-of-living/compare_cities.jsp?country1=United+States&country2=United+States&city1=San+Francisco%2C+CA&city2=Jackson%2C+WY

Thank You

Dan Harkey