Why states with no income tax aren’t as affordable as they may seem?

Ralph
00:00:00

Are you feeling that pinch in your wallet? Do you dream of moving to a state with no income tax, thinking it'll solve all your financial woes? Well, hold onto your hat because today's episode might just turn that dream on its head. We're diving deep into why these seemingly affordable, no income tax states might not be the paradise you're imagining. Stick around to hear the eye-opening story of my client, Jim, who thought he'd struck gold by moving to Tennessee only to find him drowning in a sea of sales taxes. By the end of this episode, you'll have the knowledge to truly make an informed decision about affordability when you're looking at comparing states. So why aren't states with no income tax as affordable as they may seem? Don't get blinded by that dream of paying no state income tax.

Narrator
00:00:48

Welcome to the Ask Ralph podcast, where listening to an experienced financial professional with over 30 years of experience can help you make sense of confusing questions, current headlines and industry trends about taxes, small business, financial decision making, investment strategies, and even the art of proper budgeting. Ask Ralph makes the complex simple by sharing his real world knowledge from a Christian perspective with all things financial.

Now here's your host, Ralph Estep Jr.

Ralph
00:01:17

Let's talk about yesterday's show. Yesterday, we tackled the tricky topic of lending money to friends and family and the tax issues that come out with it. And we talked about emotion than tax and more about emotion than financials, but I'm going to tell you if you missed it, I'm going to highly recommend you go listen, because the truth is we covered some critical points that could save you a lot of heartache and more money down the road.

Now, before we get into today's episode, I'd like to take a moment to share something personal with you. My mother-in-law, Dianne Bethard, is currently battling the late stages of Alzheimer's disease. In light of this, I've assembled a team representing the Ask Ralph show to participate in the upcoming Alzheimer's walk here in Wilmington, Delaware. For those of you in the area, we'd be honored if you'd join us this Saturday, October 16th. If you're unable to attend but still wish to support the cause, we've set up a donation page and you'll find the link in the show notes. Listen, every contribution, no matter what the size brings us one step closer to defeating this devastating illness.

And if you've got any family members going through that, you understand just how truly devastating this is. Your support means the world to us and to the millions affected by Alzheimer's. Cause we know together we can make a difference.

Well now, let's jump right to a question from one of our listeners. And she's been struggling with today's topic. Her name is Dana, and she comes to us from Michigan. She writes this, "Hey there Ralph, I'm at my wit's end with my high taxes in Michigan. My husband and I are considering a move to Florida because we've heard there's no state income tax. It sounds like a dream come true. But I can't shake this nagging feeling that we might be missing something. Are we making the right decision? The thoughts of uprooting my family are giving me sleepless nights. Please help."

Dana, trust me. I hear your frustration, and I am so glad you reached out because your situation is why we need to have this conversation today. I hear what you're saying. You want to escape the income taxes, and I get it. And rest assured, by the end of this episode, I'm going to give you a clearer picture of what a move like that really entails.

I'm going to unpack the hidden cost. Now that's a great play on words, but there are some hidden costs, which many people miss. And I want to remind you, just like Dana, this show is all about answering your questions. That's why it's called Ask Ralph. If you've got a burning financial question, just head over to justaskralph.com and let me know what's on your mind and I will get an answer to your question.

Dana your question reminded me of a powerful verse from the Bible that speaks directly to the heart of our discussion. It comes from the book of Proverbs 14:15. And it says this, and this is kind of harsh. But it says, "The simple believe anything, but the prudent give thought to their steps."

Now I'm not saying you're simple. But it's so easy to get blinded by the allure of not paying state income taxes. But it's also a reminder to us as Christians, that we've got to be stewards of our finances, and we've got to look beyond those surface things, and carefully and thoughtfully and prayerfully consider our decisions because the truth is, spoiler alert, there is no magic bullet. And as I always say, knowledge is power.

So you might ask, "Ralph, why aren't states with no income tax as affordable as they may seem?" While I answer this, let me tell you about my client, Jim. Now Jim, he was a lot like you Dana. He was fed up with the high taxes he's paying here in Delaware. Yup. That's where I live as well. And he decided to make this big move to Tennessee. He was lured by the promise of not having to pay state income taxes. So picture this. Jim's a successful business, small business owner in the consulting business. He was able to work from home.

He's in his mid-50s and here he is packing up his life in Delaware saying goodbye to friends and family and heading south with the dreams of lower taxes dancing in his head. Now he'd done his research or so he thought. I remember he had asked me about some basic questions about Tennessee taxes and whether it was really true that they had no income tax, but he really didn't talk a great deal more about it and I didn't ask for a more robust discussion.

Never told me more about it. And so when I got a call from him, I was actually surprised when he had told me he moved. Now he knew that Tennessee had no state income tax, and he'd calculated how much he'd save each year. And it was a big number as a substantial amount. See, Jim made about $200,000 a year. So in his case, he calculated he would save about $16,000 a year by ditching Delaware and heading to the volunteer state. Truth is, he told me afterwards, he said, Ralph, I was practically giddy with excitement. Well, let's fast forward six months and I got a call from Jim. This was actually my second call after he had called me before to tell me he had moved. And all of a sudden, the excitement in his voice was gone. And you could just tell it had been replaced by frustration and confusion.

And he said to me, he said, "Ralph, I don't understand. I'm not paying state income tax, but somehow, I feel like I'm bleeding money left and right." Well guess what? Jim had found those hidden costs of living in a no income tax state. And they started to rear their ugly heads. You see, because here's a simple truth.

States need revenue to function. It's really that simple. It's really an old-fashioned shell game. If you're not getting it from income tax, they're getting it too from somewhere. They're getting it somewhere else. In Tennessee's case, that was through a hefty sales tax. And see, Jim hadn't factored that in. Jim's combined state and local sales tax rates, which can go up to 9.55%, yes you heard me right, in some areas of Tennessee. And that's one of the highest in the nation. But of course he said, but, but there's no state income tax right. But here's the problem. Every time Jim went to the grocery store, every time he bought new clothes or picked up supplies for his business, he was hit with this tax. See, Jim had discovered that since he liked to spend and needed supplies for his business, the allure of the lack of income tax was being replaced with a sales tax close to 10%. Look, it added 10% to the costs of his life and the costs of him doing business. And Jim hadn't even considered that. But here's the problem. It didn't just stop there. Jim also discovered that Tennessee has higher property taxes. In fact, they are through the roof.

Okay. That's another bad joke, but I thought it was good, because he was used to these sales or the, excuse me, these property taxes in Delaware. But you want to know the real kicker? Jim later realized that as a business owner, he was actually paying more in overall taxes than he'd been paying in Delaware where we don't have any sales tax. The lack of state income tax benefited him personally in Tennessee, that was fantastic, but his business was taking a bigger hit. And it really comes down to consumption versus income taxes.

And most people don't really consider this. If you're buying, you're paying sales tax. Now, I'm not saying that moving to a no income tax state is always a bad idea. But here's the truth. Jim's story illustrates why it's crucial to look at the bigger picture. You've got to take a moment and consider your entire tax burden, not just one aspect of it.

So, let me break it down a bit further. Now currently, there are nine states with no income tax. Those are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Sounds great, right? Ralph, I'm moving to one of those states. Let me start packing my bags. But here's what you need to know. First thing, sales tax. Most of these states have higher than average sales taxes.

Look at Washington for example. It has a combined state and average local sales tax of 9.29%. That's as of 2024. The second thing. Number two, property taxes. Some no income tax states make up for it with higher property taxes. Listen, my son lives in Texas. Texas is notorious for this. Yes, there's no state income tax, but the property taxes are through the roof. Number three, other taxes. Some of these states even have what I'll call unique taxes.

Washington, for example, has a business and occupational tax that affects many small business owners. And the last thing, but not the least thing. The cost of living. Often, these popular, no income tax states like Florida or Texas, they have a higher cost of living in than in other areas, especially when it comes to housing. Especially in those sought after locations. And listen, the impact of these tax structures, it varies depending on your personal situation. There's no cookie cutter approach. If you're retired and living off savings, a state with no income tax but high sales tax might work in your favor, but if you're a business owner like Jim, or if you do a lot of consumer spending, you might end up paying more overall. So you might ask, "Ralph, what can you do?" Well, you know how I roll, man. I'm going to give you some actionable steps.

So the first thing I'm going to tell you to do, and this is one thing that Jim didn't do: He did a partial cost analysis. I'm going to tell you to do a comprehensive cost analysis. You got to look beyond just income tax. Calculate your likely expenses for housing, for food, for transportation. And don't forget about this one, healthcare in the new state. Because every state's going to be different.

Number two. Consider your lifestyle. You got to ask yourself a real simple question. Are you a big spender on consumer goods? Do you own a business? Because the truth is these factors will affect how different tax structures will impact you. You've also got to think long-term. You got to consider how your tax burden might change as you age, or if your income changes. Because here's the truth.

I've found that my retired clients generally spend more on retirement since they have the time to do things. And if you're paying tax on spending, that can really add up. Fourth thing. Consult a professional. A financial advisor or a tax professional like me can help you crunch the numbers and see this whole picture.

I can certainly help you in making that decision. And I'll talk about how to make an appointment with me later in this show. And number five. I can't stress this one enough. Visit before you move. Spend time in a state you're considering. Talk to locals, especially those in a similar financial situation to yours. Get informed. It's the key to making the best decision. Remember, if you haven't heard anything else I've said, there's no one size fit all solution when it comes to taxes and affordability. What works for one person might not work for another. The key is to be informed and to make a decision based on your unique circumstances. Now let's take a minute to recap cause I know I dropped a lot of stuff on you. We've learned that states with no income tax often make up for another way. They're going to get taxes one way or another, whether that's through sales tax, property tax or any other means. We've seen how this played out for my client, Jim.

He thought he was making a great financial decision. He thought he was making a smart financial move. But in the end, it ended up in a worse position. And we also discovered the impact of how these different tax structures can vary based on your personal situation. And guess what? Here's the rest of the story.

Guess what? After living in Tennessee for just over two years, Jim packed his stuff and came back to Delaware. He told me, well, you know, Ralph, I missed my friends and family, but I think it was more about he missed his money. So remember, it's not just about the money, it's about your lifestyle and it's also about what's important to you. Now, maybe you've heard all this and you're feeling overwhelmed by all this information. Well, don't worry. That's exactly why I'm here. I would love to help you navigate these complex financial matters and create a personalized plan that works for you. Whether you're considering a move like Dana, or you're just looking to optimize your current financial situation, I'm here to help. I'm going to take a look at your overall financial situation. Maybe you just want to make sure you're on the right track.

I would love to help you. You can schedule an appointment with me by going to askralph.com, click on the banner that reads "Book a call with Ralph" and I will work with you. I will help you move from living paycheck to paycheck. Maybe you say to me, Ralph, I feel like I'm taking three steps forward only to get kicked back four steps. I will help you achieve freedom.

I will help you find that and break free from that financial bondage to improve your personal finances. Maybe you're like my client that I met with yesterday. He's struggling with his business. He needs help with his business finances. He needs to understand how to grow his business. And he's looking for ways and you might be looking for those same ways to help you achieve all your financial goals.

So let's start today. Let's create that personalized plan just for you. For a $150 consultation fee, which I will refund you if we're not able to create a personalized plan that exceeds your expectations. So don't let the complexity of state taxes keep you up at night like they're doing for Dana. Schedule your appointment today, and let's create a plan that will set you on the path to financial freedom. And speaking of freedom, don't forget to tune in tomorrow.

We'll be discussing what are 9 signs that show that I'm financially secure? Now, let me tell you when I was preparing for that one, that was a doozy. So it's an episode you don't want to miss. And remember this. My passion is to help you achieve financial success. That's why I turn on this microphone.

I turn on this camera and I want to see you live out your dreams and find your kingdom and find your purpose. And more importantly than that I want to help you grow in your faith during the same thing. And I know working together, if we work together, if you make that consultation appointment with me, we can master your finances from that Christian perspective. So as I always say when I close, stay financially savvy, and God bless you.

Narrator
00:15:14

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And remember, financial issues don't have to be complicated, just ask Ralph. The information contained in this episode of Ask Ralph is based on data available as of the date of its release.

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