Written in 2003
About 15 years ago, a young man paid me $100 to suggest just one idea that would save him money. He was in his twenties. Like an idiot, I accepted his offer. I should have handed back his $100 and told him this: “If I can save you money, will you give me half of the savings for three years?”He was a commodities broker. He claimed to make $200,000 a year. I asked him where he lived. He said Portland, Ore. My suggestion was incredibly simple:
Move across the state line to Vancouver, Wash., which has no state income tax. Oregon had a 10% top income tax bracket, but no sales tax. I told him, “Buy all of your big-ticket items in Portland, but live in Vancouver.” Taxes matter.
What amazed me at the time was the fact that someone who was pulling in $200,000 a year as a commodities speculator had never bothered to consider the tax consequences of his geography. His income was not tied to geography. All he needed was a telephone. A few miles up the road was a tax haven. This never crossed his mind.
Texas has no income tax. This creates problems for businesses located just across the state line. Texas business owners in effect receive the equivalent of a tax subsidy. This was especially true before Texas revised the tax code for business in the mid-1990s. In response to the Texas threat, the Arkansas legislature decades ago quietly passed a law that few Arkansas voters know about. The law grants income tax immunity to residents living inside the city limits of the two-states border city of Texarkana. Today, when you drive down State Street, you see all of the banks on the Arkansas side of the line. Taxes matter.
Robert Anderson replaced me at the Foundation for Economic Education (FEE) in 1973 when I decided to go into the business world. He retired from high-tax New York to Wyoming (no income tax), but does his bulk shopping in Montana (no sales tax). That’s whenever he doesn’t live in his motor home at Disney World in Florida (no income tax). Taxes matter.
I lived in Texas for almost 20 years. I moved out of North Carolina in 1979 because I got tired of paying North Carolina’s income tax. It also galled me that North Carolina allowed me to only deduct 15% of my income for charitable donations. Above 15%, I had to pay the state for the right to give away my money. The state offered only two exemptions from this law: you could donate 100% of your money to the state, tax free, and you could donate more than 15% to a university in the state. I called this the Duke exemption. So, when I knew I had a winning direct-mail ad for Remnant Review, I took most of my year’s business profits (almost $150,000 — a good year) and did a mass mailing in late December (a tax-deductible expense for all of 1979), moved to Texas in the first week of January, and collected all of the money that came back in the mail (tripled) in Texas, where I paid no state income tax. That saved me at least $20,000 after moving costs. Taxes matter.
If you could keep an extra 4% to 7% after taxes, compounded, for 40 years, this could make a tremendous difference for your net worth. This is why anyone who lives in a high tax state had better live there because he makes more money than the tax burden costs him, while keeping after-tax expenses as low as he could in a low-tax state. Otherwise, he is giving away his money to bureaucrats. Taxes matter.
THE ANCHOR FACTOR
Most people pay no attention to such matters when they are young. If they live in a high-tax state, they don’t move out of state. When they are middle aged, they are chained to an anchor: grandchildren. They don’t move.
This is why young people should decide in their twenties to move out of a high-tax state. They should then systematically invest their tax savings.
They can buy a lot of things on the Internet and thereby escape paying sales taxes (at least for now). So, a state with no income tax and a high sales tax is less of a burden for smart shoppers. Best, of course, is a state with neither sales tax nor income tax. New Hampshire comes to mind.
There is a Web page that lists all states in terms of their tax burden. The chart is adequate, but it doesn’t consider business taxes as a separate category. For running a business, other sources of information are superior, such as Agora’s manual, “The State Income Tax Report.” But, as a handy-dandy introduction, click here. [gone] Print out the page. Then ponder your economic future.
The thing that grabbed me is this. The #1 state for taxation, from the bureaucrats’ point of view, is Maine. State #49 is New Hampshire, which has a high property tax. The states are contiguous. They provide similar state “services.” They have similar populations culturally. Yet they impose dramatically different tax burdens. New Hampshire’s economy is consistently stronger than Maine’s. Taxes matter.
It’s also worth comparing Massachusetts and Vermont with New Hampshire: same story.
Remember the colored map of which counties went for Bush and Gore? here.
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