I live in Illinois, a state with one of the highest net migration losses, even prior to COVID19. The biggest reason for the exodus? Taxes.
I hear it all the time, “I love Chicago, but the taxes are too much.” Or, “Chicago is a wonderful city but the taxes are so high, I’d never raise a family here.” I am obviously all for saving money, however, I wonder what the return is for leaving a city that you love.
For most people, the largest tax expense is federal income taxes. The federal income tax rate varies by income level, somewhere between 10% and 37% in 2020, and does not change based on where you live, so long as it’s within the United States. However, there are several other types of taxes that can vary significantly based on where you live such as state/local income taxes. But how large is the impact of these variable, smaller taxes? Let’s dive in.
We’ll compare three relatively large cities across the U.S.; Chicago, Denver, and Charlotte.
For simplicity, let’s assume the household income is $200,000, of which $30,000 is subject to sales tax. Let’s also assume ownership of a $500,000 residential home.
The first big tax bucket that varies by location of residence is state income taxes. In Illinois the state income tax rate is 4.95%, or $9,900 on $200,000 of income. In Colorado the rate is 4.63%. North Carolina has the highest state income tax rate of 5.25%. The tax rate differences across the three states chosen for this exercise are relatively minimal, 0.62%. Keep in mind, California’s state income tax is a whopping 13.3% while Florida, Texas and a few others are 0%.
Note that there are some nuances in state income taxes. For instance, Denver also imposes a flat tax of $5.75/month on income greater than $500 ($69/yr.). Additionally, some cities across the U.S. impose additional local income taxes such as New York City.
Another tax bucket that varies by location of residency is property taxes. There are many nuances in county property taxes. For simplicity I’ve calculated the effective tax rate on a $500,000 house in the three counties and have linked my sources for these effective rates. In Cook County (Chicago), the effective property tax rate is ~1.87%, or $9,350/yr. on a $500,000 single family home. In Denver County, the effective property tax rate is ~0.52%, one of the lowest in the country. In Mecklenburg County (Charlotte), the effective property tax rate is ~0.97%.
Again, the difference in property tax rates across the three locations is less than 2%, however, this tax rate is based on the value of property vs. annual income. As many individual’s own property valued at 2.5x income, the 2% variance in property tax rates is approximately a 5% variance of annual income.
A third variable tax bucket is sales tax. In Cook County the state and local sales tax is 10.75%, or $3,225 on $30,000 of expenditures. In Denver County the state and local sales tax is 8.31% compared to 7.25% in Mecklenburg County. As not all income is subject to sales tax, typically only 14%, this tax is not nearly as significant as property and income tax.
Below is a chart summarizing the above tax considerations:
Limiting all other factors, Chicago is the most expensive city of the three. In comparison to Denver, Chicago is $8,122 more expensive on an annual basis. That’s just over 4% of a $200,000 annual income.
Based on the above, I will not accept taxes as the sole reason for a move. 4% is too slim a margin. That’s not to say that I don’t recognize all of the other factors for a move, geographical features such as mountains and oceans, school districts, neighborhood safety, a front yard, and job opportunities among so many others. Any one of these things can certainly change the margin. As can proximity to friends/family. I’d probably spend $8,000 on skiing alone if I moved to Denver. Not to mention the 4% salary hit I’d probably take and increased travel expense to visit family in Illinois.
You’ll have to get more creative than “taxes” to convince me to leave such a wonderful city.
