Today’s post is written by Mrs. PoP, the better half of The PoPs, a 30-year-old couple that blogs about their journey in search of Money, Happiness, and Kittens over at Planting Our Pennies.

Femme Frugality kindly invited me, Mrs PoP, over to her site to talk about income taxes, since Mr. PoP and I tend to look at income taxes from a uniquely frugal person’s perspective. Thanks so much, Femme!   Remember the old saying, “There’s nothing as certain as death and taxes”? Well, that might not be quite so true. No, we haven’t yet found the fountain of youth – though we are celebrating the 500th anniversary of Ponce de Leon’s search for just that in Florida this year. Since his search failed, death is still a certainty. So that means it’s taxes that are less certain than many would have you believe. A disclaimer – I’m not here to talk about U.S. federal taxes. In the U.S, we’re all subject to those federal taxes (FICA, income, estate, etc.) equally*. The uncertainty in taxes comes when we start looking at state and local taxes that can vary pretty dramatically based on where you live.

Two Main Types of Local Taxation

There are two overarching categories that most state and local taxes can fit into. They are either:

• Taxes based on your income – these are taxes on your wages, interest, dividends, etc. or
• Taxes that are based on your consumption levels – think sales tax, property tax, or car registration fees

Taxes on Income

These are the taxes that affect those who earn income fairly equally. And realistically, that’s most of us. Yes, many states have progressive income tax rates like the federal government, but you don’t really get a choice as to how much of your income you’d like to pay taxes on.

Taxes on Consumption

In contrast, taxes on consumption (like sales tax and property taxes) give the taxpayer (that’s you and me!) much more control over how much we want to pay in taxes. Want to pay less in sales tax? Buy less stuff! Want to pay less in property tax? Buy a smaller (read cheaper) home!

Not Mutually Exclusive

Don’t assume that because I’m talking about these two different types of taxation that they are mutually exclusive. Or that they balance each other out. Many states with high income taxes also have high property and sales taxes (*cough* California and New York *cough*), so it’s important to consider both pieces of the equation.

Taxes From a Frugal Perspective

Proof of that Kitty PoP is utterly dependent on us – He crawled down a pair of Mr. PoP’s pants and got stuck!

Frugal people, like Femme Frugality here, like to get the most bang for their buck. But they also know that there’s a difference between being frugal and stealing. Mr. PoP and I don’t use any tricks to minimize our tax bill. Heck, we don’t even qualify for itemized deductions and we’ve never tried to pass Kitty PoP off as a dependent – though he really is entirely dependent on us for survival. What we have done is chosen to live in a place that taxes what we spend rather than what we earn, which helps maximize the benefits of our fairly frugal lifestyle. We think of it as a “choose your own adventure” approach to taxation, since we choose the amount of taxes we pay based on the lavishness of the lifestyle we choose to lead. Our chosen frugal tax home is Florida, where we have 0% state income tax, and our county has a relatively modest 6% sales tax. Millage rates on property taxes (2% in our county) are in the middle of the pack compared to nationwide property tax rates, but generous exemptions for permanent residents in Florida brings that the effective rate quite a bit. After the exemptions, our property tax rate was about 1% last year.

It’s Not Just Florida!

As it turns out, Florida isn’t the only state that provides more of a “choose your own adventure” approach to taxation. There are seven states that have no income tax whatsoever (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming), and two more that only tax dividends and interest (Tennessee and New Hampshire).

 

Let’s Look At Some Numbers

Just for giggles, I wanted to see what our state taxes would have been last year if we had lived in different states across the country. So I tried out this state calculator as a comparison. (Seriously – it’s a handy little calculator to play with.) I used our gross employment income of $184K that you can see on our 2012 shareholder letter and claimed an exemption for me, Mr. PoP and zero dependents. Just like our federal taxes. So how do different states stack up?

• Florida: $0
• California: $11,811
• New York: $10,775
• New Jersey: $8,555
• Colorado: $8,519
• Arizona: $6,048
• Pennsylvania: $5,520

But note – none of these values include additional city/locality income taxes that I know NYC has, and FemmeFrugality has mentioned that Pittsburgh has as well.

The Moral of the Story

State and local tax bills add up, big time. Even before adding in any amounts for property taxes in these other states, it’s clear to see that just the state income taxes in all of these jurisdictions are well over the $1,846 that we paid last year in property taxes. That’s almost $10K less than we would have had to pay just in income taxes if we lived in California. And I may be partial, but I think Florida beaches are nicer, too! So if you’re thinking of moving, or just not really tied to the state you’re living in, it’s definitely worth considering the impact of state taxes when evaluating how the move is going to affect your bottom line.

How much are you paying in state income taxes? Would you consider moving to a state that had lower tax rates or a more “choose your own adventure” approach to taxation?

* By equally I mean we all play by the same tax rules for federal taxes. Don’t need to provoke any political discussions here…

*FF note:  Thanks so much for contributing, Mrs. PoP!  Such a great article with so much information—I originally asked Mrs. PoP to guest post because I had no idea that some states had 0% income tax!  The City of Pittsburgh has the highest locality tax I’ve ever had to pay at 3%, and this is the first year our state taxes have eclipsed that rate at 3.7% income.  Looking at the compared stats I guess I shouldn’t be complaining!  Now if we could just get the city to plow our roads every once in a while…*