Thinking About Moving to a State With Lower Taxes? Here Are the Mistakes to Avoid

This week, I mentioned that a recent analysis by the Tax Foundation showed that North Dakota, Kentucky, Nebraska, South Dakota and Texas — the four states with the lowest state and local tax burdens — also have the lowest costs of living, particularly for a college graduate.

However, the tax model for these states typically isn’t so much the flat tax as the sliding scale, where the state takes over most of the tax burden — essentially a personal income tax on top of the income tax federal law already mandates.

There are other basic structural changes that would also make tax reform possible, and it’s important to do them, too.

One key tweak is getting rid of corporate income tax in states that don’t already have it (though, as I’ve pointed out, there’s really no reason why the IRS should set up shop in any state that has an existing income tax, or multiple rates, so long as the state taxes consumption like states that have income taxes, like Nebraska, or put income taxes toward education like Kansas, and not tax consumption like Massachusetts.)

Some liberal commentators were aghast when I mentioned this. “Corporate income taxes are tiny anyway!” they cry. Yet you know why our corporate income tax is tiny? Because for decades, state governments have been soaking up corporate profits that have naturally flowed into states that don’t have corporate income taxes, like Delaware and New York, rather than spending that money on schools or other vital services.

Another tricky angle, admittedly, is implementing a sliding scale (or even abolishing state income taxes altogether). But given our present budgetary mess, such a change wouldn’t cost much and might actually enhance incentives toward wealth creation.

Think about it: If you had to pay income tax on every penny you earned, you would rightly sit on your cheques (or carry them around in your pockets) until the next tax season. That discourages most people from saving much at all.

So replacing the income tax with a sliding scale of income tax rates would make people think twice about how much they earn, and be of much help to them in planning how to get by, and what they are going to buy next year.

The bottom line is that it makes little sense to fight with the federal government or other states over where to spend budget money, when the basic structure of taxes has been confounded by Trump’s tax code.

Or as the Tax Foundation analysis put it: “Consumption taxes, other state income taxes, mortgage interest taxes, estate taxes, sales taxes, and excise taxes form the broad base of taxation in all states.”

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