About 15 years ago, a young man paid me $100 to suggest just one idea that would save him money. He was in his 20s. 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 20s 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. 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? I like this version better: it has the Democrat counties in red.
New Hampshire went for Bush by about 7,000 votes. Nader got about 21,000 votes. So, the state’s four electoral votes went to Bush, which won him the election. (Forget about Chad; remember Ralph.)
States without state income taxes are these: Alaska, Wyoming, New Hampshire, Florida, Tennessee (earned income), Texas, South Dakota, Nevada, and Washington. Washington has a “no income tax” clause in its constitution, which takes a 2/3 majority to amend. This has been attempted repeatedly; voters have always rejected the proposed amendment.
When we think of economic opportunities, we usually think “salary.” Salary increases are usually tied to promotions. They are also tied to the decisions of our bosses as to how much we are worth.
When I think of economic opportunities, I think “business,” followed closely by “real estate.” This means counties, not states.
I then think “taxes.” This means states, but to a lesser extent, it means counties.
Ultimately, we ought to think “lifestyle.” That’s what really matters. If we pay more taxes but enjoy such benefits as greater safety, better cultural opportunities, communities of similarly minded people, then the money forfeited is worth it. Taxes then become payments for overall lifestyle received — not state “services.”
I live in Northwest Arkansas. The lifestyle here is worth paying for. I am in state #40, according to the tax chart. That’s pretty good. I am buying business opportunities and lifestyle. But I would be unwilling to live in this #40 state in most other regions of the state. Counties matter.
If I were to experience a huge increase in my income, I would buy a similar lifestyle in the #47 state: Tennessee. For pure lifestyle, I would locate in the northeast corner. But because of the residences of two of my children, now Tennesseans, I would locate closer to Nashville. Tennessee is a wide state. Johnson City is too far from Nashville and Memphis.
These are the kinds of calculations that few Americans indulge in, despite their unprecedented geographical mobility. They think “salary and family” and not much else. Cost of living enters in when they are moving from a place like Arkansas to a place like San Francisco, or the reverse, but otherwise, not many people think about cost of living.
But retirees do. Californians are reversing the great westward migration of the 1930s. They are becoming Arkies. They choose a place like Northwest Arkansas because it feels more urban, less Arkie. Northerners have been moving to Asheville, N.C., for three decades. The beauty and lifestyle are good, and taxes are no worse than in northern states, New Hampshire excepted. The very rich live in Naples, Fla. in the winter and Asheville in the summer.
The richest Americans live on Jupiter Island (average home price: $5.6 million) in the winter and Mt. Desert Island, Maine, in the summer — not long enough to establish residence. Add Jekyl Island, Georgia, to the list, and that’s where the elite meet to eat. (Duffy ain’t here, nor are his peers.)
PAYING EARLY FOR YOUR FUTURE LIFESTYLE
A young married couple may choose a big city because it offers better pay for young men who are just starting out. I recommend to such couples that they select lifestyle from day one. Where would they like to retire? Move there now. Start buying real estate. Start putting roots down in the area where they will be buried.
If this requires working at low wages for a time in order to build up a small business, do it. If this involves turning down a future transfer, even if turning it down means getting fired, do it. Buy lifestyle on the installment plan: no money down, 50 years to pay.
Commuting is generally wasted time unless you use the drive time to learn things that will advance your career or your income or your calling. (Calling: the most important thing you can do in which you would be the most difficult to replace.) Time is precious. A high-paying job that eats into your time is not a good job unless you own the company.
It is difficult for young men to believe this. In life’s inescapable trade-off between time and money, young men think they are long on time and short of money. This is usually a mistaken evaluation. Money can compound; time always contracts. We are short of time.
This means that we usually must pay for our future lifestyle with forfeited early money. We must live poorer early in order to live better later. This is true of our investment of money. It is also true of our investment of time. Because of the heavy anchor of family ties, the cost of buying a better lifestyle late in life is prohibitively expensive for most people unless they started buying it early.
Up the road 40 miles from me is a visible testimony to this truth: Bella Vista, Ark. For decades, it has been a retirement community for Chicagoans and similarly deprived lifestyle victims. They come for golf: nine local courses. The wife builds her dream home. The husband plays golf. They join a country club. Then the husband drops dead. The wife moves back to her family up north. She sells her dream home. You cannot imagine the nice homes that you can buy cheap in Bella Vista. Ten years ago, before the Californians started pouring in, they were even cheaper.
Before Punta Gorda, Fla., became a hot market three years ago, it was the same story. It may still be.
Taxes matter. Lifestyle matters even more.
You should make a decision soon. Do you intend to retire? If so, do you intend to retire into another occupation or calling? Unless you are very rich — a multimillionaire — your golden years will be employment years. Social Security and Medicare aren’t going to be there when you need them.
You should begin to identify towns with low real estate costs. Look for cultural support institutions, such as a college or university that offers concerts and plays, plus a large library. Consider buying a rental home there that you can retire into later. Make the transition less expensive.
If I lived in an area with very high real estate costs, such as Boston, where a parking space sells for as much as $100,000, or San Francisco, or southern California, I would consider moving out of my home and renting it, thereby establishing it as an income-producing property. A year from now, I would sell it or exchange it on a tax-deferred basis for several rental homes in the town where I intend to move. (See Section 1031 of the Internal Revenue Code.) Anyone age 55 or older should sell such a residence now and use the one-time tax-free capital gains to buy several rental properties outside the region.
Most people are tied to emotional anchors. They cannot bring themselves to cut the chain. This offers investment opportunities for the handful of people who see what the future is likely to bring: price inflation, rising urban crime, higher taxes, and a disguised default of Social Security/Medicare.
One way or another, you are buying a future lifestyle. Pick it now. The longer you procrastinate, the more expensive it will be when it comes time to buy.
October 4, 2003
Copyright © 2003 LewRockwell.com