Casey Schwab
Casey Schwab

It’s tax season, which means Americans are keenly aware of the price of their civic duty. But, as WalletHub points out, not all state taxes are created equal.

The business news site spoke with Casey Schwab, assistant professor of accounting, about why states differ on tax rates and how that has changed over the years.

An excerpt from that interview appears below:

Do people consider taxes when deciding where to live? Should they? 

Taxes are generally not the primary determinant of where a taxpayer chooses to live. However, ignoring state and local taxes can substantially reduce an individual’s after-tax income. For example, taxpayers living in Texas do not pay state income taxes while taxpayers living in New York City are subject to substantial state and city income taxes. Taxpayers also need to consider property, sales and various other forms of taxes. 

Individuals are most likely to take taxes into account when there is substantial variation in taxes within a close geographic proximity. Living on a state border often creates such variation. For example, although the linked document is not current, it displays variation in taxes across state lines. There is often substantial variation in income taxes, sales taxes, property taxes and even excise taxes (e.g., alcohol, cigarettes, etc.) across county and state borders. 

How can state/local tax policy be used to attract new residents and stimulate growth? 

In general, lower corporate state taxes make it less expensive for a company to operate within the state, which entices corporations to shift operations to that state. Similarly, lower individual state taxes make it less expensive for sole proprietorships and partnerships to operate. Lower individual taxes also make it less expensive for an individual to live in that state because the individual is left with higher levels of after-tax income and, presumably, greater after-tax purchasing power. 

Note this discussion focuses exclusively on explicit taxes (e.g., taxes paid directly to a taxing authority). As more businesses move to a state to take advantage of the tax savings, implicit taxes can occur. From a business standpoint, if lower explicit taxes stimulate growth, the increased demand for productive inputs (e.g., labor, raw materials, etc.) can increase the cost of those inputs and lower firms’ pre-tax profits (or rates of return). Implicit taxes equal the reduction in the pre-tax return and, in the long run, often offset many of the benefits of lower explicit taxes. As a basic example to illustrate this point, if businesses move to a state in response to lower explicit taxes, there will be increased demand for the current labor force which will drive up labor costs (i.e., people get paid more as more companies compete for their services). Those increased labor costs can reduce a firm’s pre-tax profits (which is the definition of an implicit tax). 

How has the total amount families pay in state and local taxes changed as a result of the financial crisis? 

My response is a conjecture and not based on hard data. Given the financial crisis resulted in lower real property values, many families have lower property tax bills (assuming tax rates have stayed the same). Due to many states’ tax revenue shortfalls, I know some states have increased state income tax rates which will increase a family’s tax bill. I do not know if there have been many changes to state and local property tax rates, sales tax rates, excise tax rates, etc.