The Changing Picture of State Taxes

State and local taxes are a higher portion of retirees’ expenses than in the past. These taxes are a more important factor in people’s decisions of where to live in retirement. Yet, many people are making decisions with the wrong information.

If state and local taxes are important to you, do not rely on information even one year old to choose your retiree tax haven. States and localities changed their tax structures significantly in the post-2000 revenue decline. Some traditionally low-tax states hiked their revenues. Some states managed to cut taxes.

As a result, relative tax burdens changed dramatically, and that changed the rankings of the states.

Take a look at an annual survey done by Bloomberg Wealth Manager. In 2000, the best 10 states for retirement based on tax burdens were: Wyoming, Louisiana, Alabama, Nevada, Washington, Tennessee, California, Arizona, Alaska, and Utah. For 2005, the rankings changed significantly. In order, the top 10 states were Hawaii, Wyoming, Delaware, Alabama, Louisiana, Nevada, Alaska, Colorado, Washington, and Arizona.

Changes made by the states were striking and had dramatic results. Oklahoma enacted an income exclusion for retirees and eliminated taxes on capital gains. Its rank rose to 19, from 27 in 2004 and 29 in 2000. Massachusetts, once among the highest tax states, now is ranked as among the most favorable for retirees at 20.

Some traditional low-tax states have reversed course. My state of Virginia dropped five levels to 23 after increasing the sales tax and eliminating its $12,000 retiree exclusion. Arkansas dropped seven slots to 28 because of a significant sales tax increase and other tax hikes.

Here is a constant anomaly. Many people move to Florida for retirement, citing its lack of income and estate taxes as a reason. Yet, Florida never is in Bloomberg’s top 10 for retirees. Its property, sales, and intangibles taxes override the other benefits in Bloomberg’s calculations.

If you are considering a move for retirement, do not rely on a state’s reputation from years past. Also, remember the local levies can be significant. It pays to get a feel for the state’s recent trends in taxes and its political climate. You don’t want to be one of those people who moved to a tax haven only to see taxes rise.

General information about a state’s tax burden can be obtained from the Tax Foundation at taxfoundation.org. State web sites usually offer significant details about taxes. Many state and local Chambers of Commerce have information with tax law details. It might pay you to have a local tax professional use last year’s tax return to estimate what your taxes would have been in the new state.