Florida, Texas and Tennessee have become hot real estate markets in recent years, in part because they offer the appeal of low taxes and a cheap cost of living.
But a new analysis of how much state and local taxes cost rich and poor residents in those states throws cold water on the assumption that moving to such states is a smart move in tax terms.
States, including Florida, Texas and Tennessee, don't offer the tax savings that pictures of lower taxes might suggest, especially for low-income families, according to a new analysis that measures the effective state and local tax rates paid by different income groups. From the Institute on Taxation and Economic Policy, a left-leaning tax think tank.
“States described as ‘low-tax’ often have high taxes on low-income families,” ITEP said in the report. “At the national level, we find evidence that states that impose lower taxes on higher income earners tend to impose higher taxes on their lower-income residents.”
ITEP's analysis found that Florida, Texas and Tennessee rank high on the list of states where state and local taxes are regressive, resulting in a deeper impact in the portfolios of lower-income residents than in the portfolios of higher-income residents.
This is the case even without a state income tax, the ITEP researchers said.
According to the report, a host of other taxes are responsible. So does the heavy reliance on property taxes and the scarcity of tax breaks that can be turned into refunds, she added.
The Sunshine State's taxes create a wide gap between the effective state and local tax rate for the bottom 20% of households and the top 1% of earners.
While low-income families in Florida spend 13.2% of their income on state and local taxes, the richest 1% in Florida spend 2.7% of their income on state and local taxes.
Nationally, the lowest-income families pay 11.3% of their income in state and local taxes, the report estimates. The richest 1% hand over only 7.2% of their income.
Tennessee ranks third on the report's “Tax Inequality Index,” behind second-place Washington State, which also lacks an income tax but recently added a capital gains tax for high-income earners and a tax break for families.
Texas ranks seventh, behind Nevada (5th) and South Dakota (6th) — also without state income taxes.
California and New York rank 47th and 48th, respectively, while Washington, D.C., is at the bottom of the index.
“Most government tax systems are regressive, meaning the less you earn, the more you pay,” said Carl Davis, director of research at the ITEP Institute and lead author of the report. “Often, we call this an inverted tax code because it is the exact opposite of the type of progressive taxation that a large segment of the public supports.”
More than half of people, 52%, say the government should redistribute wealth by imposing higher taxes on wealthy households, according to a 2022 Gallup poll. The poll numbers have been on this point since 2013.
The ITEP report comes as more states are cutting their income taxes. More than a dozen states are cutting income tax rates this year, continuing a recent trend in which more states have rolled back some of their taxes.
A state's public perception of “low taxes” or low tax revenue collections are “reliable indicators” that taxes will be low for the wealthiest residents, the report said. However, it “tells us almost nothing about the level of tax being imposed on low-income households,” the report continued.
For Sadaf Knight, CEO of the Florida Policy Institute, the report is an opportunity to flip the script in her state.
The low-tax reputation is “part of our identity and something people really promote as the reason people live in Florida.” But the lack of a personal income tax is also “a driver of our unfair tax code.”
Knight's organization has been pushing for a statewide earned income tax credit. More than 30 states now have the tax credit built into their law, targeted at low- and moderate-income families, according to the National Conference of State Legislatures.
Florida ranked No. 1 on ITEP's list of “most regressive” state and local tax systems, up from No. 3 in 2018, when ITEP last conducted the analysis.
Florida, Texas and Tennessee remain hot spots
At that time, Florida and Texas, among other Sun Belt states, emerged as favored resettlement destinations. Recent data from U-Haul UHAL,
Clarify the trend.
When people needed to rent trucks one way, U-Haul reported that Texas and Florida were the top destinations. Since 2016, Texas has not ranked second on U-Haul's annual list of places where do-it-yourself moves happen. Florida has been among the top four growing states for nine consecutive years, U-Haul said.
Read also: Why Jeff Bezos' move to Miami is a great 'tax play' for the billionaire
Tennessee ranked fifth on U-Haul's list this year, while New York ranked 43rd and California ranked last.
What's going on?
“I think in general taxes rank pretty low on the list of reasons people move from one state to another,” Davis said. Housing costs, wages, beds and weather are all important parts of the mix, he noted.
He said the different tax cuts may be stark for the richest and poorest residents, but the differences are smaller in the middle bracket of households.
Other cost-of-living metrics help explain the appeal of places like Florida, Texas and Tennessee. The 2023 average cost of living in those states was below the national average, according to the Council for Community and Economic Research.
The nonprofit, which counts state and local business groups among its members, has a long-term index that compares the cost of living in different parts of the country.
State and local taxes are only one part of the landscape for taxpayers, while federal taxes loom large, said Jared Walczak, vice president of state projects at the Tax Foundation, a right-leaning tax think tank.
He said the buildup to the rising tax bill for higher earners and benefits targeted to lower-income families and the federal tax code is “very, overwhelmingly progressive.”
Many states don't have tax rules that get steeper at the top “not because they don't care about providing care to low-income families. They realize that the state's tax code may not be the best place to do that.”
He said that countries compete with each other to attract people and companies. “Many states have found that the path to greater prosperity for all their residents is a more neutral tax policy focused on lower rates and more competition.”
With federal taxes in the mix, Davis said taxes become steeper at higher levels — even if their amount is subject to debate.
“It's been the case for many years that people think high-income families don't pay enough,” Davis said. “The fact that states tend to tax wealthy residents at a lower rate certainly plays a role in the public’s frustration with the overall tax system.”
