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Which are the least tax-friendly states in America? California doesn’t crack top 10, but Illinois sure does

Published: Oct 2, 2019 10:01 a.m. ET 

 

Plus, some of the main tax questions you need to answer before you relocate in retirement

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Illinois is the least tax-friendly state in the U.S., according to a new analysis by Kiplinger's based upon the burden faced by a hypothetical family of four. 

By

CATEYHILL

EDITOR

 

It’s taxing to live in this state. 

Kiplinger’s 

This week, the personal-finance publication Kiplinger’s released its list of the most — and least — tax-friendly states in America. To draw its conclusions, it used a hypothetical couple with two kids and $150,000 in income a year plus $10,000 in dividend income, and then looked at the income-, property- and sales-tax burden that family would face. 

Illinois took the No. 1 spot on the list, thanks in large part to its high property taxes. The Land of Lincoln was followed by Connecticut and New York, both of which have pretty high-income taxes. 

The 10 least tax-friendly states: 
1. Illinois 
2. Connecticut 
3. New York 
4. Wisconsin 
5. New Jersey 
6. Nebraska 
7. Pennsylvania 
8. Ohio 
9. Iowa 
10. Kansas

Meanwhile, the most tax-friendly states (in order) were Wyoming, Nevada and Tennessee. The first two don’t levy an income tax; Tennessee has an income tax, but it only applies to interest and dividends and not to salaries and other wages.

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The 10 most tax-friendly states: 
1. Wyoming 
2. Nevada 
3. Tennessee 
4. Florida 
5. Alaska 
6. Washington 
7. South Dakota 
8. North Dakota 
9. Arizona 
10. New Hampshire

One surprise? California, widely considered a high-tax state, didn’t crack the top 10 least-friendly tax states. (Of course, it’s important to point out that this Kiplinger’s ranking would look different if the hypothetical family and its income and dividends were different.)

See: Three cities that ‘have it all’: Chicago, Porto and Melbourne 

Rocky Mengle, the tax editor for Kiplinger’s, told MarketWatch that’s because many people “when they talk about California tax, they focus on the 13.3% [income tax] rate, which is the top rate — but that is for people making more than $1 million.” For many others, the rate is much lower, he said, adding that “California has a fairly progressive income tax, with nine brackets.” 

Mengle added that these kinds of analyses are often useful to people looking to relocate, such as in retirement. He said retirees should “pay attention to what type of income they are going to be relying on in their golden years.” That’s because states can tax income, Social Security, money from an IRA or 401(k), rental-property income and other sorts of income differently. 

For example, Social Security income is not taxed in most states, but 13 states do tax it: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. Even then, they don’t all tax it the same. 

Retirees may also want to consider inheritance and estate taxes in the places they might consider moving to. Right now, 13 states and Washington, D.C., have an estate tax, and six have an inheritance tax. This NerdWallet guide can walk you through that. 

Guess who they'll come after next...

Here’s how ‘Milk-the-rich’ will backfire in NY

Mayor Bill de Blasio may want to “tax the hell out of the wealthy,” but a Citizens Budget Commission study out last week warned that the city and state are already too reliant on tax revenue from the rich.

Taxpayers with $1 million or more in taxable income accounted for 1 percent of personal-income-tax filers in fiscal 2016 but paid 37 percent of the state’s personal-income taxes, the study noted. In the city, those earning over $1 million paid 39 percent of the personal-income taxes.

Yet the incomes of these top earners are “highly volatile” and “sensitive to economic trends,” says the CBC, especially since much of their earnings come from capital gains, which can vary greatly year to year.

And when incomes swing, so does tax revenue. Budgets that rely on those revenues can face sudden, unexpected surpluses — or huge, painful shortfalls. In fiscal 2008, for instance, the state’s personal-income tax revenue jumped by $4.2 billion; the next year, it plunged by $5.7 billion.

Meanwhile, state and city spending plans bake in ever-higher outlays; once something gets a line in the budget, it’s almost impossible to cut its funding. Which is why budget shortfalls mean budget crises.

Here’s the really bad news: Both the city and state are already projecting multibillion-dollar gaps over the next few years. And everyone says the economy’s next downturn is just a matter of time.

Meanwhile, the state’s high taxes on millionaires only encourage them to flee the state. They won’t be around to help stem the red ink when it starts to flow.

The epidemic of budgetary dishonesty

Pritzker's Untruth: Illinois' Budget Is Billions Out Of Balance

by Tyler Durden

Tue, 06/11/2019 - 10:05

acebookReddiEmaPrint

Authored by Ted Dabrowski and John Klingner via WirePoints.com,

Gov. J.B. Pritzker says Illinois’ budget is balanced ”for the first time in decades.” That’s the claim he made upon signing Illinois’ $40 billion budget for 2020. Pritzker’s claim is simply not true. According to the state’s own actuarial calculations, his budget is billions in the red.

A big reason for the unbalanced budget comes from how politicians account for the state’s retirement debts versus how financial professionals do. There’s often a gap of several billion dollars between the two. Hiding that gap has allowed Illinois pols to perpetuate the myth of balanced budgets for decades.

Take Pritzker’s 2020 budget. The state’s pension funding laws, set up nearly 25 years ago by the General Assembly and then-Gov. Jim Edgar, require the state to pay $9 billion* to Illinois’ five state-run pensions in 2020. “We are paying the full payment that is required under the ramp that was put in place in 1995, the statutory required payment,” Pritzker said when he signed the budget.

But what Pritzker ignores is the amount the state’s own actuaries say is required to properly fund Illinois’ pensions in 2020, an amount that exceeds $13 billion. That’s a total shortfall of $4 billion.

And it’s not just pension payments that are being shorted. It’s also payments for state-worker retiree health insurance that are grossly underpaid.

State actuaries calculate the required payments for those benefits at about $4 billion annually, yet the state has only paid around $1 billion yearly in recent years. That’s billions more in shortfalls that Pritzker’s budget ignores.

Defenders of the “balanced-budget” claim will want to paint the above as a matter of semantics. But the billions in shortfalls are not only a matter of accounting. When the state continues to grow its pension promises faster than it can pay for them – and then doesn’t pay enough into its state-worker retirement plans – it doesn’t balance the budget. The state’s debts jump as a result. Illinois’ skyrocketing pension and retiree health insurance debts are the evidence of that.

Illinois not even “treading water”

Despite the fact that Pritzker’s payment to pensions consumes nearly a quarter of the current budget – no other state is in such dire straits – it still won’t stop the state’s pension debts from growing. That’s how sick Illinois’ finances are.

Illinois’ Commission on Government Forecasting and Accountability shows that despite a $9.2 billion* contribution into pensions in 2020, the state’s unfunded liabilities will still increase by $2.4 billion to $139 billion. Illinois is not unlike the financial deadbeat that never pays the minimum payment on his credit card. As a result, its debts just grow.

To just “tread water” – to keep Illinois’ debt flat from one year to the next – the state payment in 2020 should be $2.4 billion higher, or over $11 billion in total.

That tread water amount, however, does nothing to reduce Illinois’ pension debts. Even more, it’s based on the state’s actuarial assumptions actually panning out. If they don’t, then the state’s pension debts will be even bigger.

Statutory payment

If Pritzker and team want to make claims of “balanced” budgets, they’ll have to make lots of changes going forward.

For starters, they’ll need to dump the Edgar ramp, which pushes the repayment of pension debts far into the future, requires just 90 percent funding levels by 2045, and assumes overly optimistic investment rates.

In its place, they’ll have to accept the stricter standards adopted by the state actuaries (see Exhibit 2 for an example of TRS’ standard). Their required payments are larger to ensure the pension shortfalls get paid down sooner. They pursue 100 percent funding targets and accelerate the repayment of debts (TRS’ actuaries target 2035, SERS targets 2040 and SURS targets 2045). And how they account for individual pensions is more conservative (entry age normal vs. projected unit cost). All that results in required payments that are $4 billion larger than the state’s statutory requirements.

But politicians should go even further. While the actuaries still depend on ramps, other financial groups demand the use of less rosy investment rate assumptions and flat debt repayment schedules (level dollar) to determine yearly state contributions.

Wirepoints has covered JP Morgan’s estimates of Illinois’ required payments and ran our own as well, shown below. Those more responsible assumptions would require the state to put even more money into the pension plans.

Irresponsible

Politicians on both sides of the aisle can pat themselves on the back all they want for passing a budget. But the truth is they’ve just made Illinois’ debt crisis even worse.

They’re not paying what they should, nor have they passed a single structural reform that would help lower the annual cost of retirements. (In fact, they’ve done the opposite by reboosting pension spiking for teachers.)

Illinois fiscal reality won’t change until the state is more honest about its debts and it reduces those debts through structural reforms.

*The state’s contribution includes $8 billion in money from the state’s general fund budget and an additional $1 billion from other special funds.

Read more about how politicians mislead Illinoisans about the impact of retirements on the budget:

• State budgets don’t matter. Illinois will run massive deficits anyway
• Hey Gov. Pritzker, Illinois budget shortfall is more than $9 billion, not $3.2 billion
• Why Warren Buffett is right to warn about Illinois

Exhibit 1.

Exhibit 2.