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Tempted to Flee High Taxes? You May Miss What They Pay For

Moving to a place with low (or no!) taxes might sound like a beautiful, fanciful dream to some of us. But to young families struggling to raise their children on a budget or retirees seeking to stretch their pension in some of the country’s most expensive real estate markets, it’s often more like a game plan. After all, when you’re putting down roots, why not do it at a place where you won’t have to bury thousands of dollars in property, income, and state sales taxes along the way? Money that you’ll shell out every single year?

But more and more homeowners are discovering one of the oldest adages in the real estate book: If it sounds too good to be true, it’s because it often is.

High taxes pay for things that many transplants might have taken for granted, like parks, arts programs, mass transit, and bike lanes—not to mention top-notch public schools. Taken aback by the lack of services they encounter in their new community, refugees from expensive states often wind up advocating the same sorts of taxes they were trying to escape.

“You get what you pay for,” says Norton Francis, a senior research associate who specializes in local and state taxes at the Urban-Brookings Tax Policy Center. “If you’re moving from a higher tax area to a lower tax area, you might be giving up some amenities.”

Charleston: A case study

There’s no shortage of newbies heading to the historic city of Charleston, SC, both for the lower taxes and the year-round balmy weather, says local real estate agent Randy Bazemore. The state was ranked as having the ninth lowest taxes in the nation in 2016 by WalletHub. (It does, however, have high flood insurance premiums on coastal homes.)

But those new residents who are enamored with how much further their dollars can go down South are often the same ones who wind up advocating loudly for better public transportation, such as light-rail systems or expanded bus service, as well as more bike paths and greenways, he says.

Those services are typically paid for through state and property taxes—which existing residents generally don’t want to see rise.

These very different priorities can lead to tension between transplants and the old guard, says Kurt Cavanaugh. He moved from Brooklyn to Charleston two years ago to become the executive director of Charleston Moves, a bike and pedestrian advocacy group. One of its goals, supported by many younger and newer residents, is to get protected, dedicated bike lanes in the city. Although these are increasingly common in metros like New York City, the group is running into heavy opposition from some longtime residents and politicians.

Call it a tax battle for the heart and soul—and, perhaps, the future—of the Old South.

Voters in nearby Mount Pleasant shot down a measure last year to increase property taxes, according to The Post and Courier. The revenue would have gone toward recreation, arts, and open space, potentially even toward a proposed 80-mile bike and pedestrian trail.

But there have been victories for the extra-amenities folks, too. Charleston’s school district approved a tax hike last month on property such as vehicles, boats, and commercial and rental homes to fund education, according to NBC affiliate News 2.

“It’s very frustrating for people on a fixed income when they raise these taxes,” says Bazemore. But transplants “come down here and say, ‘Oh, it’s cheap.’”

New companies, new taxes

Property taxes also often rise when large companies relocate or open branches in cheaper areas of the U.S., such as the Southeast, bringing in a slew of their employees, say tax experts.

“Those relocations often lead to pressure to increase the quality of local education systems,” says David Brunori, deputy publisher at Tax Analysts, which provides tax news and commentary. “And that has put some pressure on property taxes in many of those states.” The new corporate transplants are often “moving out of higher-performing public school systems that have a lot more resources,” he adds.

Property taxes usually don’t go up much. But even incremental increases can strain relationships between the existing residents’ “fiscal conservatism” and the needs of the newest community members, he says.

“All of a sudden, you need more teachers, more schools, more roads, more public services in general” to accommodate new residents, he says.

Yet such services are key determining factors for companies scrutinizing potential sites for relocation. Today’s businesses strive to have it all: way cheaper operating costs without losing the ability to attract—and retain—talented workers who don’t want to live just anywhere,  says Jason Hickey, CEO of Hickey & Associates. His Minneapolis-based firm helps Fortune 500 companies relocate or consolidate facilities.

“Quality of life is extremely important to workers, particularly millennials,” he says. “Parks, bike trails, and mass transit are becoming incredibly important.”

Executives are now taking extra note of high school and college graduation rates in potential new locations, even meeting with school superintendents to ensure there will be a pipeline of highly qualified future teachers, Hickey says. He’s even seen companies turn down sweet tax and incentive deals to relocate to a particular area where the public schools weren’t very good.

Who’s moving where

But let’s be clear: Plenty of those who move cross-country aren’t just following their dream jobs.

Many are lower- to middle-income earners with easily transferable gigs, such as assistant store managers, and are looking to make their dollars stretch even further, says Bill Galston, senior fellow in governance studies at the Brookings Institution, a Washington, DC–based think tank.

Retirees often trade the Northeast and the Midwest for warmer and cheaper living in the Southern and Western swaths of the country, says Michael Stoll, a public policy professor at University of California, Los Angeles, and a consultant for moving company United Van Lines. And these newcomers don’t need to pay a premium for good school districts.

“A lot of pensioners will move where there’s lower property taxes … and where there are exemptions for retirement income,” says Tax Analysts’ Brunori.

Nearly 40 states don’t take a cut of Social Security income. And about a dozen don’t take a share of most pensions. These factors can result in thousands in savings.

Before making a move, look at the overall financial picture

But before you put your home on the market and start packing up your belongings, weigh the lower costs of your new community against your expected quality of life, says Greg McBride, chief financial analyst of the personal finance website Bankrate.com.

Spend a spend a week or two in the new destination as a sort of try-before-you-buy trial run. Test out how you’d get around and what kinds of public amenities you might want to use (or would like to have).

Do your research: If you’re moving for lower taxes, make sure they’ll apply to you. For example, property taxes can be higher for new homeowners than for existing homeowners, who are grandfathered into a lower tax rate, he says.

And remember: States need to make money somehow. For example, there’s no state income tax in Texas—a boon to those moving into the Lone Star State to work in the oil and gas industries. But property taxes are often higher than average to make up for it.

“People are very shocked when they come here,” says Houston real estate agent Greg Nino.

Of course, not everyone cares about things like bike lanes and mass transit.

“You’d like to think that higher taxes equate to a better standard of living,” says Bankrate.com’s McBride. “But it’s like beauty: It’s in the eye of the beholder. Some people place greater value on good weather or lower costs of living.”

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