By Matthew Heimer
When people consider relocating for retirement, state income taxes often factor into their calculations—and it’s no coincidence that Florida, Texas and Nevada, none of which has a state income tax, have developed reputations as retirement destinations for the fiscally prudent. But before you go into contract on a Sun Belt condo for your leisure years, it pays to check out sales taxes, as well, which are in force in all but 5 of the 50 states. While savvy retirees can structure their portfolios and nest eggs to minimize income taxes, sales tax is often inescapable—sooner or later, everybody has to buy groceries.
State sales taxes aren’t the only ones nibbling at your nest egg. As the nonprofit Tax Foundation points out in a report on sales taxes released this week, 37 states allow county and municipal governments to levy sales taxes as well, with those taxes adding 5% or more to a purchase price in some extreme instances. Seen through this lens, the price of living in some “low tax” states—and in particular, in a few popular with retirees—can look distinctly different. Nevada, for example, has a state sales tax of 6.85%, one of the highest in the nation, and county and municipal taxes add another 1.08% to the average resident’s bill. Texas’s 6.25% state sales tax rate and Florida’s 6% rate are higher than the national average; local sales taxes are rare in Florida, but in Texas they bring the average resident’s total sales tax rate above the 8% mark.
Two other states with little or no income tax wind up in the Tax Foundation’s top five for combined state and local sales taxes: Tennessee (highest overall, with an average combined rate of 9.44%) and Washington (fourth, at 8.86%). Also in the top 5: Retiree magnet Arizona, which has a state income tax that ranges up to 4.5%. At the other end of the spectrum: Delaware, Montana, New Hampshire and Oregon, none of which have state or local sales taxes.
All these rates may seem like small potatoes, of course, compared to federal income-tax rates of 15% and higher. But since people 65 and over tend to spend a higher proportion of their disposal income on day-to-day necessities, the bite can turn into a significant one.