Taxing geography

Kiplinger's Personal Finance Magazine, Oct, 1998 by Marc L. Schulhof

Our survey shines the spotlight on the enormous differences among state and local tax bills across the country.

As you get ready to head for the polls, the pols are talking tax cuts like never before. Chalk it up to the normal election-year rhetoric supercharged by a once-given-up-for-dead phenomenon: the budget surplus. The sweet sounds of "giving back" aren't just playing in congressional races, either. State-level politicians are chiming in, too, as the surging economy dumps billions of unexpected dollars into state coffers.

What better time, then, to take a look at state and local tax burdens across the country? You might consider the picture pretty or downright ugly--depending on where you live--because the state and local tax load varies enormously from city to city.

Take a look at our table on pages 100 and 101, which shows what a hypothetical family living in either of the two largest cities in the 50 states and the District of Columbia can expect to shell out. The range is staggering: Based on the same income (for income-tax purposes), same spending pattern (sales taxes) and same home value (property taxes), the tab ranges from $2,748 in Cheyenne or Casper, Wyo., to $12,664 in Buffalo, N.Y. That $9,916 spread leaves a lot of room for contemplating your own tax bill.

SMOKE AND MIRRORS? Our table shows that although nine states have no broad-based income tax, their residents don't necessarily pay less tax overall. Compare no-income-tax San Antonio, Tex., with Wilmington, Del., whose residents face a top state-income-tax rate of 6.9% and a local levy of 1.25%. Our hypothetical family pays a virtually identical total amount of tax in both cities. Why? Because the Texans pay sales tax, which doesn't apply in Delaware, and their property-tax bill is nearly three times as high on homes of equal value.

The First State's no-sales-tax stance is even rarer than Texas's lack of an income tax. Just five states refrain from levying a sales tax. Some 7,000 state, county and municipal jurisdictions impose them, according to Vertex Inc., in Berwyn, Pa. For many of them, this tax is a spigot that can easily be opened wider. Last year, 389 jurisdictions raised rates and 201 added new sales taxes.

"People don't tend to notice sales taxes unless they buy cars or other big-ticket items," says William Waugh Jr., a professor of public administration and political science at Georgia State University.

But sales taxes don't always go up. In Nebraska, buyers are temporarily paying 0.5% less on their purchases, thanks to a surplus-inspired one-year rate rollback that ends on July 1, 1999. And voters in Ohio recently overwhelmingly rejected a sales-tax increase that would have offset a property-tax cot.

In Ohio and elsewhere, the property tax is increasingly in the political cross hairs, in part because a number of state supreme courts have declared that funding public education through property-tax receipts is unconstitutional. Voters, too, routinely express their displeasure over this levy.

"With property tax, there's sticker shock," says Waugh. "You get a bill once or twice a year and it scares the hell out of you because it's big."

Buffalo owes its dubious honor of topping our list in large part to the $8,500 property-tax bill levied on our hypothetical family's $250,000 home. (Yes, that's an awfully expensive house in Buffalo, but read on.)

A CLOSER LOOK AT PROPERTY TAXES

Asking people to pick the tax they hate the most is a lot like asking which Brussels-sprout recipe they find most distasteful. Yet time after time, polls show that the property tax is the one that really gets under taxpayers' skins. For the purposes of this story, we concur. Income and sales taxes are easy to place side by side: If you earn a certain amount or buy a certain amount of taxable goods, you pay a certain amount of tax, which varies depending on where you live. But property taxes are impervious to such clean comparisons.

The analysts and economists we consulted agree that the best way to compare property taxes in various jurisdictions is to compare houses of the same value because that's what property taxes are based on--value. So our charts show the tax on a $250,000 house in every city. On such a house, a family in Boston, for example, would pay $3,250, while a family in Tulsa would owe $3,000.

But critics complain that this method ignores the fact that $250,000 buys a lot less house in Boston than in Tulsa. To see how much this variable might skew the rankings, we analyzed the property-tax numbers on less-expensive homes ($200,000 and $150,000) and on the different values for a standard, 2,000-square-foot house. If our family lived in a cheaper house in Buffalo ($166,000 for a 2,000-square-foot house) than in San Diego ($270,000), for example, maybe that would dramatically upset the rankings. It didn't. Even though the San Diego house was valued at more than 60% more, the property tax was almost 50% less.

In all cases, the results hewed to our original findings: No matter how we approached the property-tax issue, four of the five most-expensive and least-expensive cities appeared on every list.