One of the consequences of 2020 is that taxes are going to change in the coming year. I’m going on record as predicting that regardless who wins the Federal election in November, taxes are going to change. I know that I’m not saying anything terribly earth shattering. I suspect you all expect that.
Tom Wheelright is one of the most well known accountants on the conference circuit. He’s one of Robert Kiyosaki’s Rich Dad Advisors and I love the degree to which he explains the tax code. Some people think of the tax code as a way for governments to extract money from the population. There are two ways you can look at a tax rate. You can look at it in absolute terms as a percentage, or you can look at the rates relative to what they were last year. Did the rate go up or down and by how much? Often politicians tend to focus on revenue collection, but they ignore the side effect which can be difficult to predict.
But Tom has a secondary definition which I find equally useful. The tax code can be seen as a series of incentives. In that secondary definition Tom makes it clear that you’re not taxed on how much money you earn. You’re taxed on how you receive that money. Structure matters more than dollars in this instance. If you receive money as employment income, versus interest income, versus active business income, versus capital gains they all get different tax treatment. The most favorable tax treatment can be considered an incentive to adopt the most favorable structure.
This is something that governments sometimes forget. All levels of government collect tax. Some tax consumption. Some tax property ownership. Some tax income. There are taxes everywhere.
Most cities calculate the amount of property tax owing based on a tax rate which is multiplied against the assessed value of the property.
The tax rate can vary by area depending on the type of property and the costs associated with the infrastructure in that area. For example, some areas with new schools or higher water costs may have a higher tax rate. Some rural areas that don’t have water supply or trash collection may have a lower tax rate. In my home city, the tax rate averages about 1.07%. The city of Vancouver which is one of the most desirable and beautiful cities in the world has a tax rate of 0.26%.
Houston Texas has one of the higher tax rates in the country at an average of 2.09%. But Texas has one of the lowest state income tax rates.
Illinois has a high state tax rate and the second highest property taxes in the country.
California has relatively low property tax rates at 0.76%, placing them in the lowest third of state property taxes. But they have the highest state income tax rates.
The state that created the largest incentive for people to leave was New Jersey. They have the 6th highest state income tax rate, and the highest property tax rate in the nation.
When you look at Florida’s average property tax rate placing it 26th among states in the Union, combined with a zero personal state income tax rate, is it any wonder that you hear so many New York, and New Jersey accents in Florida? The incentive was for people to move to Florida.
Think of Taxes as merely incentives, and make your decisions accordingly.