When it comes to paying taxes of any kind, there are two concepts that invariably hold true. First, nobody likes paying them. Second, most people think they pay more than their fair share. In the Midwest, and in Illinois in particular, many people are talking about why our taxes are so high. It is no secret that some residents have gone as far as to move out of the State just to avoid Illinois taxes.

With proposed graduated Illinois Income tax hikes on the table, we did some research and crunched the numbers to figure out how Illinois, Michigan, and other nearby states stack up in terms of overall tax charged to its residents.

Most everyone is at least somewhat familiar with Federal income tax. Per the 2020 Federal Budget, in 2018, of the $3.33 trillion the US Federal Government collected in income taxes:

  • 50% came from individual income taxes
  • 34% came from payroll taxes, and
  • 6% came from Corporate taxes

All told, roughly 90% of the $3.33 trillion came from the biggest three taxes at the federal level, two of which apply to everyday individuals.   Per the US Census Bureau and Taxfoundation.org, of the state tax revenue collected, the following sources account for the majority of overall State tax collected:

  • 35% came from Property Tax
  • 34% came from Sales Tax
  • 20% came from State Income Tax and Municipal Income taxes
  • 2% came from Automobile taxes

As such, we included these factors in our state-by-state list (with local taxes being averaged and extrapolated throughout a state).   This list isn’t meant to give an exact representation of how much your state will collect from you, as things like licensing fees, fines, estate taxes, and investment tax would be very difficult to incorporate. However, much like the top three tax sources at the federal level, these top four taxes at the state level apply to most taxpayers and are collected annually. They represent over 90% of any state’s sources of revenue, creating an effective baseline for comparison.

Of course, taxes paid are based on income levels, how much your house costs, how big your family is, and other markers. For our list, we will focus on the following modeled family:

  • Family of 4: 2 parents, 2 dependent children
  • $250K of gross income, all from wages
  • A home owned and valued at $400K
  • $75K per year spent on taxable goods
  • 2 automobiles valued at $25K each

Based on the parameters, the following table ranks the States collecting the lowest amount of tax to the highest amount of tax. (All tax percentages used in our analysis were obtained from taxfoundation.org)

The listings in the table confirm popular belief: Purely from a tax perspective, it is expensive to live in Illinois, California, and New York. The table also shows that many of the more rural states collect fewer taxes from residents. It must be noted, however, that the states with lower taxes often obtain supplementary income through licenses, corporate taxes, or permits for the extraction of natural resources.

Now let us look at neighboring states in the Midwest and see how their tax rates affect our modeled family. In comparing Illinois (46th on the list) and Indiana (19th), we can see that Indiana taxes are about 23% less than Illinois taxes.  In Wisconsin (45th), the family modeled would be taxed nearly equally as they would in Illinois. By moving West to Iowa, the modeled family would actually increase its tax burden by 17%.

Does this mean that Iowa is more expensive to live in than Illinois?  To answer the question of overall expense, we must look at not only tax burden, but also cost of living. Cost of living includes relative price of housing, food, transportation, medical care, and other consumer goods. Cost of living also changed city to city as well as state to state. For example, per the US Census Bureau, the same $400K house in Arlington Heights would cost $384K in Ann Arbor, $288K in Peoria, and $320K in Des Moines. Wages are also correlated to cost of living, so for someone still in the workforce, an expected income drop would be expected when taking the same job in a city with a lower cost of living. For this reason, we encourage everyone to assess cost of living and adjust the income and property value numbers down for areas with lower cost of living. One simple resource for assessing cost of living is through Bankrate’s COL Calculator. Cost of Living and taxes need to be considered together and weighed against intangible factors such as proximity to family and friends, weather, natural environment, culture, etc. when decided on where to live and whether to move.

If you are interested in having a tax ranking like the one above created for your family, reach out to us and we would be happy to run the numbers for you. Sometimes moving to another state may prove to be an effective way to preserve income heading into retirement. However, you may oftentimes find that the grass is not always greener on the other side of the state line.