Pamela Villarreal looks up from her laptop. She checks that the correct webpage is projected on a large screen at the end of a conference table. She nods OK. I’m visiting with Ms. Villarreal, a senior fellow at the National Center for Policy Analysis in Dallas, to check out a new tool on the center’s website — a free calculator that will estimate the lifetime value of moving from one state to another.
Yes, you read that right: the lifetime value. Not just whether you can afford a move today, but the long-term impact on how much more (or less) you’ll be able to spend each year or leave to heirs.
For starters, I ask Ms. Villarreal to test the move that many people are making every day, from California to Texas. We do this by using as an example a 40-year-old worker who is single and earns $70,000. We’ll call her Charming Angela (CA). She has $70,000 in retirement accounts and $70,000 in taxable savings. Angela rents in California at $1,500 a month and intends to rent in Texas at the same amount.
Ms. Villarreal presses the “calculate” button.
The screen blinks. The results appear in a flash. Charming Angela will gain $1,615 a year in spendable income by moving to Texas. If she saves it rather than spends it, she’ll have an additional $133,593 in her estate.
That’s nice, but not exactly earthshaking. (Then again, the long-term gain is nearly two years of her salary.)
“What if she moves so she can become a homeowner?” I ask.
Ms. Villarreal has Charming Angela take $40,000 from her taxable savings for the down payment on a $200,000 condo. It has a $160,000 mortgage, with an $810 monthly payment. She presses the “calculate” button again.
We gasp. “Maybe we should call her Lady Gaga!” Ms. Villarreal exclaims.
Moving to Texas to become a homeowner will add $12,692 a year in spendable cash. It will do this every year for the rest of Charming Angela’s life. If she saves the additional spending power and maintains her current spending level, the move will increase her estate by a whopping $1,049,571. All in dollars of today’s purchasing power.
The big benefit here doesn’t come from escaping the California income tax. Virtually all of the benefit comes from moving from a state where many middle-income people can’t afford a home, to a state where they can.
But forget the estate value. Just how long do you think it would take a $70,000-a-year worker to gain after-tax spending power of $12,692 a year in this economy? Maybe never, right?
How can this be? I’d like to say it’s simple, but it isn’t. The engine behind this calculator isn’t driven by the relative price of avocados and movie tickets. Its primary driver is tax differences. A single worker earning $70,000 a year gets hit with a tough income tax in California. The federal income tax rate is pretty tough, too.
When she moves to Texas, she sheds the California income tax. More important, she gets a pile of itemized deductions for home ownership. These reduce her federal income tax. She also gets to own an asset and build equity by paying off mortgage debt.
I ask Ms. Villarreal if she has found other moves as dramatic. “Well,” she says, “you can get figures in the millions pretty easily when you use high-income people as examples.
“It probably says a lot about why LeBron James went to low-tax Florida to join the Miami Heat instead of NBA teams in high-tax states like New York, Illinois or California.”
More conventional online moving tools, such as the calculators on bankrate.com or CNNMoney.com, are based on data from the Council for Community and Economic Research. The council’s data allow you to compare the cost of housing, food, insurance, clothing, fuel, medical care and other common consumption items in different cities. The same data is used to provide the city-to-city cost comparison chart in each issue of Where to Retire magazine.
The calculator behind the NCPA’s tool is different. It’s based on ESPlanner software, the same software that professor Laurence J. Kotlikoff and I used as the basis for our book on financial planning, Spend ’Til the End. Using a very sophisticated calculating engine, it calculates the lifetime discretionary income ramifications of decisions about location, shelter, savings and taxes.
The main difference between the NCPA tool and the financial planning software is that the NCPA calculator makes a variety of assumptions to reduce the items you have to enter to get a result. The NCPA calculator is at whynotmove.org.
Questions about personal finance and investments may be sent by email to firstname.lastname@example.org.