Relocation by P&L

Choosing to move between states is both an emotional and a rational decision – and even in its rationality, is emotional.

For example, we can calculate that we’d make more money living in another state, but what would we spend that money on? And would that trade be worth what we lose by leaving the original state? I didn’t find there was any easy way to make moving between states a truly rational decision, but I did find a way to automate the rational part so I could focus on the other.

As always, it’s an excellent time for a spreadsheet!

(In retrospect, if I had known how complex it might get, I’d have use a Python. Virtually all taxes can be modeled by a linear equation where the final tax paid is the marginal tax rate multiplied the income above a certain threshold and added to the constant, cumulative taxes paid on all income below that threshold. Some have a limit on the maximum possible paid, such as the federal Social Security tax. A simple three-line function and a constant map with <10 entries would’ve trivially solved the problem that took a spreadsheet many VLOOKUPs to solve …)

But anyway, let’s talk the spreadsheet. It takes some obvious items into account:

• Federal income taxes, including state and local tax deductions.
• State income taxes.
• Local income taxes, such as in NYC.
• Local sales taxes based on projected taxable spending.
• Local property taxes based on projected taxable assets.

It is not incredibly precise, since I’m using not-particularly-well-vetted information on property and sales taxes from the internet and because it only uses information from the already-gone 2020 tax year. But I find that adjusting percentages a little bit here and there doesn’t make much difference in the ordering of where you make more or less money, although it does shift a few thousands between here and there.

And, notably, it doesn’t take cost of living into account. Things as simple as the cost of groceries and housing can change dramatically: a can of beans that cost $1.25 in Silicon Valley suddenly cost $0.90 in Utah, or a house worth $800k in Colorado simply wouldn’t be unattainable in Silicon Valley.

But … Overall it’s precise enough.

I entered a collection of cities meaningful for a person interested in working the tech: Seattle, San Francisco (ish), Boulder, New York City. Then added a few that were useful comparisons for various reasons: Honolulu and Tricities for friends, San Diego for coworkers, etc. These provided a “map” of sorts of how compensation could change with location.

By far the hardest part was computing progressive taxes for many states and federal taxes. The function VLOOKUP was useful, but I found that because it used integer offsets rather than cell pointers as inputs, it was not robust against adding, removing, and moving columns and rows. I never solved that – Like I said, it would’ve been better to do this in Python after all.

I did, find, in general, some surprising things.

• The amount of money a person makes after taxes is nearly the same whether one lives in Colorado or in Silicon Valley.
• The state income tax rate is the primary driver of the post-tax income. A small tax difference ends up being a lot of money.
• You make the most living in Seattle, since the state has surprisingly regressive income taxes despite being a high-income progressive area.
• The best tradeoff between cost of living and income is in the “rest of the state” outside the main metropolitan area driving the state’s highest income; for example, Tricities in WA or well outside Denver in CO. (This doesn’t apply to California since California just … Is its own place.)
• Locations don’t really reverse in ordering as your income changes; the gaps betwen places just get bigger.

What I’ve mostly told coworkers is that Silicon Valley, while it may be effective for getting your career moving, is not a place anyone should settle once they have “enough”. Intuitively I suspected this in 2015 when I decided to move – “just until I reach L5”, I said – but it’s comforting to see it confirmd by the analysis. And there is a huge advantage that many others already know that moving to a no-tax state in retirement can extend retirement by years.

Let’s step back, though, to how this is all inherently emotional. I have a slide deck about perrsonal finance that notes very clearly that once you’ve saved “enough” (20% rule, anyone) it doesn’t matter what you spend your money on. I think the next bit of entertainment will be what I’ll buy with the extra money I “earn” by living in Colorado and buying a less-expensive house.

Here’s to saving and spending for fun instead of on taxes and overpriced housing!