“Geographical arbitrage” is the term used to describe the act of moving to a different city, state, or country due to lower costs of living and/or higher incomes. Many of us, especially those of us living in major metropolitan areas, may be unaware of our potential wealth building opportunities by simply moving to a different city or state and finding a similar job (or working remotely). Quite often in large companies with multiple locations, a transfer is possible to a new location without even needing to resign from your current job. Below, we are going to talk about how where you live impacts your wealth. It is all made possible by the “federalist system.”
The Federalist System & Geographic Arbitrage
The United States is one of only 25 countries in the world which had subdivided regions with their own regional governments which are not under control of a centralized, federal government. In the US, we call these states. Other countries may call them provinces, or in Russia’s case, “oblasts.” The fact that states exist with their own tax policies makes it easier for US citizens to move to a more tax-friendly area without having to either become an expat or renounce their citizenship.
Countries which have states/provinces/oblasts are called “federal states” while ones which do not are called “unitary states.” Below is a map of which countries have federalist systems (green) and which ones have unitary systems (blue).
Which States Are the Most Tax-Friendly?
To begin thinking where we could move to and increase our wealth while doing so, we need to start with discussing the tax-friendliness of each state. Most of the time, when we think of tax-friendly states, we are thinking about states with low state income, taxes, and property taxes. Kiplinger puts together a map each year ranking each state for its tax burden on its populace. As of the end of 2020, the most tax friendly states were:
- Washington
- Nevada
- Arizona
- Alaska
- Tennessee
- Florida
- California (this one is questionable due to the study’s methodology)
- North Dakota
- Delaware
- Wyoming
Out of these states, many do not have state income taxes (WA, NV, AK, FL, TN, WY), while others boast very low sales and property taxes.
The least tax friendly states were:
- New York
- Connecticut
- New Jersey
- Maryland
- Michigan
- Illinois
- Wisconsin
- Iowa
- Nebraska
- Kansas
Note that most of these states are concentrated in the northeastern and midwestern United States. Some of these states impose extremely high-income taxes (such as New Jersey’s 10.75% top bracket) and many of these states also have localities which have their own income taxes. For instance, New York City assesses up to a 3.876% (as of 2021) city income tax while New York State has income tax rates as high as 8.82% for top earners.
For those interested in this topic, the Kiplinger map can be accessed here. Now that we know which states are most tax-friendly, we can continue.
Housing Costs
The single greatest expense for most people is the cost of housing. The cost of food, utilities, transportation, etc. normally takes a backseat to this cost. Therefore, it is important to also determine what the average cost of housing is in different locales. Of course, it makes the most sense to drill down to your specific locale, but that is beyond the scope of this article.
Here is a 2019 article from Business Insider indicating the median average rent in each state. What the article indicates is that rents (and most likely home prices) are highest in the western and northeastern United States. Florida, Georgia, and Texas are also marked as relatively expensive. The cheap states for housing are the ones which are largely rural – the Midwest, the Carolinas, Pennsylvania, and the Deep South. Some states, such as New Jersey and Illinois, have quite high housing prices as well as high taxes. This one-two-punch makes these states very expensive to live in.
Average Incomes
Now that we have an idea of which states cost a lot to live in, we can look at average incomes for each state. If the cost of living is high, but incomes are also well above average, living in that state may not be detrimental to overall wealth building. The map below from Census.gov provides this information.
What we notice is profound, specifically that there seems to be little relationship between a state’s tax-friendliness and its average incomes. Louisiana, for instance is considered a tax-friendly state with cheap housing, but much of its populace is strained to prosper there due to very low incomes. Therefore, the cost of living in Louisiana is low, but earning potential is also low. Therefore, an opportunity opens for remote workers and retirees, who can either earn the higher incomes of a different state (virtually) or depend on investment income versus wage income.
Another message from this analysis is that if you have a job opportunity in two states with the same salary, you should consider accepting the job in the location with a lower cost of living. This happened to me when I was interviewing with State Street Bank a while back. The salary was nearly the same, but I had the option of working out of Boston, MA or Phoenix, AZ. Taxes and housing costs are significantly lower in Arizona versus Massachusetts, so I asked to be considered for the position in Phoenix.
Final Thoughts – Make Sure to Live Somewhere You Like
This analysis I described above and the resources to conduct it are useful for determining where you could live to maximize your wealth, but there is one wild card, you. A running joke about Wyoming is that is has a low cost of living and high incomes for a reason – winter lasts eight months and freezing blizzard-like conditions are common. Therefore, few desire to live there (especially in the eastern part of the state) unless they can become wealthy doing so.
I’ve made the mistake of moving to an undesirable location (to me at least) for high incomes and low housing costs. As someone who loves being outdoors and hates cold weather, I moved to a northern, rust-belt city known for its low cost of living versus other cities and hated it. That’s not “WELLthy” as money doesn’t matter if you’re not happy. Conversely, I have friends dotted across beaches and ski resorts around the United States who need to live very frugal lifestyles to sustain themselves. They’re happy though and understand that true WELLth is the combination of positive financial habits, saving, and psychological self-care.
Want to see how much you could increase your net worth by moving to another state? Click here to download my Geographical Arbitrage Worksheet.