A few months ago Bloomberg’s Wealth Manager did a feature on the wealth-friendliness of the 50 states and the District of Columbia. The magazine rated each state’s tax laws, looking at how they would affect four different types of families.
The magazine’s first category was the high-income family. This might be a couple who are both professionals, earning above-average salaries. Such a family would own its own home, but would obtain most of its wealth from salary rather than investments or other assets. The second category was a family that had a more modest income, but held most of its wealth in a paid-off residence and other assets. The third category described a family that had both a high income and a high net worth in residences. The fourth was a retired family with income from retirement accounts and pension funds and no earned income.
The magazine figured income tax numbers for a hypothetical family in each of the four categories. Then each state was graded according to the amount of tax due. Rankings were given for each of the four categories, plus an overall rating which combined the four categories.
Overall, South Dakota ranked 12th in the nation for wealth friendliness, garnering a grade of A from Bloomberg’s. This was a poorer grade that it received five years ago, when its overall ranking was 8th. Our neighbor to the west, Wyoming, ranked first in the nation, followed by Nevada and Alaska. Dead last in the rankings at 51st was the state of New York. Wisconsin was 50th and Idaho ranked 49th, with all three states getting F’s. Nebraska ranked a dismal 48th but at least squeaked by with a not-quite-failing grade of D-.
In the first category, which measured our wealth friendliness to the family that derived its wealth from salary, South Dakota ranked 7th, garnering a grade of A. That was a bit surprising to me, since South Dakota is one of only four states that don’t have any income taxes. While 7th isn’t exactly a bad ranking, I expected us to be higher. What knocked us down were our high property taxes and sales tax.
In the second category, which measured the wealth friendliness of South Dakota to those who primarily hold their wealth in real estate, we ranked 25th and received a C+. There is no surprise here, since our state depends heavily on property taxes to fund education and local government. Wyoming and Hawaii were the top rated states for those owning real estate.
When it came to the family that obtained its wealth from both income and real property we ranked 6th, another A grade. Finally, our wealth friendliness to retirees was a respectable 18, with a grade of B.
Overall, South Dakota is certainly a wealth-friendly state. However, we are decidedly more friendly to those with high incomes or those who obtain their income from a more traditional investment portfolio with stocks and bonds. We are pretty much average when it comes to wealth friendliness for those who invest in real estate or who are retired.
That leads me to believe South Dakota is a great place to earn money and accumulate traditional assets. However, if a disproportionate share of your net worth and income comes from real estate, there may be better states in which to put your money.
The comparative wealth-friendliness of a state is only one relatively minor aspect to making investment decisions, especially because the rankings change fairly quickly. If you are deciding where to live after retirement, though, it may be something to consider, right behind such factors as weather and proximity to grandchildren.