Many taxpayers wish their taxes were lower. If you consider yourself one of the many, you may want to consider moving to one of the few states that don’t tax a taxpayer’s earned income.
However, just because a state doesn’t have an income tax doesn’t make living there any easier. In fact, many states have higher taxes on other things, like liquor and property, which taxpayers have to pay alongside the federal income tax.
Whether you live in a state that doesn’t have an income tax or you’re looking to move to one, there are a few things you should consider. Here, we’ll break down how these states make up for their lack of funding from income taxes and whether living in these states is worth it.
Table of Contents
What Is Income Tax?
Income tax is a tax on the money that businesses and individuals earn. Income can be wages, salaries, tips, and commissions, but it can also be investment earnings. State and federal income tax is automatically deducted directly from workers’ paychecks — independent contractors pay their taxes quarterly throughout the year or when they file their tax return.
Every year, taxpayers are required to file a tax return to determine the taxes (if any) they owe the government. The Internal Revenue Service (IRS) collects taxes, employing the rules and regulations that dictate what income is reportable and taxable. The government then uses this money to provide cities and rural districts with public goods and services for residents.
Some states use graduated income tax rates to determine how much taxpayers owe. Also referred to as a progressive tax, this is a percentage of your income that is taxed based on how much you earn. The more you earn, the more you are taxed. Progressive taxes might include estate tax, investment income, and tax credits.
What States Don’t Have Income Tax?
States that don’t charge income tax include Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, Tennessee, and New Hampshire. Each of the states discussed below has a tax burden that is less than 10%.
There is no income tax in Alaska, so no employee withholding for state income tax is necessary. Instead, Alaska relies on funding from petroleum revenues to pay for state operations. Because of the lack of income tax, Alaska has one of the lowest tax burdens as a share of income per capita. Note that certain cities and jurisdictions do collect sales tax.
Each year, residents can apply to receive money from the Alaska Permanent Fund Corporation, which generates mineral royalties, as well as investment returns through stocks, bonds, real estate, and capital gains. Property taxes and corporate taxes also help to make up for what Alaska lacks in income tax funding.
Florida does not have an income tax on individuals. The major taxes collected in Florida include sales and use tax, intangible tax, and corporate income taxes. While the state’s tax burden overall is very low, Florida doesn’t rank that high in affordability because local taxes are much higher.
While Florida residents do not have to pay state income tax, they are still responsible for paying federal income taxes. Similarly, Florida doesn’t have an estate tax or intangibles tax on investments.
No income tax is charged in Nevada. Home to “Sin City,” Las Vegas, Nevada’s taxes do not include personal, business, or corporate income.
Because there are fewer revenue streams for the state, Nevada relies heavily on sales tax. The sales tax in Nevada is 6.85%, but certain counties and cities can charge an additional 1.25% in local taxes. This makes Nevada’s sales tax is 8.1% in some areas — one of the highest in the nation.
Much of Nevada’s revenue is generated through travel and tourism. With millions of tourists visiting annually, Nevada is able to generate billions of dollars to make up for their lack of income tax.
There is no corporate or personal income tax in the state of South Dakota. It is one of the most tax-friendly states in the U.S., with a low sales tax as well. South Dakota does have fairly steep property taxes, but it is the home of several major credit card companies, which help the state generate the revenue that income taxes do not generate.
Like many states without an income tax, South Dakota also generates revenue from the sale of alcohol and cigarettes, imposing an excise tax on alcohol. In addition, South Dakota’s tax structure has a steep bank franchise tax, which is based on a business’s net income. This South Dakota tax structure declares a minimum of $200 tax on a business’s location, as well as a progressive tax that ranges from 0.25% to 6%, based on business income.
There is no income tax in Texas — in fact, Texans have put a constitutional restriction on income tax. The state’s constitution already requires that any income tax needs voter approval and that the tax must be put to use for property tax relief and public education.
However, the state has some pretty high sales and excise taxes — those collected on fuel as well as cigarettes and alcohol — to pay for its infrastructure and other government services. In some areas of Texas, sales tax is as high as 8.25%. Property taxes are also quite high in the Lone Star State.
While there is currently no income tax in Washington state, they may potentially have it in the future. A wealth of tax breaks throughout Washington has legislators reconsidering the lack of an income tax.
Like many other states without a personal or corporate income tax, Washington residents pay more in sales and excise taxes. Gasoline is also more expensive. People and businesses in Washington are subject to taxes like business and occupation (B&O) and/or a public utility.
According to U.S. News & World Report, Washington is number one on the list of best states. However, the state does have hefty property prices and a cost of living that’s higher than average.
Wyoming is another state with no personal or corporate income tax. The state is one of the least populous in the entire country, so imposing an income tax wouldn’t really do much. To generate an income and maintain the state’s infrastructure, Wyoming relies on the taxes imposed on natural resources such as coal and oil.
The state also has some of the country’s lowest sales and property tax rates. Wyoming’s current sales tax is 4%, with prescription drugs and groceries exempted from this tax. Citizens of Wyoming also don’t have to pay taxes on retirement income.
Tennessee is close to having no income tax. The state imposes the Hall income tax, which is a tax on individuals and other entities who receive interest from bonds, notes, and stock dividends. Named after Frank S. Hall, the senator who sponsored the tax legislation, the Hall tax has seen many protests from Tennessee citizens.
In addition to the Hall income tax, Tennessee also relies on a very high sales tax as a source of revenue, with sales tax accounting for approximately 60% of Tennessee’s tax collections.
New Hampshire has no tax on earned income, but they do impose a 5% tax on dividends and interest. In March of 2018, state legislators passed the SB 404 plan to phase out taxes on investment income. The tax would be lowered by 1% over the next five years until it is eventually repealed by January of 2024.
Additionally, New Hampshire has no sales tax. To make up for the lack of these taxes, the state has hefty excise taxes, imposing them on the purchase of alcohol. Property taxes are also quite high in New Hampshire to supplement the lack of income and sales tax imposed on residents.
Are States Without Income Tax Worth It?
If you’re considering moving to a state with no income tax, there are several things to consider first.
Depending on your situation, living in a state without income tax may or may not be the best choice. One thing to consider is what the other taxes are like in that particular state. Some states raise taxes on things like sales or property to make up for the losses they experience from a lack of income tax. In most cases, the sales tax is often much higher.
It’s also important to consider the overall cost of living in the state — is it something you can afford? Also, consider what a lack of income tax does to the infrastructure of the state. Are the education and healthcare systems suffering because of a lack of funding?
States without income taxes are not always fair, either. In most cases, people with lower incomes pay a majority of state taxes.
Living in a state without income tax may or may not be the right choice for you, depending on what you earn. Ultimately, it’s important to look at factors besides just income tax when making a decision about where to move.
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